CEO pay comparisons
CEO pay reported by Billabong International Ltd today was less than that awarded in the previous year. Mr Derek O'Neill collected about $2.2 million during a year in which the group earned $146 million net profit.
By contrast, on the same day, BHP Billiton reported that CEO, Chip Goodyear, earned about $8.8m (4 times as much as O'Neill) from a company which earned $13.7 billion (94 times as much as Billabong). Admittedly, Mr Goodyear's pay increased by about 32%, whereas Mr O'Neill's came down from about $2.4m.
This simple comparison shows how executive pay is never a simple comparative issue. Shareholders (and their associations) need to use their 'non-binding' votes wisely now that they have a formal vehicle through which to voice their opinion about remuneration. Part of the cost borne by the shareholder is the price of the executive as a "commodity" - the experience, education, capability and value he/she brings to the role. This price of entry has to be paid irrespective of subsequent success and, to a certain extent, irrespective of the size of the company or industry sector in which it competes. A quite separate part of the price is a reflection of the performance of the company during the year - and even that is only relative to the degree of success the previous year.
In this example, $13.7 billion profit is clearly better than $146 million profit in every respect - it is a better return on funds employed, it has increased at a higher rate year on year, it represents a greater earnings per share, etc. Is it, though, a better result when the economic conditions in which it was earned are factored in? The conditions in which BHP found itself were decidedly more lucrative and arguably less competitive than those in which Billabong found itself. Should this bring them closer on a comparative basis? BHP had predicted and made itself ready to take advantage of those favourable conditions in the years preceding their advent. Does this mean we can ignore the favourable conditions and credit BHP in absolute terms?
These are some of the complexities surrounding corporate performance assessment that need to be considered by shareholders before they jump on the "CEO is overpaid" bandwagon. Having thought about these complexities, there is also the issue of attribution. Was it really because of the CEO and the Executive team that these results were achieved? In our experience, it is often despite them. On this point, it is interesting to note that BHP Billiton has responded to the need to recognise that all of the employees are entitled to benefit from the booming conditions in which it finds itself - not just the executives and the shareholders. BHP intends to propose a new all-employee share plan at its annual general meeting in Brisbane later this year. The "Global Employee Share Plan" is a 'matching' plan whereby the company will buy as many BHP Billiton shares for the employee as those purchased by the employee up to a maximum of $US5,000 worth of shares.
Author: Greg Brogan
Date: 25 Sep 2006