GuerdonNews Volume 2 Number 6

July 2006

Dear [FIRSTNAME],

Happy new financial year to most Australian subscribers, and welcome to Guerdon Associates’ July 2006 newsletter.

In this month’s newsletter we report on some fascinating and revealing research into CEO share ownership levels and company performance, advise on the outcome of a government report on corporate social responsibility (CSR), point out that relative TSR measures overlook risk management and a method to remedy this, briefly cover recent research on the impact of consultants on executive pay, outline a more rational approach to executive remuneration and provide an update on the proposed new superannuation law transitional arrangements.

We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData® on line database and our regular summary of other news sources featuring Guerdon Associates.

Is There A Relationship Between CEO Share Ownership and Performance?

In a prior article we summarised some of the possible consequences of requiring CEOs to own shares.

We also suggested alternative methods that may be considered in an August 2005 article at http://www.guerdonassociates.com/News-Detail.asp?cid=1&navid=1&NewsID=52. In that article, we analysed situations when a shareholding policy may be considered. This time, we report on original research on the extent of CEO share ownership and Australian company performance over 1, 5, and 10-year periods.

The results are conclusive. There is, indeed, a strong relationship between CEO share ownership and shareholder returns. But before you rush out to invest in companies where the CEO has a big stake, or dumping companies where there is not the case, or consider introducing your own company’s CEO shareholding requirement policy, we urge you to read our research. There are differences between industries, size of companies and extent of shareholdings.

Government Report Tells Investors to Amend Pay For Corporate Social Responsibility

The parliamentary committee report looking at corporate social responsibility (CSR) in the wake of the James Hardie asbestos issues has recommended that institutional investors use their power to have companies amend the way they pay “directors, executives and managers” to include performance pay for meeting longer term CSR goals.

The Problems With Relative TSR Performance Measures – Directors Should Watch For Risk

Relative Total Shareholder Return was first introduced to Australian public companies by one of our directors in the early 1990s.

It has become by far the most common long term incentive (LTI) performance measure used for executive remuneration.

This month we focus on the issue of risk and the use of the relative TSR measure for executive incentive pay. Given that ASX Governance Principle 7 requires boards to develop mechanisms for dealing with risk, we thought we would provide an overview of a major risk factor neglected by most boards, i.e. use of relative TSR as a performance measure for incentive pay.

Remuneration Consultants – The Good, The Bad, And The Ugly

At the risk of shooting ourselves in the foot, we thought it best to report recent research on consultant use and executive pay.

The research was based in Britain, and was made possible as a result of changes to its Companies Act in 2003. Under these changes, companies are required to name compensation advisers in their annual reports. Theoretically, this also includes any internal company advisers, including the CEO and remuneration manager, as well as external advisers. Boards considering a policy of using only independent remuneration advisers may wish to consider these findings.

Toward More Rational Executive Remuneration

There are several points in the remuneration planning process where ambiguity exists and a lack of understanding can lead to the establishment of inappropriate levels of executive pay.

Awareness of these decision points will enable remuneration committees of boards of directors to exercise appropriate diligence in developing executive pay structures and levels that are motivational for executives and equitable for shareholders and employees as well. While executive remuneration comprises numerous components, this article addresses only issues associated with executive fixed pay, bonuses, and long-term remuneration.

Update: Federal Budget proposed superannuation changes – transitional issues

Under the government’s recent Federal Budget proposals it was announced that post-tax superannuation contributions (“undeducted contributions”) would be subject to an annual limit of $150,000, with the limit applying from 9th May 2006.

The possibility of an averaging provision over three years to allow for large one-off payments was also signalled.

Latest GuerdonData® Updates

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

AXA Asia Pacific Holdings Limited, Corporate Express Australia Limited, CSR Limited, Hastings Diversified Utilities Fund, Programmed Maintenance Services Limited, SP Ausnet, and Westfield Group.

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

“Pay Not A Barrier To Internationalising Aussie Boards”, AAP NewsWire, 30 May 2006.

“Australian Firms Can Nominate Int’l Directors to Boards: Report”, Asia Pulse, 31 May 2006.

“Pay Barrier No Longer Exists for Aussie Boards, Research Shows”, AAP NewsWire, 31 May 2006.

“Pay Barrier Debunked”, The Mecury, 1 June 2006, p 29.

“Director Pay Levels”, Herald Sun, 1 June 2006, p 40.

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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