Macquarie Group (ASX:MQG) chief executive, Nicholas Moore, forfeited performance share units worth an estimated $1.3 million, according to an announcement by the bank yesterday.
While it still leaves Moore with a total remuneration of $7.8 million to March 31, according to The Australian Financial Review, it is an example of innovation in executive pay strategies by the Macquarie Group board.
Recently, there have been two other examples of unusual activity in the vexed area of remuneration.
Last month, Peter Scott, the chairman of the fund manager, Perpetual, took a 42% pay cut, while dropping the average pay for Perpetual’s non-executive directors by 25%, as the company forecast a big drop in profits.
In February, Nick Collishaw, chief executive of developer Mirvac Group, took a 25% hit to his $2 million a year salary, and moved from a fixed-term contract to a rolling one. Collishaw’s incentives, based on his base salary, would also fall – even if he reaches performance targets.
Most boards are too conservative in their executive remuneration practices, says Ben Morris, head of Hay Group’s Executive Reward Practice. “Eighty percent of the top 200 listed companies use relative total shareholder return as the long-term incentive measure,” Morris says.
“They need to stop focusing on what everyone else does, and to ask, ‘What works for us, for our business, our maturity, our business strategy?’ ”
Governance analyst, Martin Lawrence, a director of Ownership Matters, says the moves by Perpetual and by Mirvac are “very unusual”, and that most boards stopped doing anything innovative as soon as the global financial crisis hit. “One reason is that boards started saying, ‘Get us something that won’t get us into trouble’,” Lawrence says.
Rewarding executive performance using relative total shareholder return (TSR) is seen as best practice by many investors, Lawrence says.
Relative TSR measures a company’s share price growth and dividends paid against a basket of comparable companies over a period of time, typically three years. “If your company has TSR of say 18%, and 95% of companies in the basket have done better than you, you are not going to get anything,” he says.
A big push by investors has been behind that introduction of the relative TSR measure, and shareholders sought to put an end to the “rising tide lifts all boats” issue in measuring performance, meaning that in a bull market, company leaders do not have to be very good to get a lift in share price. “The flipside is that in a bear market, it rewards shareholder return that falls the least,” Lawrence says. “You could argue it does well to align the management with shareholders. It is usually seen as the ‘least bad’ option.”
In the case of Macquarie Group chief, Nicholas Moore, his performance was measured on relative return on equity (see how this is calculated here), compared to a basket of 13 other domestic and global banks. The second hurdle was the compound annual growth rates in earnings per share (calculation is here).