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Companies reveal CEO contract details

By Peter V O'Brien

Friday 29th August 2003

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The pressure of corporate governance rules (formal or presumed) and general expectations of shareholders are leading to disclosures of executive remuneration that were unthinkable a few years ago.

Outrage at payments made to discredited executives in the US and other countries was the catalyst for the new openness.

Companies in most western jurisdictions, including New Zealand and Australia, have been required to list directors' and executive remuneration in annual reports for some years.

New Zealand provisions provide for payments to directors to be given under each name but those to executives can be given anonymously in broad dollar bands.

The latter were the result of a misguided attempt to protect a doubtful desire for executive privacy but had little effect, because people with knowledge of an organisation's hierarchy can work out who got what.

"Got" is the operative word, because the dollar band system relates to the year under review.

It has nothing to do with disclosing what could happen in future.

Examples of the new disclosure system are coming out of Australia, the latest being the announcement last week of the terms of contract for mining heavyweight BHP Billiton's chief executive Charles (Chip) Goodyear.

BHP Billiton chairman Don Argus said Mr Goodyear's remuneration was "at risk" and subject to the performance of the whole group.

Mr Argus said demanding performance hurdles were applied to the short and long-term incentives that made up the "at risk" component.

Actual dollar and percentage numbers disclosed as Mr Goodyear's terms of contract were less important (and possibly less interesting) than the range of items.

Some shareholders might argue Mr Goodyear was worth more, or less, than the board decided, but they saw the full deal.

The contract between the company and Mr Goodyear is used here only as an example of the new order, rather than singling it out for individual critical comment.

Mr Goodyear is employed under a single contract of service with no fixed term. The group can terminate the contract on 12 months' notice and the chief executive on three months' notice.

Payment can be made in lieu of notice but the absence of a fixed term gets over large payments when companies decide to get rid of people after, say, two years into a five-year fixed term.

There is a $US1.25 million base salary and an entitlement of an additional annual amount of 48% of base salary (initially $US600,000) in lieu of a contribution to any pension or superannuation scheme.

Mr Goodyear can either pay that amount into a scheme or defer receipt until retirement.

An earning rate equal to the US 10-year bond rate would be applied to deferred receipts.

Those payments were straightforward, irrespective of the quantum.

The chief executive would also get the cost of health insurance, life and disability insurance, costs associated with the preparation of tax returns and a contribution toward the cost of relocation from the UK to Australia.

Costs associated with his relocation to the US would be paid after termination of the contract.

Incentive awards are payable under the company's shareholder-approved group incentive scheme and calculated with reference to the base $US1.25 million.

"For performance at the target level, which requires Mr Goodyear to meet the vigorous performance hurdles set by the board, including delivery of the budget, Mr Goodyear would receive 70% of his base salary as a cash bonus.

"Whatever is earned as a cash bonus would be matched with deferred shares of an equivalent value. Those shares must be held for two years. The remuneration committee has discretion to allot options instead of deferred shares."

There is a detailed formula for calculating the long-term incentive component, which comprises performance shares.

The incentive is based on comparisons of total shareholder return with those of other peer companies and earnings per share growth with the greater of the increase in the Australian consumer price index or the increase in the UK retail price index, plus 2% a year.

There are other terms in the contract, related to termination and entitlements on termination.

The key point is that everything is clear. It seems no nasty surprises would pop up on termination of the contract.

This type of disclosure is becoming the governance standard (AMP's deal with chief executive Andrew Mohl in December, for example) and is essential.

There will be arguments about amounts and other terms. People are at least getting something to argue about.

The key point [of Mr Goodyear's contract] is that everything is clear. It seems no nasty surprises would pop up on termination of the contract

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