Who wins from CEO pay packets?
Sometimes investors do, with Macquarie Group Ltd (ASX: MQG) recording strong profit growth in FY14 and a further 35% profit growth in the first half of 2015.
It's probably no surprise then that CEO Nicholas Moore's pay packet leapt 48% to $13,080,432, making him the fourth highest-paid ASX executive according to The Australian Financial Review.
Investors should also be pretty happy with rising dividends and a strong share price.
Other times the link between pay, performance, and shareholder happiness is a little more opaque.
Harvey Norman Holdings Limited (ASX: HVN) shares climbed roughly 15% in FY14, while net profit after tax lifted 30.5% excluding property value changes and applying a constant tax rate to last year's results (Harvey Norman had a lower tax rate last year).
CEO Kay Page experienced a 54% increase in pay to $2.77 million, while founder Gerry Harvey's salary rose 10% to $1.1 million.
Despite modest salaries compared to their peers, a staggering 75.82% of shareholders voted against the remuneration report, with some feeling that the arrangement should have included shares rather than a pure cash payment.
They're not alone either, with Newcrest Mining Limited (ASX: NCM) recording a 44.8% vote against CEO Greg Robinson's pay increase of 63%.
A total of 91 companies recorded a 'first strike' (more than a 25% vote against the remuneration report) in 2014, with a further 9 recording a second strike – which allows shareholders to vote on a decision to remove the board.
Executive pay is a tricky beast at the best of times, and even the simpler salary packages can be difficult to figure out once short term and long-term incentives are factored into the equation.
Further, comparing what a director gets paid with what they should be paid is even more difficult.
Logically their pay should rise as the company performs better, but how does one measure that?
Linking pay to changes in the share price allows for wages to be inflated on sentiment, not business fundamentals.
Linking it solely to earnings is also problematic – and wait, by earnings do we mean Earnings Per Share (EPS), Earnings Before Interest and Tax (EBIT), Net Profit After Tax (NPAT), or any of the so-called 'underlying' figures associated with these measures.
Capital raisings can reduce EPS while still significantly increasing earnings and driving growth for future years. Improvements in outside market conditions can increase profit without a single change to the way the business is run.
There's also the question of whether other measures – like staff productivity, environmental improvements, or Total Recordable Injury Frequency Rates (TRIFR), should be included as part of a pay package.
Productivity can improve significantly but without a major immediate impact on earnings since staff can be a relatively small expense to the business.
Safety culture isn't immediately material to a company's results, but improved safety reduces the likelihood of expensive lawsuits and reparations as well as potentially making an important contribution to employee morale, which is vital to performance.
It's tough to work out, but you can distil all the complexity down to three essential questions:
- Do I like what the executives are doing?
- Is their pay an accurate reflection of how my shares are performing? (i.e. is it increasing as my earnings/dividends/share price increases)
- Do they deserve it? Or instead, are they worth it?
When you're considering that last question, bear in mind that none of Australia's five most highly paid executives came from the 'Big Four' banks.
News Corp (ASX: NWS) CEO Robert Thomson saw his pay catapult 353% to $13.2 million – and number three spot on the list – on a 4% decline in revenue and 53% decrease in net income.
And the highest paid of them all, David Gyngell of Nine Entertainment Co Holdings Ltd (ASX: NEC), received $19 million as overseer of a 21% increase in revenue and 92% decline in NPAT.
Food for thought.
