All bull and no bear

It may be the taxpayers who are bailing out executives on Wall Street but in Australia it's the shareholders.

Stumbling Queensland banking and insurance juggernaut, Suncorp, has just shown precisely what not to do. That is, shower executives with unseemly pay rises while shareholders get it in the neck.

Chief executive John Mulcahy enjoyed a pay increase from $5.3 million in 2007 to $6.2 million in 2008. During that time, net profit actually dropped from $1.1 billion to $556 million. Yet the more accurate reflection of how shareholders fared is an earnings per share measure, and EPS dived from $1.59 to 60 cents per share.

A Suncorp spokesman was at pains to point out that Mulcahy's short-term incentive component had been scaled back.

This is a prelude to the kind of sophistry to which we can look forward in the annual report season now upon us (the season when pay cheques are unveiled) as executives - who are in reality just managers of a business belonging to other people - seek to rationalise their avarice.

Why John Mulcahy picked up an STI, or any kind of bonus at all this year, is the pertinent question. Besides earnings sliced in half, the share price began the financial year at $16.92 and closed it out at $13.04. It is now $10.40.

No Coles discount for Goyder

A bit more on the strife at Suncorp later. The bancassurance group is by no means alone in paying for lack of performance, or rewarding failure for that matter.

As with Suncorp's massive acquisition of rival insurer Promina at the top of the market - a deal on which the verdict of the jury remains steadfastly out - Wesfarmers bet the company on Coles.

Hitherto, Wesfarmers had been an admirably disciplined company both in its executive pay and in its acquisitions.

It had shied away from bonuses - which debunks the theory on high-performance pay as this had been one of the best performers in the market for two decades - but it has just announced a large bonus scheme for CEO Richard Goyder.

Reflecting the obvious need to turn around Coles - by no means a new ambition - annual bonuses of up to 120% of base pay will accrue to Goyder based on unstipulated ROE (return on equity) measures.

True, the deal has thumped Wesfarmers' ROE, indeed the stock looks way overvalued by that gauge even now, but Coles is Goyder's baby anyhow.

His career and reputation are inextricably linked with the fate of the Coles' transaction and a large bonus grant based on secret performance measures is hardly going to make him work any harder.

All bull, no bear

The rise of executive pay has been, for years predicated on rising earnings and stock prices in the upswing of the bull market and now boards are figuring out new ways to pay their executives more while shareholders lose.

The notion of ``at-risk'' pay is joke if executives can't share any hardship with shareholders, or even a bit of a pay cut, during a downturn.

At Oxiana, Owen Hegarty's $10.6 million farewell payment was knocked on the head by shareholders only for the board to find a way to pay him $8.6 million ex-gratia.

At Consolidated Media, executive chairman John Alexander was rewarded with no less than a $15 million termination payment despite presiding over the decline of Nine Network. CMH is down, Nine is skirting with a breach of its banking agreements, Alexander picked up $19 million.

At AGL, former chief Paul Anthony pulled out $11.3 million in 2007 and a further $6.2 million for four months' work in 2008 including a $5 million termination payment.

It should be said that Anthony and Alexander - or Mulcahy and Hegarty for that matter - can hardly be blamed for striking a keen deal for themselves. It can also be said that boards are weak for capitulating to such feeble contracts.

At the failed Allco Finance Group, David Clarke is asking for an options grant to be turned into cash while Bendigo chief Rob Hunt is watching his 2009 Long Term Incentive component also turned into a cash payment.

Spin the tale

When the market turns down and companies underperform, so should executive remuneration. Otherwise it is a perversion of the market for executive talent.

It is bad capitalism, it is cake-and-eat-it-too, it is best-of-both-worlds, it is untenable and shareholders should be angered.

At AGMs and in press releases and friendly TV interviews, you will hear that boards have had remuneration experts sign off on their independent remuneration schemes. You will not hear why it is that boards cannot price labour in their own markets.

You will be told that the credit meltdown is to blame for poor performance. You will not be told that the job of a manager is to manage, and manage risk, whatever the macro conditions might be.

You will be told that executive pay really must keep pace with best practice and international benchmarks, a la Wall Street. When it comes to pricing their own labour the executive lobby cries America, and when it comes to pricing their employees they cry Asia.

Suncorp woes

There will be much acrimony between shareholders and boards this year. In the case of Suncorp, which has two businesses - insurance and banking - the bad debts are flowing thick and fast on the banking side while the rise in the group's cost of wholesale funding is choking new lending.

Excluding a $200 million exposure to the failed Raptis Group, Suncorp is now believed to have exposure to non-performing loans of $660 million against a budget for bad debts of $96 million. It won't give a number.

The group denies it but there is also believed to be a large ``reduction in headcount'' in the pipeline.

In insurance, Suncorp is still digesting its $7.9 billion acquisition of rival insurer Promina, a deal it struck at the top of the cycle in late 2006. The official line is that the integration of Promina is going well.

The real line is there is $5 billion of goodwill sitting on Suncorp's balance sheet. The IT systems are yet to be integrated and almost all the top executive talent of Promina - which ran the likes of Vero, AAMI, GIO, APIA and Shannons - has walked.

mwest@fairfax.com.au

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