Economy

Why Telstra’s patchy performance has put Sol Trujillio under pressure: Kohler

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Not a good look to be whacking the workers while pocketing squillions yourself, but Sol Trujillo is not a man to worry about foam-flecked union officials ranting about executive excess.

Not a good look to be whacking the workers while pocketing squillions yourself, but Sol Trujillo is not a man to worry about foam-flecked union officials ranting about executive excess.

Anyway, the CEO of Telstra knows he actually took a pay cut in 2008 because he failed to meet performance benchmarks.

The only reason it looks like his salary went up from $11.8 million to $13.4 million is because it includes the accounting value of unvested options, which may or may not vest and have nothing to do with what he actually got paid.

That’s really why he’s whacking the workers with a secret plan to force them into non-union agreements; he’s under pressure.

Trujillo’s base pay fell from $2,987,314 to $2,900,634 between 2007 and 2008; his cash short term incentives fell from $2,656,800 to $2,581,200. If you exclude the accounting value of unvested options, his wage went from $9,009,875 to $8,561,601 – a drop of $448,274.

I’m not saying he’s doing it tough. Let’s face it, he’s not shopping at Aldi. But given that a Telstra results presentation is like standing in a blizzard of warm snow on a smoggy day in Beijing, where it’s hard to see anything at all, a good way to understand how Telstra is really going is to see how the executives went on their STIs (short term incentives).

Answer: It was patchy.

On earnings and revenue measures they “exceeded stretch” (although what those stretch targets were, exactly, is not disclosed). Stretch was also exceeded on PSTN revenue and “TR1 in production” (I’ll explain later) as well as broadband marketshare.

On mobile services retail revenue they exceeded target but not stretch, and on TR1 conversion and TR2 in production they got nothing because they missed the threshold.

TR stands for “transformation release”; TR1 is the billing and customer service revamp and TR2 is a new operational system. There have been murmurings around the industry for a year that there were problems with these programs, and now that has been confirmed.

Trujillo and the team have also fallen short on long-term incentives (LTIs). The 2006 and 2007 LTI plans reached their first testing point on 30 June 2008; against the 2006 plan 60% of the total payments were tested this year and only 20% were paid.

That’s largely because they scored a zero on return on investment, operational support systems and expense growth (another hint as to why the “secret documents” were drawn up to get the unions out of the picture).

For the 2007 targets, 27% of the incentive payments were up for testing and only half (13%) were paid. That’s because of zero scores on “stretch EBITDA growth”, total shareholder return (TSR) and TR1 conversion.

By the way, the Telstra executives have a “gateway TSR hurdle” of 11.5% compound annual growth to be achieved over the period of the plan, so they can forget all about that with the share price falling.

The fact that Sol Trujillo took a pay cut in 2008 because he failed to meet his targets is the company’s real secret document, certainly if you compare that information with the snow that was being sprayed about yesterday (slide headings included “outperforming our global peer group”, “IT transformation going well”, “redefining the business”, etc etc).

Since arriving in 2005 Trujillo and his management team have clearly simplified the company, focused it more on customers (apart from wholesale customers, of course, who have got together in desperation to build their own network) and have built very handy wireless and IP networks.

The main problem is margin. Under Trujillo it has fallen from 50% (EBITDA to sales) to 42% this year.

And the future of this is quite clear – if Telstra builds the new national broadband network under anything like its own terms, margin will head back to 50%; if not, it will be squeezed further.

It all comes down to the national broadband network. If Telstra loses, there will have to be another transformation much more drastic than Trujillo’s.

And the greatest indictment of Trujillo’s management of all is the amazing fact that Telstra might actually lose the tender. It should never have got itself into that position.

This article first appeared in Business Spectator

 

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