Season’s greetings, and welcome to Guerdon Associates’ December newsletter. As the last newsletter for 2005, we summarise 2005 pay outcomes and trends for ASX 300 Chief Executives using what we consider to be the most valid methods. In the course of summarising the data we discovered a milestone in Australian executive pay, so be among the first in the country to know by reading below! We also announce a new range of GuerdonData™ reports and services and conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData™ on line database.

Take Caution With Media Reports On CEO Pay

We recommend caution with any media reports on remuneration increases. To date we have observed media reports with skewed sampling, incomplete or misleading remuneration measures, and arbitrary adjustments.

Even our own summary, which we know to be methodologically sound, will not be valid for a particular company’s purposes. Always insist on data that is valid for your own company. Ideally this involves matching roles with similar objectives and scope in companies of the same size in the same industry.

Our summary is for CEOs across the entire ASX 300 group. Hence it is not valid enough for your company's particular pay purposes. But we trust it will be a valid indicator of overall trends, and so provide pointers for you in questioning your external or internal remuneration advisers.

Our analyses are different from media reports. Please be aware that:

1. This data is based on changes in remuneration elements for the (a.) same incumbents who (b.) occupied the same position in (c.) the same company for at least (d.) 2 (e.) full years. We have noticed numerous reports (both privately commissioned and in the media) that fail on the data validity test in at least one of these 5 requirements.

2. The remuneration measures used are Total Fixed Remuneration, Short Term Incentives (STIs), Long Term Incentives (LTIs) and Total Remuneration. While these are derived from disclosures, they differ from the measures in annual report remuneration tables. The AASB does not require equity to be separated out and reported as a salary sacrifice or package component (in which case it goes into the Total Fixed measure), bonus (in which case it goes into the STI measure), or as a LTI. So various media reports and private surveys we have seen variously report cash salary or cash bonus increases, but not the whole picture. For example, cash salary may go down if the executive sacrifices salary for more shares. Or Total Fixed Remuneration may increase, while cash stays the same, if the board insists that future pay increases be taken in restricted shares. Cash bonuses may be offset or reduced by having to take half in equity. For these, and many other reasons, we analyse remuneration in the format outlined above. In general, the news media does not use this approach.

CEO Levels Of Pay

The average Total Remuneration level has been skewed by a few big payers.

In the table above, average Total Remuneration is much higher than the median, implying a pay distribution skewed by some relatively high payers. The averages and quartiles shown for each remuneration element are calculated independently. That is, the 25th percentile Total Fixed Remuneration CEO is not the same person as the 25th percentile STI CEO. Therefore, each row cannot be validly added. In addition, all statistics are based on incumbents receiving the item, and exclude any zeros (i.e. CEOs who do not receive a particular item).

CEO Increases

LTI increases are much higher than for other elements this year.

The table above indicates the rate of pay increase derived from annual report disclosures for total fixed remuneration, short term incentives, long term incentives and total remuneration.

Coincidentally, this year’s total remuneration increase mirrors the rate of increase in the USA.

As early analyses of ours indicated in prior newsletters, this year has been very robust for remuneration increases. An excellent profit year that saw average earnings per share growth for these ASX 300 companies of 22.6% would imply a healthy increase in STIs. However, long term incentives grew at double the rate of short term incentives. Does this mean that an oft criticised focus on short term results, reinforced with pay heavily weighted by short term bonus payments, is undergoing change? Read on.

CEO Remuneration Structure

A milestone has been achieved for Australian executive pay.

Changes in the structure of CEO remuneration are illustrated in the figures above.

The pie charts indicate two things of very major significance. In fact, this year is a milestone year that has yet to be heralded. So here it is, an exclusive to subscribers of Guerdon News:

• Disclosed for the first time in Australia, Long Term Incentive reward exceeds Short Term Incentive reward for the ASX 300.
• Even more remarkable, total pay at risk (i.e. the sum of all incentive pay) is greater than total fixed pay.

Unfortunately this does not mean CEOs will necessarily be tempted to focus on strategies for long term sustainable growth, as the next section indicates.

Turnover

If CEOs are not going to stay around, what performance aspects are they likely to focus on? To an extent it may depend on how long they stay.

The annualised turnover rate for CEOs is 21.9%. That is, based on 196 companies reporting data for 2 years in AASB 1046 format, only 153 had the same CEO at the end of both financial years. CEO tenure is just over four and a half years.

Assuming the LTI plan is for 3 year performance, the average CEO will effectively realise only 1 vested LTI payment versus probably 4 STI payments during their tenure. To shore up their financial future for retirement, it could be argued that the average CEO would be tempted to concentrate on short term results, rather than sustainable long term earnings growth. Boards would be well advised to have their advisers look more closely at this conundrum.

Board Reports – A New GuerdonData™ Service

We are pleased to announce that GuerdonData™ subscribers will soon have access to a new series of reports.

“Board Reports” focus on directors’ committee memberships and chairmanships, work loads and meeting attendance, board membership and total emoluments across all ASX 300 boards, shareholdings, independence, years of service, and company performance. In addition, for each board, subscribers can access a summary of its committees and the membership of these committees.

As with GuerdonData™’s “Remuneration Reports”, data will be updated daily as each company releases its annual disclosures.

Board reports will be available to subscribers from mid-December.

As with Remuneration Reports, first year corporate subscribers have unlimited access to all reports.

Stay tuned for further services that will be made available to subscribers next year.

Latest GuerdonData™ Updates

This month’s updates to GuerdonData™ include disclosures from the following 21 companies:

AUSTRALIAN WORLDWIDE EXPLORATION LIMITED, BURNS PHILP & COMPANY LIMITED, BEACH PETROLEUM LIMITED, COLES MYER LIMITED, EMPEROR MINES LIMITED, FOODLAND ASSOCIATED LIMITED, GEODYNAMICS LIMITED, HOUSEWARES INTERNATIONAL LIMITED, JUST GROUP LIMITED, KIMBERLEY DIAMOND COMPANY NL, MOUNT GIBSON IRON LIMITED, PRIME TELEVISION LIMITED, RAMSAY HEALTH CARE LIMITED, RESOLUTE MINING LIMITED, SEVEN NETWORK LIMITED, SP TELEMEDIA LIMITED, SYMEX HOLDINGS LIMITED, TRANSURBAN GROUP, VISION SYSTEMS LIMITED, VIROTEC INTERNATIONAL LIMITED, ZINIFEX LIMITED

Executive and director remuneration data from all ASX 300 companies on GuerdonData™ is available to any subscriber. Visit our website for more information on GuerdonData™.

Assess how easily you can find out director and executive pay information by viewing our 6 minute demo. Click on the "More Info" button below.

Guerdon Associates in the News

Rolfe, J 2005, ‘Pay Investors’ Concern’, The Advertiser, 2 November, p 49.

Rolfe, J 2005, ‘The Best Value For Money CEOs’, The Courier-Mail, 2 November, p 30.

Rolfe, J 2005, ‘Their Pay Is In The Millions But These CEOs Are…Value For The Money’, The Daily Telegraph, 2 November, p 55.

‘Magnificent Seven Deliver Value For Big-Buck Pay’, 2 November 2005, p 22.

Robinson, M 2005, ‘Shareholders Get The Picture’, The Australian Financial Review, 16 November, p 63.

Kitney,D and Buffini, F 2005, ‘Executive Packages: Who Earns A Fair Day’s Pay?’, The Australian Financial Review, 19 November, p 17-18.

Disclaimer

The information, analysis and opinion in this e-mail and attachments are intended to be for informational purposes only. Analyses are based on information taken from public documents or private surveys, and we do not represent to its accuracy. Guerdon Associates assumes no liability for the use or interpretation of information contained herein. This publication is provided "as is" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of marketability, fitness for a particular purpose, or non-infringement of third party rights.