Spotlight turns to dated mining executive incentive schemes as early annual report insights emerge

Early insights into how the resources sector has performed in the wake of the mining downturn suggest that mining companies must reassess traditional remuneration practices and adjust to a new business climate. Modified incentive structures in a range non-mining sectors resulted in just 13% of reward incentive payments across lower performing companies in the last financial year, while over 70% of reward incentives were paid to CEOs in metals and mining, with these companies reporting an average shareholder loss of some 21%.

An analysis conducted by independent remuneration firm, The Reward Practice, reviewed ASX 300 remuneration reports, isolating the top performing and lowest performing companies across all industries, and differentiating the results against the metals and mining companies.

Although the metals and mining sector reported lower than average fixed salary percentage allocations in the bottom performing companies, on closer inspection total executive remuneration (salary and incentives) was largely obtainable over a relatively short period of less than two years and evaluated on mostly ‘hygiene’ measures that do not underpin business growth. As a result, within this group more than 70% of reward incentives were paid out, despite some company profits falling and a significant drop in shareholder value.

Mr Warren Land from The Reward Practice, stated the mining boom and talent shortage may have seen some boards and shareholders become complacent with incentive provisions and achievement metrics, but in tougher times, a ‘set and forget’ approach presents a number of risks.

“It is apparent that metals and mining companies need to move away from a ‘vanilla’ approach to remuneration packages. This is particularly so in light of continued market shifts and variable profits, which is part of a miners’ DNA,” Mr Land said.

“Our research highlights a number of sizable reward payments despite significant company losses. In one case a CEO received 135% of his STI targets against a loss of 12% to shareholders. On closer analysis we see the issue is not merely about the distribution of fixed salary payments and incentives, but also what the rewards are measured and reported against.

“In many cases within the mining sector, CEO rewards include non-financial metrics, such as environment, company culture and safety. The industry is less likely to include a profit gateway, which means rewards can be achieved regardless of the company’s financial performance or position. There is increasing pressures for companies to reconsider their executive remuneration packages.”

The 2012 Corporations Act introduced the ‘two strikes’ rule, whereby shareholder votes against unsatisfactory remuneration reports can enact serious consequences on the company. Together with the Hon Scott Morrison’s recent Banking Executive Accountability Regime (BEAR) provision to defer bonus payments in the major banks by four years, and a number of media reports highlighting highly paid executives, the spotlight is on company boards to demonstrate balance in their remuneration packages. More shareholders are using their voting power to influence decisions on CEO and executive remuneration.

Based on information drawn from the analysis, evidence exists that a number of top tier organisations are embracing or taking steps to adjust ‘homogenous’ methodologies and move towards a more tailored structure aligned with the business. However, the metals and mining sectors in the mid to lower tiers have been slow to act in this space and Mr Land believes boards need to plan ahead. Boards need to determine the remuneration strategy well before the performance year commences.

“When Ardent Leisure lost its CEO earlier this year following its theme park crisis, the new CEO remuneration package differed significantly from the predecessor. It was far more aligned with the business and had a greater emphasis on pay for performance, incentives and portions of the fixed salary being paid in deferred shares,” Mr Land continued.

“The mining sector is similarly event driven and subject to peaks and troughs, which means remuneration needs to be more nuanced by incentivising in accordance with the investment cycle. Being an extractive industry reliant on replenishing reserves, more medium to long term targets should be implemented to recognise the volatility of the project capital expenditure. Certainly, a more appropriate and balanced approach is required moving forward.”

The Reward Practice is an independent remuneration consulting practice based in Western Australia that specialises in board, executive and employee reward and recognition programs. Mr Land is a former Executive of Ernst & Young (EY) and has provided services to a broad range of ASX listed companies.

All 30 June year end ASX listed companies must lodge their financial reports with ASIC by 30 September, with the majority of Annual General Meeting’s occurring over the months of October and November.

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