The average retail investor could be forgiven for thinking the entire world of finance has conspired to justify the enrichment of executives at the expense of shareholders.
When David Jones (ASX: DJS) recently announced that it has held off giving its board and management a pay rise, the financial press touted it as an achievement of sorts. Another way of looking at it is that the board is implicitly admitting that the pay rises awarded to directors and management in the past, are no longer defensible.
David Jones’s CEO Paul Zahra will receive fixed pay of $1.5 million in the current year. It’s surprising to me that most seem to happily accept that a CEO of a large company should profit handsomely when the owners of the business, the shareholders, are losing money. The board has also lowered the baseline earnings per share on which the CEO’s performance is measured to reflect the fact that earnings will drop in FY2014. This means it is quite possible that Zahra will again earn hefty performance pay.
To borrow the words of Warren Buffett, who has set the remuneration of many top-performing CEOs:
“Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre or worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.”
Investors should have a clear head about how remuneration policies are set. This is how it works: shareholders pay for “remuneration consultants” who are chosen by board and management to suggest the appropriate remuneration for board and management. Although the shareholders pay the bills, the consultants know that if they suggest that executives are overpaid, they won’t be hired again — by that board, or any other. The consultants’ job is to justify the salaries of executives.
Zahra received over $2.2 million in 2012 and over $2.4 million in 2013. By way of comparison, his counterpart at Myer Holdings (ASX: MYR), Bernie Brookes, received over $2.5 million in 2013. The smaller retailers tend to pay their executives more modestly. For example, in 2013, Specialty Fashion Group (ASX: SFH) paid its non-executive directors a total of $518,000 and its CEO just over $1.06 million. Thus, the board and CEO received far less in total than the just CEO of David Jones or Myer.
And how have shareholders fared? Since Paul Zahra took the helm of David Jones in July 2010, the share price is down about 35%. The share prices of both Myer and Specialty Fashion Group are down about 20% in the same period. Retailing has not been profitable for the owners of these companies over the last three years, but David Jones shareholders have done particularly badly. However, this may mean that the market currently undervalues these shares.
Personally, I’m a little uncomfortable with the investment case for David Jones, although other analysts hold a different view. Zahra got the top job when the prior CEO, Mark McInnes bailed out after a sexual harassment scandal, and received a $1.5 million “settlement” despite reportedly offering his resignation. While he may have performed well in the seven years he was CEO, it is arguable that he did not deserve such a generous golden handshake.
As Buffett puts it, for some companies, “yesterday’s most egregious excess becomes today’s baseline.” Investors would do well to keep an eye on remuneration for boards and management. You will often find that company founders who still own a large shareholding are among the most modestly paid, and they often treat minority shareholders very well.
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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.