GuerdonNews Volume 2 Number 7

August 2006

Dear [FIRSTNAME],

Welcome to Guerdon Associates’ August 2006 newsletter.

In this month’s newsletter, we discuss disclosure requirements, revealing possibly more disclosure than was initially indicated by Australia’s Treasury, note that the US has taken steps that will bring it more into line with Australia’s disclosure requirements, and provide a gem of an example of "remuneration principles” disclosure. We report good news that should allow the board’s search for offshore executive talent to be more successful. Several articles cover the application of share options, with an update of the backdating furore engulfing the US business press, an outline of an alternative and “truer” method of expensing share options, and a concern that companies may be expensing too much with their current option expensing methods. With the potential to be on par with option backdating, but entirely legal, we warn Australian audit and remuneration committees to watch out for goal posts being moved to get that ever elusive incentive reward. Our penultimate article lauds loans to acquire shares, and laments the omnipotence of US law that prevents Australian companies with US operations from using them. We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData® online database.

Watch out for next month’s issue when we will report some interesting research and data on Australian director remuneration.

Remuneration Disclosure Changes - Hedging Your Bets, And More

As we reported a couple of months ago, the Australian Treasury is considering reducing the compliance burden associated with executive and director remuneration disclosures.

However, at a recent public meeting (with an audience, we are told, of about 3), Treasury presented a paper outlining proposals to the AASB. Included in the discussion was possible disclosure of incentive hedging policies (well, so much for simplification…). That is, company policy relating to executives selling the potential gains from options and rights before the end of any performance period.

US Catching Up To Australia On Disclosures

Last Wednesday, July 26, the SEC voted publicly to adopt new disclosure standards that, in many ways, are similar to Australia’s disclosure requirements.

One point of difference is that the company’s relative performance chart will be removed from the report (although it will be required to be published elsewhere).

Here’s A Thought

Getting tired of reading directors’ remuneration reports where the remuneration policy is to “attract, retain and motivate”?

One US steel company described their philosophy in this way:

“We will hire five people to do the work of ten, and pay them like seven.”

There is so much scope to freshen up remuneration reports, and still comply. Hope this helps….

Searching Offshore For A CEO? Now The Near Impossible Is Only Just Hard Work

900,000 Australians have decamped to take up employment far from this country’s sunny shores.

That is 13% of the working population. Research indicates they earn more and are taxed less. Some of them are CEOs. So it is only fair Australian companies should import CEOs in return. Australia is a net importer of talent overall. Where it succeeds on the shop floor it fails in filling the chair on the top floor. Very recently, however, tax changes make the search for a new CEO from offshore that much easier.

Option Fair Market Value – This May Be An Alternative That Reduces The Impact On Your Bottom Line

Under IFRS, employee share options are required to be expensed at fair market value.

This is derived using mathematical models sanctioned under the accounting standards. However, even with very sophisticated models, some companies argue that the expense generated is still higher than the true value of options. But the only way to prove this is to create employee share options that have an immediate market value based on trades between buyers and sellers.

Option Expensing Errors A Big Deal

Recently an Australian mining company announced that it had undervalued the expense of executive and director share options in its accounts by $1 million.

The result also meant that the disclosures of executive and director remuneration were incorrect (for example, the CEO options were originally disclosed as being valued at $77,252 when it should have been $338,173).

Springloaded Options? We Thought You Would Never Ask

Options backdating refers to the practice of selecting (in retrospect) the most advantageous or lowest share price within a given period of time to establish the date and exercise price of a company's share option grant.

In addition to the potential financial gain obtained by executives (at the expense of shareholders), this practice lets companies avoid the compensation expense for discounted options they should have shown on their income statements, under accounting rules in effect before 2005.

Australian Companies’ Potential For Moving the Goal Posts With Executive Rewards – Directors Should Watch Out!

Option backdating in Australia has, in our experience, been more commonly associated with administrative streamlining than moving the goal posts to game the system.

That is, option grants to (typically) new recruits have exercise prices and issue dates that are backdated to the issue date provided to the bulk of employees that received them in that year.

What should be of more concern to directors is the potential for Australian companies to have their own, homegrown version of “goal post moving”. And, while it is a practice that is questionable, in most cases it is legal.

Executive Loans For Oz Companies With US Ambitions – Forget It!

Loan backed share plans have many advantages.

The cost of the loan is tax deductible to the company. There is no FBT on the loan. And the executive is encouraged to build and hold a stake in the company. Unfortunately, for Australian companies that operate in the US, this is not allowed. It is such a serious concern that Australia’s Treasury has made a submission to have the US law changed.

Latest GuerdonData® Updates

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

AVJennings Homes Limited, James Hardie Industries NV and Metcash 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

Ahmed, N 2006, “Shareholding Bosses Good for the Company”, Sydney Morning Herald, 11 July, p 22.

Ahmed, N 2006, “Research Finds Bosses Take Stakes in Own Company”, The Age, 11 July, p 1.

Cratchley, D 2006, “CEOs Put Money on Their Jobs”, Herald Sun, 11 July, p 30.

“Buying Back the Farm”, The Gold Coast Bulletin, 11 July, p 17.

“Confident CEOs Invest”, The Daily Telegraph, 11 July, p 22.

“Top CEOs Punt $6M on Their Firms”, The Australian, 11 July, p 21.

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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