GuerdonNews Volume 2 Number 3

April 2006

Dear [FIRSTNAME],

Welcome to Guerdon Associates’ April 2006 newsletter.

This month’s newsletter is dedicated to non-executive director (NED) pay. We not only look at current levels of pay, but we also examine the background to recent trends in NED pay, including changes to retirement provisions, fee sacrifice for shares, and workload. We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData™ on line database.

Directors’ Fees – Larger Companies Skew Data

Median ASX 300 non executive director fees per board is $83,750.

Table 1 shows a breakdown of current remuneration levels per NED per ASX 300 board, excluding board chairmen (for chairman data see our March 2006 newsletter by clicking on the "More Info" button below).

The difference between the average and median indicates a significant skewing of fees above the median. Our analysis of the data indicates that director pay is exponentially correlated with market capitalisation.

But What Does The Average Director Earn From All Boards?

We asked GuerdonData™ to provide the total fees earned across all ASX 300 boards by NEDs in the database for 2005. The data is shown below.

Only a few directors sit on multiple ASX 300 boards. Hence, ASX 300 directorships tend to be occupied by part time directors. Is this a good thing?

To find out, read the full artice by clicking the "More Info" button.

Factors Still Driving NED Fee Increases

Debate regarding director remuneration has been fuelled by the escalation in the workload of company directors, onerous legal and regulatory obligations, and better disclosure of remuneration arrangements for directors.

In addition, investor groups have lobbied for the removal of tenure-based arrangements such as retirement benefits, while at the same time calling for directors to reduce their workload by relinquishing multi-directorships.

These factors have contributed to significant growth in NED fees during the past two years, evidenced by the AGM resolutions presented to shareholders for increases in director fee pools. For example, 17 of the 20 largest ASX-listed companies have increased their aggregate fee pools during this period.

To read more, click the "More Info" button.

The End of Good Ol’ Days Of Director Benefits

Retirement benefit arrangements for directors had their origin in a time preceding the introduction of compulsory SGC contributions.

Although there was a surprising degree of variation in the formulae applied to the calculation of entitlements, most shared common elements of service period, average or aggregate fees paid over a specified period (such as the final three years of service) and an initial qualifying period. These arrangements were similar in nature to defined benefit superannuation.

Pressure to remove these arrangements in recent years stemmed from:
• Perceived additions to already generous retirement provisions with SGC “top-ups”;
• Shareholder and investor dissatisfaction with the notion of entitlements generated by tenure rather than merit, and
• The not uncommon coincidence of substantial payments with termination of board service associated with a company financial or performance crisis.

When freezing of director retirement allowances put some companies on thin ice – how frozen is “frozen”?

There have been two broad approaches to the removal of retirement benefits:

a) cessation of the accrual at a specified date for all directors;
b) ceasing to offer the benefit to directors appointed after the specified date, but continuation of the arrangements for existing directors.

Companies frequently advised that they had “frozen” the accrued value of the benefit at the specified date, but the approaches to this took different forms.

Click on the "More Info" button to read about those different forms and more.

How much should fees be adjusted?

Reducing benefits together with the pressure for increased fees to recognise growing workloads, generated a flow of AGM resolutions to increase fee pools in order to accommodate an element of director remuneration that had previously sat outside the pool

In almost every case, an adjustment to fees was made to compensate for the value of the annual retirement benefit accrual foregone (or in the case of the new directors, not provided). This was usually based on an estimate of annual value, given that individual values varied according to tenure and fee histories of individual directors. Adjustments of approximately 30% to the fee levels were not uncommon, with some adjustments approaching 50% of the pre-existing fees. In some cases, part of the increase was compulsorily taken in the form of company shares by way of fee sacrifice.

Superannuation Now For NEDs

Retirement provision for directors is now afforded in essentially the same manner as for most executives and other employees, via the Superannuation Guarantee Charge.

In some cases, companies will base the SG payment on the actual fees, rather than restricting the calculation by reference to the maximum contribution base.

There is also an opportunity in some companies for directors to “fee sacrifice” in exchange for superannuation or shares, as there is for employees.

The structure of NED remuneration (main board and committee fees)

Approaches to the treatment of committee responsibilities have fluctuated over the years.

Practices moved from recognition of committee responsibilities through payment of separate fees, to payment of a single board fee encompassing main board and committee duties. Now we see a trend back again to separate fees.

This trend reflects a concern to more accurately capture the burgeoning workload associated with various board functions, and in particular, to recognise differences in workload between the committees.

Irrespective of the philosophy adopted by individual companies, it is almost universal practice to pay a specific fee to the chairmen of board committees.

Participation on subsidiary boards

During the past year or so, we have noticed a significant rise in the interest of directors in determining a fair and equitable approach to the setting of fees for participation on subsidiary boards.

Subsidiary boards take a variety of forms, ranging from special purpose or single transaction entities having directors drawn from management within the relevant business unit of the organisation, to vehicles fulfilling compliance functions and staffed by fully independent directors, to very active and “operational” entities such as superannuation trustee boards.

For more on this, click on the "More Info" button below.

Latest GuerdonData™ Updates

This month’s updates to GuerdonData™ include disclosures from the following 16 companies:

Australand Property Group, APN News & Media Limited, Alumina Limited, Capral Aluminium Limited, Caltex Australia Limited, Gasnet Australia Group, General Property Trust, Iluka Resources Limited, Iress Market Technology Limited, Lihir Gold Limited, Oxiana Limited, Pacifica Group Limited, Portman Limited, Promina Group Limited, Rio Tinto Limited, and Woodside Petroleum.

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

Robinson, Michael 2006, “Incentives Aplenty in Private Equity Deals”, Australian Financial Review, 13 March.

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.

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Copyright © 2006 Guerdon Associates

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