Date: August 09 2012
AMID all the headlines and the hand wringing over BHP Billiton's write-downs last week, perhaps the biggest impact from the affair is that Marius Kloppers may have started a revolution by directly linking his pay to performance and to shareholder returns.
As ludicrous as that sounds, Kloppers' decision stands starkly at odds with the trend in corporate ranks during the past decade and a half when the bonus has become more important than salary and where the opaque calculations and hurdles have become a source of intense irritation to shareholders and the broader community.
The BHP chief and his petroleum head, Mike Yeager, aren't the first pair this year to voluntarily relinquish their rights to a bonus.
That distinction goes to Rio Tinto's Tom Albanese and Guy Elliott, who were attempting to atone for their 2007 folly when they stumped up $US38 billion for Alcan, which to this day remains a drag on the mining giant, as evidenced by last night's results.
For Kloppers, his decision to waive his bonus could cost him $4.7 million based on his pay last year, leaving him to get by on a $2.5 million salary.
Snide remarks aside, his pay will be a mere fraction of the amount earned by legions of even middle-ranking bankers and financiers who again this year have managed to create havoc within the global financial system, leaving millions unemployed, all the while demanding obscene wealth in the form of bonuses.
It is worth noting that, despite the $3.8 billion in write-downs on its US shale gas territories, BHP is likely to deliver an annual profit within a whisker of $US17 billion - 22 per cent less than last year but a formidable result on any calculation.
Executive bonuses have become akin to encores at a concert. No matter how bad the performance, it has become an obligatory part of the repertoire, where the artist demands and expects the adulation of the crowd. The annual bonus - split between short-term and long-term - these days makes up the bulk of a chief executive's pay, often accounting for more than two-thirds of annual salary. In itself, that tends to make a mockery of the term. A bonus should be an addition, a reward for a job well done.
While there are legitimate arguments that it is in the interests of shareholders that the bulk of executive pay should be ''at risk'' rather than a guaranteed salary, in reality it has just never worked that way. With the bulk of annual salary as a bonus, executives tend to fight tooth and nail to ensure it is awarded despite performance and regularly in the face of abject failure.
In 2011, executive remuneration in the top 50 ASX-listed companies rose 11.8 per cent during a year when the Australian stockmarket fell 15 per cent. Just how those numbers are reconciled is a complete mystery. But the general theme during market downturns is that the hurdles employed to calculate bonuses encompass far broader parameters than simply stockmarket performance. That's fine. Except that last year there was a great deal of wailing from the executive ranks that the hurdles, particularly on their long-term bonuses which are usually delivered in shares, needed adjusting. Was it the fault of QR National boss Lance Hockridge that it rained so much? What about Richard Goyder at Wesfarmers? His $6.7 million long-term bonus was at risk simply because the stockmarket had slumped.
From an executive point of view, the brilliance of the bonus system is its sheer complexity. Each company employs different systems, imposes different hurdles and arbitrarily alters them when conditions require. Even if you could find the formula, you'd need a boffin with a doctorate in quantitative theory to guide you through the maze.
Occasionally, those in the executive rank don the hair shirt and parade themselves before the public with sombre announcements of pay freezes. We've seen this kind of theatre in the banking sector. ANZ recently announced one. So did Commonwealth Bank.
A few years back, former CBA boss Ralph Norris declared a pay freeze as global finance ground to a halt. Somehow, though, his pay actually doubled. The $8.66 million he earned in 2008 swelled to $16.15 million in 2010.
How? Well the ''freeze'' only applied to the base salary, a relatively small part of the pay-packet, and not the bonuses. It is understood the latest executive pay freeze at the CBA involves more of the same.
The boom in executive salaries of the past decade largely has been an Anglo phenomenon, mainly confined to North America, Britain and Australia as executives in each blamed salary escalation in the others for the salary inflation. It was all to do with market forces.
But the backlash - community and legal - in each of those jurisdictions appears at last to be having an effect. In Australia, the two strikes and you're out rule - where a board is dumped if more than 25 per cent of shareholders vote against the executive remuneration package two years running - is now entering its second year.
That has helped focus the minds of directors on their responsibilities, although a surprisingly large number of companies last year incurred the wrath of shareholders on the issue.
This week, financial services giant AMP revealed that chief executive Craig Dunn would miss a $3.2 million long-term share bonus as he had failed to meet a hurdle comparing long-term shareholder returns for AMP to a bunch of other companies. The simple fact is that AMP's share price has sunk from $6 to $4 in the past two years.
That's what Kloppers and his counterpart at Rio have done - kept it simple. Shareholders have suffered, therefore, no bonus.
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