Executive remuneration is one of the most contentious issues in Australian business. Mark Beyer looks behind the raw numbers to find the ‘best value’ executives.
Executive remuneration is one of the most contentious issues in Australian business. Mark Beyer looks behind the raw numbers to find the ‘best value’ executives.
WOODSIDE Petroleum Managing Director John Akehurst has been rated as the ‘best value’ chief executive in WA.
A detailed analysis by corporate finance and management consulting group Trudo and WA Business News rated Mr Akehurst ahead of highly regarded Wesfarmers managing director Michael Chaney.
They were followed on the list by BankWest’s Terry Budge and Hardman Resources’ Ted Ellyard.
Mr Akehurst gained the best value rating because he created more ‘bang for the buck’ for his shareholders than any other CEO in the State.
His total remuneration over the past three financial years was $5.63 million, or about $1.9 million per year.
Over the same period, Woodside’s Shareholder Value Added (SVA) increased by $4.23 billion.
So for every dollar paid to Mr Akehurst over the past three years, he created $750 of value for Woodside shareholders.
Wesfarmers’ SVA increased by more than the Woodside figure but Mr Chaney received substantially higher remuneration ($4.5 million per year).
Hence, for every dollar paid to Mr Chaney, he created $391 of value for Wesfarmers shareholders.
The concept of SVA is designed to measure overall returns to shareholders and comprises two elements.
The first element is based on the growth in market capitalisation, adjusted for capital invested by shareholders.
This adjustment is critical because it highlights the value generated by management (see table).
The second element is the total dividends paid to shareholders.
The study used a three-year timeframe, in order to identify executives who were consistent performers over the longer term.
The three-year timeframe also recognised that executive bonuses are often based on longer-term performance.
The top performers such as Woodside and Wesfarmers generated large capital growth and paid substantial dividends.
Companies including BankWest, Fleetwood and Clough were more reliant on dividends. BankWest’s Terry Budge scored highly on the ‘value ratio’, in part because his remuneration is relatively low compared with other large companies.
Hardman Resources’ Ted Ellyard has generated substantial value for his shareholders, based on the company’s exploration success in West Africa.
Hardman, along with Dalrymple Resources, Centamin Egypt, Croesus Mining, Amity Oil and Tap Oil, paid zero dividends over the past three years.
However, all of these companies generated significant capital growth.
The accompanying table also shows a handful of companies that actually destroyed shareholder value over the past three years.
The calculations used data for the three years to June 30 2002. Woodside’s share price has weakened substantially since then, as the market has become concerned about its short-term earnings outlook.
Consequently, Woodside’s SVA would be somewhat lower than in the SVA table.
Nevertheless, even at the current share price ($11.90), Mr Akehurst would still rank as the best value CEO in WA.
Euroz Securities oil and gas analyst Oliver Foster said investors were focusing too much on Woodside’s short-term outlook.
“The company has an outstanding long-term growth strategy, and that is what John Akehurst has built over the past three years,” Mr Foster said.
Trudo managing director Anthony Wooles said the key objective of remuneration packages was to align the interests of share-holders with those of the executives.
“In practice, there are normally three components to an executive’s total income,” he said.
“The first is their base salary, including benefits like a car and superannuation, and this often reflects the size and complexity of the organisation.
“The second component is a short-term bonus incentive program. This is generally assessed annually, based on one or two key financial indicators.
“The third area is the long-term incentive program, which in many cases includes a shares or options scheme.
“The concept of Shareholder Value Added provides a guide to the medium to long-term contribution of management.
“There is no simple formula that can be applied universally.
“Incentive schemes need to be structured in a way that is appropriate for each company.
“However it is critical that the interests of shareholders and of executives are closely aligned.
“Companies also need to be transparent, so that shareholders can readily understand the basis for executive bonuses.”
Mr Wooles said the “at risk” component of executive remuneration was relatively low in Australia compared with international practice, especially in the US.
“A properly structured scheme will allow the strong performers to be increasingly well rewarded,” he said. “If shareholders are also benefiting, then I don’t think anybody would begrudge the increase in executive reward.
The HayGroup’s Reward Practice director Asia Pacific, Graham O’Neill, said there was a growing trend for companies to adopt broader performance measures.
These include the balanced scorecard concept, which measures performance against four key stakeholder groups: shareholders, customers, employees and the community, with the latter encompassing social and environmental activities.
“There is a growing level of sophistication that focuses on ‘reputational’ capital,” Mr O’Neill said.
