YOU may have noticed that Australian Agricultural Company (AAC) chief executive officer David Farley got a pay rise last year of 28 per cent, taking his total remuneration to $1.2 million.
The salaries paid to senior executives by Nufarm (NUF) in 2012 were similarly healthy. CEO Doug Rathbone received $3.08 million, while 10 executives each received between $500,000 and $1.2 million. Total remuneration for “key management personnel” rose 28pc versus an increase in the company’s overall personnel expenses of 7.6pc.
Don McGauchie is chairman of both AAC and NUF and received approximately $300,000 in director’s fees from each of them.
And just to round things off, salaries at fertiliser company Incitec Pivot (IPL) are not shabby either. No executives qualified for incentive payments in 2012, yet the CEO still received $2.1 million and the head of fertilisers $800,000.
The issue that concerns me is this - are the people who own these Australian agribusiness firms, the shareholders, doing as well as the managers and directors?
Not by my reckoning.
AAC likes to talk about a turnaround strategy, but it has a long history of destroying shareholder value. Last year was no exception; the company incurred a loss of $8.4 million with EBIT down 71pc on the prior year.
The ban on live exports continued to have an impact but the company has rarely done shareholders any favours. Total Shareholder Return has been negative for four of the past five years.
NUF lost the plot a couple of years ago and has been struggling to find a new one. The company is back in the black now and paying modest dividends, but Total Shareholder Return over the last three years has averaged -15pc per annum. Return on shareholders’ equity in 2012, at 9.8pc, is far from stellar.
IPL is also profitable and pays dividends, but overall EBIT was down 22pc with fertiliser EBIT down 40pc on 2011. Total Shareholder Return was 4pc and has averaged just 3.1pc over the last three years.
Management salaries relative to shareholder returns ought to be a key concern for the company’s owners. In my view an ideal formula would be for executives to be paid a low base salary plus a commission based on their performance at delivering shareholder value.
I wouldn’t care how much commission they earn, as long as shareholders do better.
Ensuring management remuneration does not come at the expense of shareholders is the responsibility of directors, yet they rarely seem to take it seriously. Annual reports contain pages and pages of discussion about remuneration, and short and long term incentives abound, but the figures tell their own story. Executives frequently get more even as shareholders lose money.
The true views of many directors can probably be discerned from the fact that they inevitably ask shareholders to approve an increase in directors’ fees irrespective of the company’s performance.
Overall they are part of the problem rather than the solution.
The lack of interest in this issue by shareholders encourages others to intrude. Customers and lobby groups, for example, regularly use high executive remuneration as evidence that companies are engaging in rapacious pricing. Governments, which never need much encouragement to meddle, are tempted to stick their noses in.
The thing is, salaries are not particularly high in the agribusiness sector overall. Indeed, with the exception of those who also have a foot in the finance sector, they are mostly fairly modest.
That goes for the multinational chemical companies that compete with Nufarm too. While they pay well enough to attract applicants for vacancies, their Australian CEOs and senior managers do not receive anything like the remuneration seen at AAC, NUF or IPL.
It is high time shareholders elected directors who are on their side. And if for some reason they can’t do that, they should not invest in companies that allow management to benefit at their expense. I do not have shares in AAC, NUF or IPL.
David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at firstname.lastname@example.org