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
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