ceo pay in the top 100 companies: 2005

CEO Pay in the Top 100 Companies: 2005

Research Paper prepared by

Commissioned by the Australian Council of Super Investors Inc.

September 2006

ISS AUSTRALIA

CEO Pay in the Top 100 Companies: 2005 - - Australian Council of Superannuation Investors

Published in Melbourne by

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© 2006, Australian Council of Super Investors Inc.

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Table of Contents

Table of Contents ................................................................................................... 3 1 ISS Australia.................................................................................................... 4 2 Executive Summary........................................................................................... 5 3 CEO Pay in the Top 100 Companies: Aggregate Statistics .............................................. 7

3.1 Breakdown of components and 2001-2005 change analysis..................................... 7 3.1.1 Fixed remuneration.............................................................................. 8 3.1.2 Short-term incentive ...........................................................................10 3.1.3 Total remuneration excluding long-term incentive .......................................12 3.1.4 Total remuneration including long-term incentive ........................................14

3.2 Remuneration components in detail...............................................................17 4 Disclosure of Options’ Value ...............................................................................20

4.1 Results..................................................................................................20 4.2 Emerging issues in option valuation ...............................................................20

5 Top 10 Case Studies .........................................................................................22 5.1 CEO#1: Allan Moss Remuneration & Performance Analysis ....................................25 5.2 CEO#2: Frank Lowy Remuneration & Performance Analysis ...................................26 5.3 CEO#3: Wal King Remuneration & Performance Analysis ......................................27 5.4 CEO#4: Leigh Clifford Remuneration & Performance Analysis ................................28 5.5 CEO#5: Roger Corbett Remuneration & Performance Analysis ................................29 5.6 CEO#6: David Morgan Remuneration & Performance Analysis.................................30 5.7 CEO#7: John McFarlane Remuneration & Performance Analysis ..............................31 5.8 CEO#8: David Turner Remuneration & Performance Analysis .................................32 5.9 CEO#9: Greg Clarke Remuneration & Performance Analysis...................................33 5.10 CEO#10: Chip Goodyear Remuneration & Performance Analysis...............................34

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1 ISS Australia

In June 2005, Institutional Shareholder Services (ISS), the world’s largest provider of proxy voting and corporate governance solutions, acquired Australia’s leading specialist corporate governance research firm, Proxy Australia. The combined company forms the foundation of ISS’ Australian business unit, headquartered in Melbourne.

ISS Australia is the hub for ISS’ Australian operations and provides in-market research, service and expertise to institutional investors and superannuation funds in the region and worldwide. ISS Australia, with its deep knowledge of corporate governance practices in Australia and New Zealand, its high quality proxy research and its unique governance data, plays a critical role in delivering continued value to ISS clients worldwide.

ISS Australia has a purpose-built database, containing 6 years of historical data on the S&P/ASX 200 companies — now being extended to the S&P/ASX 300. This allows the objective comparison of a company’s governance status with its peers.

Having more than 1600 institutional clients around the world, ISS understands that investors need local expertise to effectively execute their ownership rights, while at the same time appreciating the value of a corporate governance and proxy voting partner that can deliver true global scope through an integrated platform.

ISS now has corporate governance and proxy voting experts on the ground in the US, UK, Canada, Belgium, France, Netherlands, Philippines and Japan, as well as Australia.

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2 Executive Summary

ISS Australia was commissioned by ACSI to conduct an empirical analysis of CEO pay in the Top 100 listed Australian companies for the 2005 financial year. This paper reports the findings of the study.

In several areas, the study revisits issues researched for ACSI for the 2001 to 2004 financial years,1 and for the Conference of Major Superannuation Funds for the 2000 financial year.2 Comparative statistics are provided.

Of the 80 CEOs included in the survey, average total pay was $3.77 million in 2005, up from $3.56 million in 2004. The median top 100 CEO pay also increased, from $3.07 million in 2004 to $3.09 million in 2005. While this increase in the median was only 0.6%, the increase in the median over the two years 2003 to 2005 was a substantial 33.9% (from $2.31 million to $3.09 million). (The numbers have been standardised for the departure of News Corp from the index.)

Average annual fixed remuneration for a top 100 company CEO increased again between 2004 and 2005, from $1.42 million to $1.53 million, or 8.2%.

The average short-term incentive (STI) received by a top 100 company CEO again increased substantially between 2004 and 2005, from $1.29 million to $1.41 million, a 9.3% increase. This followed a 17.3% average increase between 2003 and 2004. The median STI also increased sharply, from $900,000 in 2004 to $1,000,000 in 2005, an increase of 11.1%.

The changes in fixed and short-term remuneration reported here are broadly in line with the findings of a similar study by remuneration consultant Mercer, released in late August, which found that fixed remuneration for a CEO of a top 100 company is growing at approximately 10% per annum. The Mercer study, as reported in the Australian press, found that the average short-term incentive paid to a top 100 company CEO rose 15% in the 2004/05 financial year. This is slightly higher than the average STI found in the 2005 ACSI longitudinal study, although this difference may be due to different sample sizes and methodology.

The nature of the longitudinal study, which assesses the remuneration of CEOs of the top 100 companies, rather than the year-on-year changes of individuals’ remuneration, may account for some of the differences between the Mercer and ACSI results. On a company-by-company comparison, of the 64 companies included in both the 2004 and 2005 longitudinal studies, 48 saw fixed remuneration for the CEO increase, 14 had lower fixed remuneration and two CEOs had the same level of fixed remuneration. A similar pattern is discernible in STI payments — 43 of the 64 CEOs included in the 2004 and 2005 studies received a higher STI in 2005 compared with 2004, 19 received a lower STI and two had no change in their STI. This suggests that the rises in fixed remuneration and STI would in fact be even higher but for the addition of new companies to the sample, usually at the lower end of the S&P/ASX 100, with lower overall levels of remuneration.

The 2005 study has also adjusted its overall findings to reflect the distorting effect of News Corporation on comparisons between remuneration of top 100 CEOs in 2004 and 2005: The departure of News Corporation from the S&P/ASX 100 Index between 2004 and 2005 means that the numbers for prior years, in particular for average levels of remuneration were inflated by the very large amounts received by the top-paid executive at News Corp. The report, when making comparisons between years, refers to numbers on an ex-News Corp basis. All tables in the report include both the ex-News Corp and including-News Corp average, median and maximum numbers, with the including-News Corp figures shown in brackets.

1 ISS Proxy Australia, CEO Pay in the Top 100 Companies: 2004 (Research Paper prepared by ISS Proxy Australia for ACSI, September 2005); IA Research, CEO Pay in the Top 100 Companies: 2003 (Research Paper prepared for ACSI, June 2004); Institutional Analysis, CEO Pay in the Top 100 Companies: 2002 (Research Paper prepared for ACSI, May 2003); Institutional Analysis, Board Composition and Pay in the Top 100 Companies: 2001 (Research Paper prepared for ACSI, January 2002), Section 9. 2 Institutional Analysis, Board Composition and Pay in the Top 100 Companies (Paper presented to the Conference of Major Superannuation Funds, Gold Coast, March 2001), Sections 7 and 8.

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There was relatively little change in the CEOs who made up the top 10 highest paid CEOs in 2005 compared with 2004, especially when the departures of News Corporation from the sample and retirement of Michael Chaney from Wesfarmers are excluded. Of the eight CEOs in the 2004 top 10 who were still Top 100 company CEOs in 2005, six were again part of the top 10. The other two CEOs from the 2004 top 10 were ranked 11th and 14th in the 2005 study. Of the eight top 10 CEOs in the 2004 survey still part of the 2005 study universe, five saw their remuneration in 2005 increase, by amounts ranging between 4.4% and 55.1%. The three top 10 2004 CEOs who saw their remuneration decrease experienced falls ranging from -6.9% to -16.7%.

To be part of the top 10 CEOs in 2004, a CEO had to earn $6.12 million or more; in 2005 the threshold for entry increased to $6.49 million, although the remuneration of the highest-paid CEO of a top 100 company actually fell, from $29.71 million to $18.55 million (due to the departure of News Corp from the S&P/ASX 100). If News Corp is excluded from the 2004 sample, the total remuneration of the highest-paid CEO of a top 100 company rose between 2004 and 2005, from $14.69 million (Westfield’s Frank Lowy) to $18.55 million (Macquarie’s Allan Moss).

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3 CEO Pay in the Top 100 Companies: Aggregate Statistics

This section reviews the pay of the most senior executive officer in the S&P/ASX 100 companies, over the period 2001 to 2005. All data was obtained from annual reports. The pay data information has been disclosed by the companies under section 300A of the Corporations Act and Accounting Standard AASB 1046 and, for companies with a 31 December year-end, AASB 124.

80 companies were analysed. Not all the S&P/ASX 100 constituents were included because:

Some CEOs were appointed mid-way through the financial year, and so their disclosed remuneration was for less than 12 months. These CEOs were removed from the analysis so as not to distort the figures.

Some of the entities in the S&P/ASX 100 index are trusts (or ‘managed investment schemes’) rather than companies, and therefore do not have executives; instead, they are managed by a fund-management company (or ‘responsible entity’).

For simplicity, this report refers to ‘CEO pay’. However, in relation to some companies the executive whose pay was analysed is not the person carrying the formal title Chief Executive Officer. This could be, for example, because the company has an Executive Chairman and a separate Chief Executive Officer, and the Executive Chairman’s remuneration is significantly higher than that of the CEO.

3.1 Breakdown of components and 2001-2005 change analysis

In this section the following elements of remuneration are analysed:

fixed pay — the non-variable element of the CEO’s remuneration.

short-term incentive — the annual bonus paid to the CEO in the financial year.

total remuneration excluding long-term incentive.

total remuneration including long-term incentive.

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3.1.1 Fixed remuneration

Fixed remuneration is those components of a CEO’s pay which do not vary with performance. These often include:

Base (cash) salary

Superannuation

Motor Vehicle allowance

Allowances

Non-Cash Benefits

Of these, base salary is almost always the most significant component. In 2005, it accounted for 79.5% of total fixed remuneration for the average CEO (compared to 76% in 2004 and 83% in 2003).

Table 1 shows the fixed-remuneration statistics for the period 2001 to 2005. Figures in brackets include News Corporation. News Corp is no longer a constituent of the S&P/ASX 100 index as a result of its re-registration in Delaware, USA. The figures referred to below in the text are on an ex-News Corp basis.

Between 2004 and 2005, average (mean) fixed remuneration increased by 8.2% from $1.42 million in 2004 to $1.53 million in 2005. This was double the rate of increase in fixed remuneration between 2003 and 2004, when fixed remuneration increased by 4%. The median increased by 1.5% between 2004 and 2005, compared to a 19.4% increase from 2003 to 2004.

Over the period from 2001 to 2005, median fixed remuneration increased by 76%. This is many times greater than the level of inflation and the increase in average employee earnings over that period (21.3%). As base salary and other aspects of fixed remuneration are (by definition) not explicitly tied to the company’s performance, companies should disclose clearly the reason or reasons behind a significant increase in base salary.

Table 1 also shows the range of fixed pay: from $494,531 to $8.8 million. Although the smallest fixed pay packages in 2003, 2004 and 2005 are significantly higher than the minimum fixed pay for earlier years, this is largely driven by the fact that the small figures for earlier years were for CEOs who had been in office for less than a full financial year.

Figure 1 shows the distribution of fixed remuneration among the 80 CEOs. Overall the data is reasonably normally distributed around the mean. Of the 80 CEOs, 53 were paid between $800,000 and $2 million in fixed entitlements. A total of 14 CEOs received base remuneration of less than $800,000, 12 CEOs were paid between $2 million and $3.1 million dollars while 1 CEO received fixed entitlements in excess of $3.5 million.

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2001 2002 2003 2004 2005

Average $888,407 ($1,008,012)

$984,045 ($1,027,288)

$1,361,769 ($1,424,285)

$1,416,877 ($1,554,410)

$1,533,231

Median $780,975 ($781,788)

$903,838 ($914,330)

$1,136,537 ($1,137,769)

$1,353,000 ($1,376,798)

$1,373,437

Minimum $52,055 $50,575 $345,056 $410,437 $494,531

Maximum $2,650,565 ($8,543,137)

$7,938,000 ($7,938,000)

$6,716,040 ($13,486,153)

$4,084,000 ($11,731,875)

$8,789,826

2001 to 2002 2002 to 2003 2003 to 2004 2004 to 2005

Average Change +$95,638 (+$19,276)

+$377,724 (+$396,997)

+$55,108 (+$130,125)

+$116,354

Table 1. Fixed remuneration: 2001-2005 comparison (figures in brackets include News Corporation)

Distribution of Fixed Entitlements

0

2

4

6

8

10

12

14

16

$.4m

$.7m

$.9m

$1.1m

$1.3m

$1.5m

$1.7m

$2.0m More

Figure 1. Distribution of fixed remuneration payments

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3.1.2 Short-term incentive

Most Top 100 companies have a short-term incentive plan (STIP) for their senior executives, designed to reward executives for performance across one financial year. Of the 80 sample companies in this study, 72 (90%) made a payment to their CEO under a STIP.

Unlike a long-term incentive plan (LTIP), it is not common for a STIP’s performance measures to relate to the company’s share price or total shareholder return. Rather, it is common for performance indicators to relate to (a) ‘quantitative’ metrics such as company-wide accounting performance (such as earnings per share), business-division performance, successful completion of major projects, etc; and (b) ‘qualitative’ metrics such as customer or employee satisfaction.

By far the most common type of short-term incentive is an annual cash bonus. 65 sample companies paid the short-term incentive award entirely as a cash bonus. Four companies delivered the incentive partly as a cash bonus and partly in the form of shares, and another three companies delivered the incentive wholly in the form of shares.

Table 2 shows the short-term incentive figures for 2001 to 2005. Figures in brackets include News Corp. However, the numbers referred to below in the text are on an ex-News Corp basis.

The median bonus increased by 11.1% between 2004 and 2005. Over the same period, the average (mean) bonus payment increased by 9.3% from $1.29 million to $1.41 million. The substantial increase in the average STI payment in 2005 compared to 2004 is remarkable considering the company that paid the largest STI in 2004 — Westfield — changed the structure of its highest-paid executive’s remuneration such that his STI dropped substantially. Westfield reconfigured Executive Chairman Frank Lowy’s remuneration package so that his STI fell from $13.4 million in 2004 to $4.5 million in 2005. (Note however that this was counterbalanced by an increase in Mr Lowy’s base salary from $1.2 million in 2004 to $8 million in 2005, which helped drive up the average fixed remuneration referred to earlier in this report).

Table 2 also shows the range of short-term incentive payments: from $75,000 to $17.4 million.

Figure 2 shows the distribution of short-term incentive payments (for those CEOs who received a short-term incentive payment). 65 of the 72 short-term incentive payments were less than $2.4 million. Four CEOs received in excess of $3 million each in short-term incentive payments and three between $2.4 million and $3 million.

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2001 2002 2003 2004 2005

Average $769,125 ($871,389)

$902,969 ($937,347)

$1,102,603 ($1,283,330)

$1,293,093 ($1,671,608)

$1,412,826

Median $377,936 ($386,805)

$468,011 ($475,000)

$725,000 ($735,129)

$900,000 ($911,803)

$1,000,000

Minimum $73,000 $50,000 $88,000 $126,000 $75,000

Maximum $6,239,739 ($6,239,739)

$10,944,000 ($10,944,000)

$12,381,000 ($12,381,000)

$13,400,000 ($17,980,437)

$17,436,757

2001 to 2002 2002 to 2003 2003 to 2004 2004 to 2005

Average Change +$133,844 (+$65,958)

+$199,634 (+$345,983)

+$190,490 (+$388,278)

+$119,733

Table 2. Short-term incentive: 2001-2005 comparison (conditional upon a short-term incentive payment having been made; figures in brackets include News Corporation)

Distribution of STI Entitlements

0

5

10

15

20

25

$.6m

$1.2m

$1.7m

$2.3m

$2.9m

$3.5m

$4.1m

$4.6m

$5.2m More

Figure 2. Distribution of short-term incentive payments (conditional upon a short-term incentive payment having been made)

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3.1.3 Total remuneration excluding long-term incentive

Background

Historically it has been important to consider total pay both including and excluding the long-term incentive. The way companies traditionally made long-term incentive awards, and recorded the value of them in the annual report, led to significant fluctuations in total pay from year to year:

Until approximately 2001 - 2002, it was not uncommon for companies to make ‘lumpy’ grants of options (or another incentive instrument) under the LTIP. That is, the CEO was granted options only once every three or four years. However, many Top 100 companies have in the last three or four years moved towards making more regular (annual) awards of options.

Until 2003, when an Australian company disclosed the value of executive share options granted, it would typically allocate the entire value as at the date of grant.

In combination, these two factors meant that a CEO’s total remuneration including long-term incentive could fluctuate considerably. It would appear to be relatively high in those years when options were granted, and relatively low in those years when options were not granted. However, since 2003 companies have been required to allocate the value of options (and other equity incentives) across the vesting period. This removes the lumpiness problem.

Results

Table 3 compares total remuneration (excluding long-term incentive) for the sample companies over the period 2001 to 2005. Figures in brackets include News Corp, while the numbers referred to below in the text are on an ex-News Corp basis.

Average pay (excluding long-term incentive payments) increased by 3.6% from $2.79 million in 2004 to $2.88 million in 2005. This was a smaller increase than the sharp 30.2% increase in average total remuneration excluding long term incentive observed between 2003 and 2004.

The median figure, contrary to trends in previous periods, decreased. Median total remuneration excluding long-term incentives in 2005 was $2.13 million, 11.4% lower than the 2004 median of $2.41 million. But the 2005 median figure was nevertheless 22.6% higher than the 2003 median of $1.74 million.

Table 3 also shows the range of total pay excluding long-term incentive payments: from $0.58 million to $18.1 million. The 2003, 2004 and 2005 minimums are significantly higher than the minimum figure for earlier years, but again the small figures for earlier years refect CEOs who had been in office for less than a full financial year. A News Corp executive director was the highest-paid executive in the sample in 2003 and 2004 (Peter Chernin in 2003 and Rupert Murdoch in 2004), but News Corp was not in the 2005 sample as it had relocated to Delaware in late 2004. On an ex-News Corp basis, the highest-paid CEO in 2004 received total remuneration (excluding LTI) of $14.69 million, and in 2003, $13.39 million. In both 2003 and 2004, the highest-paid CEO was Westfield’s Frank Lowy; in 2005 it was Macquarie Bank’s Allan Moss.

Figure 3 shows the distribution of total CEO pay excluding long-term incentive payments. Overall 74 CEOs were paid less than $5 million in total remuneration (excluding long-term incentive payments). Two CEOs (Frank Lowy and Allan Moss) received significantly higher remuneration than their peers on a total remuneration less LTI basis.

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2001 2002 2003 2004 2005

Average $1,814,371 ($2,018,190)

$2,200,664 ($2,381,356)

$2,141,128 ($2,444,368)

$2,787,708 ($3,146,703)

$2,881,024

Median $1,375,000 ($1,422,662)

$1,427,877 ($1,447,111)

$1,740,537 ($1,773,180)

$2,408,309 ($2,408,670)

$2,134,534

Minimum $166,457 $50,575 $387,472 $410,437 $581,750

Maximum $7,823,072 ($14,858,824)

$11,922,336 ($16,294,620)

$13,393,275 ($25,793,845)

$14,692,011 ($29,712,312)

$18,096,080

2001 to 2002 2002 to 2003 2003 to 2004 2004 to 2005

Average Change +$386,293 (+$363,166)

-$59,536 (+$63,012)

+$646,580 (+$702,335)

+$93,316

Table 3. Total remuneration excluding long-term incentive: 2001-2005 comparison (figures in brackets include News Corporation)

Distribution of Total Remuneration less LTI

02468

101214161820

$.6m

$1.2m

$1.8m

$2.4m

$3.0m

$3.6m

$4.2m

$4.8m

$5.4m More

Figure 3. Distribution of total remuneration excluding long-term incentive payments

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3.1.4 Total remuneration including long-term incentive

This section examines CEOs’ total remuneration packages, including the value of long-term incentives, as disclosed by the companies in their annual reports.

On an ex-News Corp basis, the average total remuneration of a top 100 company CEO increased in 2005 by 5.7% from $3.56 million in 2004 to $3.77 million in 2005. On an ex-News Corp basis, median total remuneration (including long-term incentives) was $3.09 million. This was 0.6% higher than the 2004 median ($3.07 million), but 33.9% higher than the 2003 median ($2.31 million).

Table 4 also shows the range of total pay including long-term incentive payments: from $659,002 to $18.55 million. The 2001 and 2002 minimums refect CEOs who had been in office for less than a full financial year. If News Corp is excluded from the sample, the highest-paid CEO in 2003 and 2004 was Westfield’s Frank Lowy. In 2005 it was Macquarie Bank’s Allan Moss.

Figure 4 shows the distribution of total CEO pay including long-term incentive payments. The data underlying Figure 4 indicates that 75 CEOs were paid less than $8 million while three CEOs — Messrs Moss and Lowy and the CEO of Leighton Holdings, Wal King — received significantly more remuneration than their peers ($12 million or more).

When examining total pay including the value of long-term incentives, the accounting treatment of long-term incentives should be borne in mind. Australian accounting standards (reflecting International Financial Reporting Standards - IFRS) require the value of long-term equity incentives to be calculated in the year they are granted, and then allocated pro-rata in each Remuneration Report during the vesting period. The up-front valuation and amortisation over several years, coupled with annual grants of equity incentives, means the long-term incentive component of CEO pay reported by a company in any particular year typically includes several allocations of equity incentives granted over several years.

Table 5 shows a breakdown of total remuneration (including long-term incentive payments) across industry groups. In those sectors with five or more sample companies, the median ‘Industrials’ CEO and the median ‘Financials’ CEO were paid substantially more than their counterparts in other industries ($4.40 million and $5.07 million respectively).

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2001 2002 2003 2004 2005

Average $2,450,513 ($2,644,393)

$3,059,008 ($3,228,695)

$2,858,343 ($3,163,769)

$3,564,486 ($3,913,123)

$3,766,224

Median $1,843,987 ($2,120,411)

$2,081,110 ($2,098,601)

$2,309,384 ($2,325,692)

$3,074,837 ($3,138,235)

$3,092,576

Minimum $166,457 $50,575 $387,472 $410,437 $659,002

Maximum $11,682,638 ($14,858,824)

$11,922,336 ($16,294,620)

$13,393,275 ($26,681,537)

$14,692,011 ($29,712,312)

$18,553,566

2001 to 2002 2002 to 2003 2003 to 2004 2004 to 2005

Average Change +$608,495 (+$584,302)

-$200,665 (-$64,926)

+$706,143 (+$749,354)

+$201,738

Table 4. Total remuneration including long-term incentive: 2001-2005 comparison (figures in brackets include News Corporation)

Distribution of Total Remuneration

0

2

4

6

8

10

12

14

16

18

$.9m

$1.9m

$2.8m

$3.7m

$4.6m

$5.6m

$6.5m

$7.4m

$8.3m More

Figure 4. Distribution of total remuneration (including long-term incentive)

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CEO Remuneration by Industry - 2005

Consumer Disc.

Consumer Staple Energy Financials Health Care

Average $ 2,363,656 $ 3,775,341 $ 2,505,444 $ 5,510,351 $ 2,498,824

Median $ 2,428,185 $ 3,483,126 $ 2,439,258 $ 5,067,918 $ 2,229,683

Min $ 945,252 $ 1,582,481 $ 1,200,000 $ 813,618 $ 1,191,715

Max $ 4,030,210 $ 8,441,661 $ 3,642,907 $ 18,553,566 $,4,210,631

# CEOs 11 8 5 16 6

Industrials Information Technology Materials Telecomm.

Services Property Trusts Utilities

Average $ 5,082,472 $ 1,300,825 $ 3,436,699 $ 4,633,467 $ 3,390,924 $ 2,342,834

Median $ 4,400,138 $ 1,300,825 $ 3,007,531 $ 4,633,467 $ 2,116,969 $ 2,342,834

Min $ 1,768,000 $ 1,300,825 $ 659,002 $ 2,577,602 $ 693,907 $ 2,020,667

Max $ 12,817,000 $ 1,300,825 $ 8,610,859 $ 6,689,332 $13,289,826 $ 2,665,002

# CEOs 9 1 13 2 7 2

Table 5. CEO total remuneration including long-term incentive, by industry: 2005

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3.2 Remuneration components in detail

This section is designed to allow analysis of the relative significance of base salary, annual bonus (short-term incentive), options/shares (long-term incentive), and other components of CEO remuneration.

The rules under which Australian companies disclose executive compensation have been in a state of flux in recent years. Since 2002, there has not been a single year when the requirements were the same as the year before. This has partly been due to duplication in disclosure rules. Similar, but not identical, rules reside in section 300A of the Corporations Act and in the Accounting Standards. While this problem has finally been addressed, it has not been the only source of confusion and complexity. The relevant accounting standard changed recently from AASB 1046 to AASB 124 — as discussed in the box below. Reporting of remuneration under the new accounting standard will result in a different categorisation of remuneration components than previously. It could also — depending on interpretation by individual companies — result in options being valued differently than in previous years.

From 31 December 2005, Australian companies are required to disclose director and executive remuneration under AASB 124, rather than AASB 1046. The new standard is significantly less detailed than AASB 1046. For example, the new standard does not say expressly how options should be valued.

As a result, from December 2005 until June 2006, there was considerable uncertainty about how the value of options should be measured, given that AASB 124 doesn’t say expressly.

One view was that companies should refer to a separate standard (AASB 2) — which does deal with valuation of options and other equity incentives, but does so for the purposes of expensing options in the P&L statement.

ASIC took a different view, suggesting that companies could still justifiably use the measurement rules in AASB 1046, even though that standard had been repealed:

‘because AASB 124 doesn’t specify a basis for measuring remuneration, it would be possible to make both the disclosures under s.300A(1)(c) and the new AASB 124 using the measurement basis in AASB 1046. This measurement basis has been used in the past, provides a ready source of comparative information, and continues to be used by at least some companies. While AASB 2 … can provide useful guidance for measuring remuneration, [it] is intended for determining expense and income relating to groups of employees.’

ASIC appears to have lost the argument. Amendments to the Corporations Regulations that commenced 3 June 2006 have removed all references to AASB 1046 and substituted them with references to AASB 124. The accounting community interprets this as meaning options are now to be valued according to AASB 2 (see, for example, Ernst & Young, HR & Tax Alert, June 2006: http://www.ey.nl/?pag=808&publicatie_id=2103).

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Table 6 provides a breakdown of the key components of CEO pay in the Top 100 companies, for the period 2001 to 2005. These figures have not been adjusted to account for the departure of News Corporation between 2004 and 2005.

Some points to note about Table 6 are:

As a component of total pay, the short-term incentive dropped in 2005 compared to 2004 but still increased significantly across the four-year period 2001 to 2005. Cash bonuses now represent 32.4% of aggregate pay, down from 36.9% in 2004, but up from 25.7% in 2001. (The 2001 figure includes short-term share bonuses as well as cash bonuses so the increase is likely to be more pronounced.)

The value of long-term incentives accounted for 23.5% of total pay in 2005, up from 19.7% in 2004 but down from 28% in 2001. This is due partly to the move towards annual cash bonuses mentioned earlier. It is also due to companies now allocating the value of equity incentives over several years, rather than, in earlier years, entirely at the time of grant. However, as noted in last year’s report, CEO at-risk pay appears increasingly to be moving towards short-term incentives based on internal indicators (e.g. earnings per share, operational and personal targets) and away from long-term incentives based on external measures of performance (such as total shareholder return).

For 2001 and 2002, the data on ‘Allowances’, ‘Motor Vehicle’ and ‘Retirement Benefits’ was aggregated and included with ‘Other benefit’ — due to the way companies disclosed at that time. However, even though those three components of pay are itemised for 2003, 2004 and 2005, the ‘Other benefit’ figure will still include some motor vehicle allowances, retirement benefits and other allowances, because some companies continue not to provide separate figures. For the same reason, the ‘Other benefit’ category also includes some superannuation for all four years.

o Those companies that aggregate several items into ‘Other Benefits’ in their remuneration tables typically include a footnote which specifies the types of benefit included in ‘Other Benefits’. However, they do not always provide a breakdown of the dollar amount per benefit. This should be disclosed as it is useful information for institutional shareholders.

For 2003, 2004 and 2005, the manner in which shares were provided as a long-term incentive is separately itemised: as either ‘Performance Rights’, ‘Deferred Shares’, ‘Loan-Funded Share Scheme’ or ‘Free Shares’. Performance rights and deferred shares (called ‘performance shares’ by some companies) are both zero exercise price options (ZEPOs). An executive who is awarded ZEPOs, unlike an executive who receives traditional options, is not required to pay anything to the company when exercising the instruments. The exercise price is zero — whereas the exercise price for traditional options is normally whatever the company’s share price was on the date the options were granted.

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2001 Total Amount

2002 Total Amount

2003 Total Amount

2004 Total Amount

2005 Total Amount

2001 % of total

pay

2002 % of total

pay

2003 % of total

pay

2004 % of total

pay

2005 % of total

pay

2001 # CEOs with

element of pay

2002 # CEOs with

element of pay

2003 # CEOs with

element of pay

2004 # CEOs with

element of pay

2005 # CEOs with

element of pay

Base salary $64,512,799 $80,211,417 $92,421,433 $88,298,660 $105,796,390 38.1% 31.50% 37.50% 30.06% 35.11% 64 78 78 75 80

Bonus component

(Cash) $78,209,362 $108,415,934 $97,655,817 31.70% 36.91% 32.41% 61 66 69

Bonus component

(Shares)

$43,569,466 $59,128,151

$1,357,121 $5,253,416 $4,775,216

25.70% 23.20%

0.60% 1.79% 1.58%

50 62

2 4 6

Other benefit $7,922,605 $22,810,308 $9,573,645 $12,847,217 $8,150,114 4.70% 9.00% 3.90% 4.37% 2.71% 48 56 51 57 66

Superannuation $2,414,713 $5,869,570 $3,041,119 $12,824,132 $8,205,386 1.40% 2.30% 1.20% 4.37% 2.72% 32 45 40 57 64

Allowances $841,986 $2,363,517 $376,363 0.30% 0.80% 0.12% 4 4 6 Motor

Vehicle $217,774 $247,215 $130,201 0.10% 0.08% 0.04% 4 3 3

Retirement Benefits $4,998,265 $5,752,636 $5,392,423 2.00% 1.96% 1.79% 4 8 5

Cash long-term

incentive payment

$7,458,969 $13,830,484 $10,870,061 $12,561,866 $12,045,691 4.40% 5.40% 4.40% 4.28% 4.00% 11 7 5 8 5

Options $22,562,872 $50,642,948 $26,644,319 $22,804,464 $22,035,660 13.30% 19.90% 10.80% 7.76% 7.31% 19 39 36 38 34

Performance Rights $10,488,984 $11,709,375 $16,798,160 4.30% 3.99% 5.58% 15 21 23

Deferred Shares $6,143,166 $9,946,831 $18,305,452 2.50% 3.39% 6.08% 10 16 22

Loan-Funded Share

Scheme $1,966,764 $732,405 $1,629,248 0.80% 0.25% 0.54% 9 6 7

Free Shares

$17,514,110 $22,076,408

$0 $1,282 $1,832

10.30% 8.70%

0% 0.00% 0.00%

15 12

0 1 2

Total $169,241,163 $251,838,210 $246,773,999 $293,758,949 $301,297,952 100% 100% 100% 100% 100%

Table 6. Components of total remuneration (News Corporation is included in 2001 – 2004 figures)

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4 Disclosure of Options’ Value

The requirement for companies to disclose the value of options and other equity incentives granted to executives is no longer contentious in Australia. Amendments to accounting standards and to section 300A of the Corporations Act (made by the CLERP9 reforms in 2004) now expressly require listed companies to disclose the value of options and other equity incentives worked out at the date they are granted. This extends to instruments with the same economic effects as options such as shares purchased with limited recourse loans.

There remains, however, considerable uncertainty and confusion around how equity incentives should be valued. As a result, there is potential for mis-reporting of option valuations in executive remuneration: For example, one top 100 Australian company, Oxiana Resources, has already announced in 2006 that it under-reported the value of options granted to executives in 2005 by more than $1 million. ISS is also aware of several cases where companies in past years reported the amortised value of options granted in the 2003 reporting year (after ASIC made it clear the value of options should be disclosed) but did not include and have never subsequently included the value of options granted prior to the 2003 reporting year. AASB 2 has made it explicit that equity incentives granted prior to 7 November 2002 do not need to be valued for expensing purposes — although it is not clear this extends to executive remuneration purposes. Some companies, including Santos and AXA, have interpreted this as meaning the value of incentives granted prior to this date no longer needs to be disclosed in the Remuneration Report.

4.1 Results

Every sample company that granted options, performance rights or other equity incentives to a director or top five executive in 2005 disclosed a value for those instruments. This was also the case in 2004 and 2003.

By comparison, in 2002 only 75% of sample companies disclosed the value of options or shares granted as at the grant date. In 2001 the level of disclosure was only 50%. These earlier results reflect the fact that, until early 2003, a number of Australian companies interpreted section 300A as not requiring them to disclose the value of share options granted to directors and senior executives.

4.2 Emerging issues in option valuation

Since the introduction of AASB 2 (‘Share-based payment’) under the adoption of IFRS in Australia, valuing equity incentives granted to executives has become more complex.

AASB 2 requires options with different types of hurdles to be valued — and expensed — differently: Options which have ‘market conditions’ as hurdles are valued differently to other types of options, including those with accounting-based hurdles. Market conditions includes hurdles relating to total shareholder return (TSR) relative to a peer group but does not include exceeding the return on equity or earnings per share of a peer group. The value of options with market conditions can be discounted to take account of the probability of vesting occurring — which is itself problematic as these discounts can be substantial and are often not disclosed — but once these options are valued at grant date, they cannot be re-valued, unless the market condition is changed. Options with other types of vesting conditions — such as earnings per share — are to be valued according to how many options actually vest, meaning companies seemingly are able to adjust the value of options over the vesting period held by an executive based on the likelihood of them vesting.

One of the features of AASB 2 is its requirement for options to be treated as an expense when used to remunerate employees. Given the requirement for options to be expensed, the accounting

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standard appears to have created an incentive for companies to use performance hurdles based on accounting measures rather than relative TSR performance, as the company will only be required to expense for the options that actually vest. From a pure accounting perspective, this appears reasonable, as it removes the possibility of a company reporting values for (and expensing) equity incentives granted several years ago that have little or no chance of vesting. However, the differential treatment of the two types of vesting condition by AASB 2 is concerning, given the preference of ACSI and other shareholder groups for equity incentives with hurdles relating to relative performance.

From a policy perspective, the differential treatment of market and non-market performance hurdles would be difficult to change, because Australian accounting standards are now largely driven by the International Accounting Standards Board, which must take account of a range of stakeholders across a range of countries. However, in assessing the valuation of equity incentives subject to performance hurdles, as disclosed in the Remuneration Report, shareholders need to be aware of the differential accounting treatment that now applies depending on the type of hurdle used.

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5 Top 10 Case Studies

This section discusses 10 ‘pay-for-performance’ case studies.

The 10 highest-paid CEOs were selected from the data discussed earlier in the report. The pay figure used to determine the ranking of CEOs was total pay including long-term incentive. Table 7 shows the remuneration for the CEOs selected.

Having identified the top 10 CEOs on that basis, pay and corporate performance data was collected for the period 2000 to 2005.

It should be noted that one of the top 10 companies (that of Westfield’s Frank Lowy) underwent a major restructuring in 2004. As a consequence, performance measures are not strictly compatible for that company between 2004 and previous years.

Measures of performance used in the graphs

Over the following pages graphs are shown comparing the CEO’s remuneration over the last five years compared to three measures of corporate performance:

Share Price Performance (SPP).

Return on Assets (ROA).

Total Shareholder Return (TSR).

SPP captures the performance of the company’s share price over several years. The share prices used have been adjusted for capital restructuring, dilution etc and are taken at the company’s reporting date. For example, if a company has a 30 June year end, the share prices shown are as at 30 June 2000, 30 June 2001, etc.

ROA is an accounting measure of profitability. It captures the particular company’s profit performance relative to that company’s total assets.

TSR is the total financial return a shareholder would obtain from owning the company’s shares for a period of time. TSR for one year takes into account the increase (or decrease) in the share price between the start and end of the year in question, and also the value of dividends paid by the company during the year (which are assumed to have been reinvested). TSR is expressed as a percentage. The graphs show 1-year TSR and 3-year TSR. 1-year TSR is the return for the company’s financial year ending in 2005 (e.g. the year to 30 June 2005 for 30 June year-end companies, or to 31 December 2005 for 31 December year-end companies). The 3-year TSR figure is the return across the three years to the company’s financial year ending in 2005. It is the total return a shareholder would have enjoyed for the whole 3-year period, rather than an average annual return across the three years.

How to compare pay and performance?

In analysing the graphs, it is important in some respects to allow for a lag. For instance, the short-term incentive component of the CEO’s pay in 2005 could be expected to reflect the company’s performance in 2004 and possibly earlier years.

A qualification to this proposition is required. This is because the typical short-term incentive plan for an ASX-listed company includes performance conditions that relate to matters other than share price and dividends. The performance measures are often related to ‘internal’ performance more than external measures like share price.

For example, it is possible that the performance measures might relate to a series of quantitative measures (earnings per share, return on equity, cost management, total operating margins, value of

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new business, occupational health and safety performance) and qualitative measures (performance relative to competitors and market conditions, stakeholder perspectives, personal leadership, effective teamwork at senior management levels and strategic positioning).

So, when looking at the graphs below, the most appropriate measure of company performance against which to compare the short-term incentive is the accounting measure of performance: return on assets (i.e. the second graph in each case).

What about fixed remuneration (which is mostly made up of base salary)? Should it be expected that a CEO’s base salary would be higher in 2002 than 2001 if the company performed well in 2001 (and, on the other hand, lower in 2002 than 2001 if the company performed poorly in 2001)? This might be expected as a matter of principle, but it should not be expected in practice. This is because the change in base salary from year to year is likely to be driven more by factors such as benchmarking against the base salary of CEOs of peer companies, rather than performance. Companies should disclose clearly the reason or reasons behind a significant increase in base salary — regardless of whether the prior year’s performance was good, mediocre or poor.

What about the long-term incentive? Until recently the generally accepted practice in Australia was that options (and performance rights, deferred shares, etc) were valued in full at the time they were granted — rather than the time the executive actually makes money out of them (i.e. when they vest). So, when examining the long-term incentive component of the bar charts in the graphs below, it should be borne in mind that this reflects options’ / shares’ value as at the grant date. In some cases (e.g. where subsequent company performance has been particularly poor), these options/shares will never have vested, and so the executive never actually derived a cash value from them. In other cases, the subsequent value received from the long-term incentive may be substantially higher than that disclosed.

The purpose of these 10 case studies is to provide some examples of the relationship between corporate performance and CEO remuneration in large Australian companies. These are case studies. They are not comprehensive statistical studies.

CEO number in study 2005 Remuneration 1. Allan Moss (MBL) $18,553,566 2. Frank Lowy (WDC) $13,289,826 3. Wal King (LEI) $12,817,000 4. Leigh Clifford (RIO) $8,610,859 5. Roger Corbett (WOW) $8,441,661 6. David Morgan (WBC) $7,448,730 7. John McFarlane (ANZ) $7,209,922 8. David Turner (BIL) $7,072,000 9. Greg Clarke (LLC) $6,532,000 10. Chip Goodyear (BHP) $6,494,111

Average $9,646,967

Table 7. CEO case studies, 2005

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Company 3 year change in CEO pay (%)

3 year TSR to 2005 financial year end (%)

S&P/ASX 100 Index TSR 3 year

(%)

Performance relative to Index(%)

MBL +203 +56 +36.9 +19.1 WDC +11 +38 +77.6 -39.6 LEI +42 +24 +49.2 -25.2 RIO +58 +112 +77.6 +34.4 WOW +156 +35 +49.2 -14.2 WBC +67 +70 +75.2 -5.2 ANZ +29 +59 +75.2 -16.2 BIL +10 -7 +49.2 -56.2 LLC (CEO not in office for 3 years) N/A N/A +49.2 N/A

BHP +15 +94 +49.2 +44.8

Table 8. Top 10 CEO Pay Relative to Performance Against the Index (figures for S&P/ASX 100 index performance are for the 3 years to the relevant company’s financial year end)

Table 8 compares increases in CEO pay for the top 10 paid CEOs over three years with the performance of their company relative to that of the S&P/ASX 100 Index. As discussed above, the main drivers of changes in CEO pay are changes in base pay and short-term incentive. These are not directly linked to share price performance (although, in the case of STI payments, there should be a link over the long-term between superior operational performance and share price). However, even given that qualification, the findings indicate an at-best-imperfect link between pay and returns to shareholders:

In the six cases where a company underperformed the S&P/ASX 100 Index over the three-year period (Brambles, Woolworths, Westfield, Leighton Holdings, Westpac and ANZ), CEO pay increased in a range from 10% (in the case of Brambles) to 156% in the case of Woolworth’s Roger Corbett.

In the three cases where a company outperformed the S&P/ASX 100 Index on a TSR basis (Macquarie, Rio Tinto, and BHP Billiton), CEO pay rose faster than the level of outperformance in two cases (Macquarie and Rio Tinto).

The only company where CEO pay rose slower than the level of outperformance of the Index was at BHP Billiton, where Chip Goodyear’s salary increased by 15% over the three years while BHP Billiton outperformed the Index by 44.8%.

The biggest disparity in increase in pay versus outperformance of the Index was at Macquarie Bank, where the pay of Allan Moss increased by 203% over the three years to 31 March 2005, while Macquarie Bank’s TSR outperformed the S&P/ASX 100 Index by 19.1% across the same three-year period.

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5.1 CEO#1: Allan Moss Remuneration & Performance Analysis

Performance:

The share price of Macquarie Bank has almost doubled since reaching a low in 2003. ROA has followed a similar pattern marked by a decrease in the first two years followed by a significant recovery. The TSR figures are similar, with one-year and three-year TSR being 38% and 56% respectively.

Pay:

Mr Moss’s remuneration has grown at a greater rate than company performance over the period 2001 to 2005. The change in total remuneration from 2004 to 2005 was 50%. The three-year change in remuneration is 203%. Growth in the short-term incentive (STI) component of the CEO’s pay has been the main driver of Mr Moss’s overall increase in total remuneration. Macquarie’s STI scheme is a profit-share scheme. The company’s disclosure of how the bonus pool is arrived at — through a formula relating to net profit after tax and earnings above cost of capital — is better than many companies; however the actual performance targets are not known.

CEO#1- Pay & Share Price

$ 0 m

$ 5 m

$ 10 m

$ 15 m

$ 20 m

2000 20012002 2003 2004 2005$0

$10

$20

$30

$40

$50

$60

RetirementLTISTIFixedShare Price

CEO#1- Pay & ROA

$ 0 m

$ 5 m

$ 10 m

$ 15 m

$ 20 m

2000200120022003200420050.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%

RetirementLTISTIFixedROA

CEO#1- Pay & TSR

38%56%50%

203%

0%

50%

100%

150%

200%

250%

1year 3year

TSRChange in Pay

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5.2 CEO#2: Frank Lowy Remuneration & Performance Analysis

Performance:

For Mr Lowy’s company, Westfield, the share price has increased relatively steadily over the period from just under $12 in 2000 to over $15 in 2005 (Westfield Holding’s share price is used for the period from 2000 to 2004, when Westfield Holdings was merged with the two listed property trusts to form Westfield Group). The ROA figures suggest that profitability has been consistently positive and relatively strong over the period after a sharp drop in 2004. The TSR used for Westfield is that calculated by Iress Market Technology, which has created a total shareholder return for Westfield Group prior to its creation in mid-2004.

Pay:

Mr Lowy’s remuneration formerly involved cash bonuses worth at least 89% of his total remuneration in every sample year. However, in 2005 the CEO’s compensation package was renegotiated, which saw an increase in fixed remuneration and a decrease in STI. ROA was at least greater than 9% for all but the 2004 financial year, indicating a growing level of profit, the major criteria in past years used to determine short-term incentive payments. But, as with Mr Moss, the quantum of the total pay package has been extremely large over the whole period relative to nearly all other Australian CEOs – and has been very stable.


$ 0 m$ 2 m$ 4 m$ 6 m$ 8 m

$ 10 m$ 12 m$ 14 m$ 16 m

200020012002200320042005$0

$5

$10

$15

$20


CEO#2- Pay & ROA

$ 0 m$ 2 m$ 4 m$ 6 m$ 8 m

$ 10 m$ 12 m$ 14 m$ 16 m

2000200120022003200420050.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%


CEO#2- Pay & TSR

17%

38%

-10%

11%

-20%

-10%

0%

10%

20%

30%

40%

50%

1year 3year

TSRChange in Pay

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5.3 CEO#3: Wal King Remuneration & Performance Analysis

Performance:

The share price performance of Leighton Holdings was excellent between 2004 and 2005 and was respectable over the sample period. ROA began to increase after dipping below 5% last year. The low level of return on assets is presumably because most of Leighton’s business is project-based with benefits often deferred until after the completion of projects.

Pay:

Mr King’s remuneration has at the very least grown in line with company performance over the period. The change in total remuneration from 2004 to 2005 was 55%. Growth in the fixed component of Mr King’s pay was the major contributor to the overall increase in total remuneration between 2004 and 2005. STI was also significantly higher in 2005 than in previous years.


$ 0 m

$ 2 m

$ 4 m

$ 6 m

$ 8 m

$ 10 m

$ 12 m

$ 14 m

200020012002200320042005$0$2$4$6$8$10$12$14$16$18


CEO#3- Pay & ROA

$ 0 m

$ 2 m

$ 4 m

$ 6 m

$ 8 m

$ 10 m

$ 12 m

$ 14 m

2000200120022003200420050.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%


CEO#3- Pay & TSR

32%24%

55%

42%

0%

10%

20%

30%

40%

50%

60%

1year 3year

TSRChange in Pay

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5.4 CEO#4: Leigh Clifford Remuneration & Performance Analysis

Performance:

The share price of Rio Tinto has grown sharply over the past year after remaining fairly steady from 2001 to 2004. ROA has been positive (rising from a low in 2003). The TSR figures show stronger signs of short-term returns. The strong recent performance in terms of share price and TSR is due in part to a general rise in the share price of resource companies, driven by booming commodity prices.

Pay:

A considerable proportion of Mr Clifford’s remuneration appears to be ‘at risk’. Throughout the period, he received an annual cash bonus determined as a percentage of fixed remuneration. These short-term incentive payments were conditional on achieving a broad range of internal targets. The measurement criteria relating to these goals were both quantitative (net profit in excess of the cost of capital, comparison with previous year’s level, etc) and qualitative. Short-term incentive payments have been reasonably consistent throughout the period. The small fluctuations in STI seem to mimic ROA which should be a reasonable approximation for ‘economic profit’, presumably one of the more significant of the relevant criteria.

The long-term incentive component of Mr Clifford’s remuneration involves a series of options and, lately, performance rights. Each grant of options and performance rights vests based on the company’s TSR relative to other similar listed companies. The grant-date value of the performance rights granted in 2004 and 2005 was large both in an absolute sense and also relative to most other CEOs.


$ 0 m$ 2 m$ 4 m$ 6 m$ 8 m

$ 10 m$ 12 m$ 14 m$ 16 m$ 18 m

200020012002200320042005$0$10$20$30$40$50$60$70$80


CEO#4- Pay & ROA

$ 0 m$ 2 m$ 4 m$ 6 m$ 8 m

$ 10 m$ 12 m$ 14 m$ 16 m$ 18 m

2000200120022003200420050.00%

5.00%

10.00%

15.00%

20.00%


CEO#4- Pay & TSR

79%

112%

12%

58%

0%

20%

40%

60%

80%

100%

120%

1year 3year

TSRChange in Pay

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5.5 CEO#5: Roger Corbett Remuneration & Performance Analysis

Performance:

2005 was a profitable year for Woolworths, with all three measures performance indicating improved returns to shareholders. ROA has consistently increased since 2001, although TSR performance has been more subdued – possibly because Woolworths’ shares have been ‘priced for perfection’ for some time.

Pay:

The company’s solid performance may have produced the 156% rise in pay over the past three years. The at-risk component now forms substantially more than 50% of the CEO’s total remuneration package, although unusually what is described as the CEO’s long-term incentive is actually seemingly an annual cash bonus. Both fixed and short-term remuneration have also increased, which suggests that if the CEO meets performance targets in the next year shareholders can expect the CEO to be allocated a substantial cash bonus.


$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m$ 9 m

2000 2001 2002 2003 2004 2005$0$2$4$6$8$10$12$14$16$18


CEO#5- Pay & ROA

$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m$ 9 m

2000200120022003200420050.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%


CEO#5- Pay & TSR

49%35%

104%

156%

0%20%40%60%80%

100%120%140%160%180%

1year 3year

TSRChange in Pay

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5.6 CEO#6: David Morgan Remuneration & Performance Analysis

Performance:

Westpac has performed respectably in 2005 on each of the selected measures. The share price has grown steadily over the period. ROA has increased since 2003 after fluctuating in preceding years and TSR has been strong over the past three years.

Pay:

Dr Morgan’s remuneration has increased over the sample period, but decreased in 2005. The decrease is due to the decrease in incentive pay while the fixed component has remained steady. However, short-term and long-term incentives remained major components of overall remuneration throughout the period. Long-term incentives consist of performance rights that vest based on performance against relative TSR hurdles.


$ 0 m

$ 2 m

$ 4 m

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2000 20012002 2003 2004 2005$0

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CEO#6- Pay & ROA

$ 0 m

$ 2 m

$ 4 m

$ 6 m

$ 8 m

$ 10 m

2000200120022003200420050.92%0.94%0.96%0.98%1.00%1.02%1.04%1.06%1.08%1.10%


CEO#6- Pay & TSR

24%

70%

-17%

67%

-40%

-20%

0%

20%

40%

60%

80%

1year 3year

TSRChange in Pay

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5.7 CEO#7: John McFarlane Remuneration & Performance Analysis

Performance:

ANZ has performed solidly over the sample period. The share price has grown steadily since 2000, and TSR has been strong over both the short- and medium-term. Over the same period ROA has been consistently (negligibly) above 1%. The low rate of ROA is because ANZ, as a bank, has large asset values on its balance sheet in the form of loans to customers.

Pay:

Mr McFarlane’s remuneration has increased significantly over the sample period. Total remuneration more than doubled between 2000 and 2005 (in 2005 it was $7.2 million; in 2000 it was $2.8 million). A relatively large proportion of Mr McFarlane’s pay is ‘at risk’ as he in 2004 and 2005 elected to receive almost all of his fixed remuneration in the form of ANZ shares.


$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m

2000 2001 2002 2003 2004 2005$0

$5

$10

$15

$20

$25

$30


CEO#7- Pay & ROA

$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m

2000200120022003200420050.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%


CEO#7- Pay & TSR

32%

59%

4%

29%

0%

10%

20%

30%

40%

50%

60%

70%

1year 3year

TSRChange in Pay

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5.8 CEO#8: David Turner Remuneration & Performance Analysis

Performance:

Brambles performed strongly after 2003 — the year Mr Turner was appointed CEO. The share price has risen dramatically between 2003 and 2005, although over the same period ROA has decreased from 7.4% to 5.9%. The poor performance of Brambles between 2002 and 2003 is reflected in the poor TSR number over three years, although all three performance measures suggest Bramble’s performance has improved under Mr Turner.

Pay:

Mr Turner’s remuneration has grown steadily since 2003 (he was granted large amounts of long term incentives prior to 2002 which were valued entirely in the year of grant. These amounts have since been apportioned over the life of the incentives). Since then, the increase in total remuneration has seemingly kept pace with the increase in share price.


$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m

2000 2001 2002 2003 2004 2005$0

$2

$4

$6

$8

$10

$12

$14


CEO#8- Pay & ROA

$ 0 m$ 1 m$ 2 m$ 3 m$ 4 m$ 5 m$ 6 m$ 7 m$ 8 m

2000200120022003200420050.00%

2.00%

4.00%

6.00%

8.00%

10.00%


CEO#8- Pay & TSR

40%

-7%

42%

10%

-10%

0%

10%

20%

30%

40%

50%

1year 3year

TSRChange in Pay

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5.9 CEO#9: Greg Clarke Remuneration & Performance Analysis

Performance:

The performance of Lend Lease has begun to show signs of recovery after a dramatic decline in performance between 2000 and 2003. During that time, the company’s share price fell by more than 50% and ROA dropped below 3%. Since late 2002, when Mr Clarke was appointed CEO, all three performance measures have showed signs of improvement.

Pay:

Mr Clarke was appointed in late 2002. Hence, there is no remuneration data prior to 2002 making a three-year comparison between TSR and pay impossible (and the 2003 pay data relates to only part of the 2003 financial year). Over the three years, remuneration has grown significantly. In particular, fixed remuneration has increased faster than either of the performance-based components.


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CEO#9- Pay & ROA

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CEO#9- Pay & TSR

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ISS AUSTRALIA


5.10 CEO#10: Chip Goodyear Remuneration & Performance Analysis

Performance:

The performance of BHP Billiton has improved steadily since 2003. The share price history (price as at 30 June) has been: 2002: $9.63, 2003: $8.59, 2004: $12.53 and 2005: $18.15. ROA has also increased substantially (from 7.5% in 2002 to 15.3% in 2005). TSR over the period has also been substantial, although BHP Billiton has also benefited from the general increase in the share prices of resources companies.

Pay:

Despite the strong performance of the company, Mr Goodyear’s remuneration has been relatively stable, growing from just over $5 million in 2003 (when he was appointed CEO) to over $6 million in 2005. The growth in Mr Goodyear’s total remuneration is largely due to increases in long-term incentives and retirement benefits.


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CEO#10- Pay & TSR

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ceo pay in the top 100 companies: 2005

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