'Out of line': Why Fortescue bosses may have to sing for their supper

The decision to pass outgoing executives nearly $3 million in bonuses is leaving a bitter taste in the mouth of some proxy firms.

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Executive bonuses handed out at Andrew 'Twiggy' Forrest's iron ore beast could be scrutinised at the upcoming annual general meeting (AGM).

Despite the Fortescue Metals Group Limited (ASX: FMG) share price rising 52% over the past 12 months, some advisory firms are displeased with how those among the miner's top brass are remunerated.

The company's AGM is expected to be held on 21 November 2023. Ahead of the event, proxy advisors are putting forward their views on how shareholders should vote on the various resolutions. Already, it's looking like management will have questions to answer on using special bonuses.

Bonuses without shareholder value

Recently, two firms have urged Fortescue shareholders to cast their vote against the iron ore major's remuneration report. Both Sydney-based CGI Glass Lewis and US-based Institutional Shareholder Services cited special payments as the crux of the issue.

As detailed in the 2023 annual report, Fortescue plans to splash nearly $3 million on 'recognition awards' between former CEO Elizabeth Gaines and former chief financial officer Ian Wells.

Philip Foo, vice president of research and engagement at CGI Glass Lewis, described the payments as uncharacteristic of a top ASX 100 company. Foo elaborated on the argument against such bonuses, stating:

These payments are in excess of the remuneration structure. We note such ad hoc discretionary payments on retirement are unusual among ASX 100 entities. These executive roles have also been well paid historically as can be expected for such prominent roles. We struggle to see how shareholders receive any value from these payments.

The messaging from ISS echoed that of Foo, noting:

This company persists with special recognition awards to senior executives, which is not typical in large companies and not in line with better remuneration governance standards.

While shareholders have the capacity to vote down the proposed remuneration report, it doesn't mean it will change. However, a two-strike rule has been in place since 2011. If the proposed remuneration is shot down two years in a row, the board could be voted out.

How can it impact the Fortescue share price?

It's a problematic situation for Twiggy and Fortescue. Shareholders may not like the company handing out millions in bonuses, but the company does have a duty to attract and retain top talent.

Several executives have decided to exit the company in recent months. Without being inside Fortescue, it is impossible to know what the true motives were behind these walkouts. However, it's fair to assume Andrew Forrest won't want high turnover in the C-suite to be an ongoing distraction.

A deterioration in the company's credit rating can evolve from an elevated turnover at the executive level, as noted by credit rating agency Moody's. This can have ramifications on access debt and the balance sheet more broadly.

Clearly, inadequate remuneration can be a negative for the Fortescue share price, too.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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