There are three private equity firms in the running to buy Coles Myer’s Myer Stores. It is expected each will provide variations of what is fairly standard private equity remuneration for the executives they acquire with the deal.
The basic premise of private equity remuneration is to provide a meaningful stake in the acquired firm as an incentive. The most common form involves facilitating a purchase by the executive team of the stake, often via private equity firm loan facilities, and additional incentives for more equity on hitting the numbers required to make the deal pay.
Private equity is overtaking hedge funds as one of the fastest growing sources and applications of global capital. Its influence is undeniable in mature capital markets like the US, Canada, and the UK. And good performing executives tend to like the experience of becoming rich, operating out of the limelight of public company disclosures, and being rid of the more onerous duties of being a listed company public officer.
While listed public companies cannot do much to protect their executives from the heavy regulatory load required of their officers, some are learning to adapt their pay practices for more effective attraction, retention and motivation. This is most evident in UK companies. It is a common and growing practice in the UK to provide more incentive “leverage” if an executive goes out on a limb to acquire big licks of company shares. For example, if the executive acquires so much equity on market, then any performance-based equity he/she earns may be doubled or tripled (depending on performance and/or degree of equity ownership). Boards figure that with the CEO’s mortgage riding on the success of the company, the CEO will sweat out more value for shareholders. Such pay plans really underscore the “R” in “at risk” pay.
In Australia, so far, this approach is not evident. The closest we tend to come in the public company domain is the practice of the listed property investment companies. Because of tax law, options over stapled securities (effectively the result of two forms of equity joined together as a proxy for a share) do not receive the tax benefits of regular share options. Therefore these companies facilitated loans to executives to acquire stapled securities. In effect, these designs operate like an option plan. While not understood by various governance groups, these arrangements are about the only way to provide a reasonable equity incentive to executives for certain types of companies. (There are other benefits from this style of plan that we will cover in future newsletters).
In any case, this solution is only part of the way to catching up with the practices of UK-listed companies, and is even further behind private equity firms already operating in Australia. Both UK-listed companies and Australian private equity firms have advantages in attracting the most talented executives away from Australian public companies, and retaining and motivating them once they are there. We think it only a matter of time before remuneration practices in Australian listed public companies start to catch up, and governance groups begin to catch on.© Guerdon Associates 2022 Back to all articles