Mining companies should reconsider incentive schemes for executives: analysis

Mining companies have been urged to reassess traditional remuneration practices and adjust to the industry’s current business climate.

Analysis conducted by independent remuneration firm, The Reward Practice, found that 70 per cent of reward incentives were paid to metals and mining chief executive officers despite their companies reporting an average shareholder loss of around 21 per cent.

The firm reviewed ASX 300 company remuneration reports for its analysis, isolating the top and lowest performing companies across all industries, before differentiating the results against metals and mining companies.

The Reward Practice’s findings revealed that the metals and mining sector reported lower than average fixed salary percentage allocations in the bottom performing companies.

However, the analysis also found that total executive remuneration – salary and incentives – was largely obtainable over a relatively short period of less than two years and was evaluated on most ‘hygiene’ measures that do not underpin business growth.

Within this group more than 70 per cent of reward incentives were paid out, according to The Reward Practice, despite some company profits falling and a significant drop in shareholder value.

The Reward Practice’s Warren Land believes the mining boom and talent shortage may have seen some boards and shareholders become complacent with incentive provisions and achievement metrics.

He added, however, that a ‘set-and-forget’ approach presented several risks in tougher times.

“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 miner’s DNA,” Land said.

“Our research highlights a number of sizable reward payments despite significant company losses. In one case a CEO received 135 per cent of his STI targets against a loss of 12 per cent 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 spotlight is on company boards to demonstrate balance in their remuneration packages, with more shareholders using their voting power to influence decisions on CEO and executive remuneration, The Reward Practice added.

It highlighted the 2012 Corporations Act, which introduced the ‘two strikes’ rule, whereby shareholder votes against unsatisfactory remuneration reports can enact serious consequences on companies.

The rule joins Treasurer Scott Morrison’s recent Banking Executive Accountability Regime (BEAR) provision to defer bonus payments in the major banks by four years.

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