Pay it for­ward

CEO re­mu­ner­a­tion is one of the most con­tentious is­sues in the world to­day. The pay­pack­ets of toplevel ex­ec­u­tives have caused protests, ri­ots and share­holder dis­sent. Are ex­ec­u­tives worth the money? Jonathan Jack­son ex­am­ines whether re­mu­ner­a­tion should be

Business First - - FEATURE -

The most re­cent CEO to come un­der at­tack for the depth of his pay­packet is Vir­gin Aus­tralia chief ex­ec­u­tive John Borghetti. Borghetti’s re­mu­ner­a­tion came into ques­tion by CGI Glass Lewis, who urged share­hold­ers to vote against Vir­gin’s re­mu­ner­a­tion re­port and the grant­ing of share op­tions to Mr. Borghetti.

CGI is an in­flu­en­tial ad­vi­sor. They are one of the lead­ing, in­de­pen­dent, gov­er­nance anal­y­sis and proxy vot­ing firms, serv­ing in­sti­tu­tional in­vestors glob­ally that col­lec­tively man­age more than $15 tril­lion in as­sets.

Their fo­cus is the long-term fi­nan­cial im­pact of in­vest­ment and proxy vote de­ci­sions. When they ad­vise, peo­ple gen­er­ally lis­ten.

In this case how­ever, Vir­gin’s four largest share­hold­ers – Sin­ga­pore Air­lines, Eti­had, Air New Zealand and Richard Bran­son – are ex­pected to vote in favour. CGI’s con­cerns over a lack of jus­ti­fi­ca­tion for high lev­els of pay will fall on deaf ears as the board moves to boost their CEO’s pay.

Borghetti’s statu­tory pay to­talled $3.7 mil­lion. The pay in­cluded a con­trac­tual bonus for the takeover of West Aus­tralian air­line Sky­west and the pur­chase of a con­trol­ling stake in Tig­erair Aus­tralia. The board also boosted his base pay by $350,000 cit­ing the fast track­ing of Vir­gin’s re­struc­ture. Yet Borghetti over­saw a $98 mil­lion loss.

Given the mag­ni­tude of the loss and the fact that his pay is ap­prox­i­mately 70% higher than the me­dian for his peers, CGI and Vir­gin’s share­hold­ers are well within their rights to ques­tion the money.

Speak­ing gen­er­ally, En­tourage CEO Pe­tar Lack­ovic says, “It is com­monly sug­gested that the suc­cess of most com­pa­nies is of­ten di­rectly re­lated to the qual­ity of its ex­ec­u­tives and this ul­ti­mately af­fects the staff and fam­i­lies of these com­pa­nies.”

In other words, topline ex­ec­u­tives are usu­ally worth the money. There is no sub­sti­tute for ex­pe­ri­ence and smarts. How­ever, Pe­tar does be­lieve that com­pa­nies should adopt mod­els that suit them.

“Be­ing one of the most crit­i­cal ac­qui­si­tions, to at­tract top line ex­ec­u­tives there is thought that com­pa­nies should seek to de­sign the most ef­fi­cient com­pen­sa­tion pack­ages pos­si­ble in or­der to at­tract, re­tain, and mo­ti­vate CEOs, ex­ec­u­tives, and man­agers and this of­ten means align­ing pay-pack­ets with prof­itabil­ity.

“What should al­ways be taken into con­sid­er­a­tion are the val­ues as well as the short, medium and long-term goals of the com­pany be­fore de­cid­ing on this and mak­ing sure they are clearly com­mu­ni­cated and aligned with all par­ties.”

It’s an im­por­tant point to make. If you are con­sid­er­ing pay­ing the big dol­lars, make sure that the money spent is in line with the val­ues of the or­gan­i­sa­tion. If not, you could bring the or­gan­i­sa­tion down.

Nick Raphaely is Di­rec­tor and Co-founder of As­set­line, a lead­ing Aus­tralian per­sonal as­set len­der. Be­gin­ning his ca­reer at Mer­rill Lynch In­ter­na­tional (now Bank of Amer­ica Mer­rill Lynch), Nick has 15 years of in­vest­ment bank­ing and funds man­age­ment ex­pe­ri­ence in the UK and Aus­tralia.

Nick un­der­stands the in­tri­ca­cies of re­mu­ner­a­tion bet­ter than most.

“In April this year, Sir James Crosby, who headed HBOS, which was once one of Bri­tain’s largest banks, an­nounced he was giv­ing up 30% of his in­dexed pen­sion, quit­ting his job with

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