Thursday, November 03, 2005 ALLAN Trench* joins MiningNews.net Premium with a weekly comment on industry trends and issues. In his first column, he reviews a subject of interest to both shareholders and professionals alike: executive remuneration.
There are few things of such widespread intrigue to both technical and commercial professionals in the resources world as remuneration strategies. After all, as benefactors of the latest commodities boom, perhaps we should all declare a conflict of interest! Indeed, a recent graduate remuneration survey cited one newly-minted mining engineering graduate as earning a starting salary package of $130,000.
Heightening the level of scrutiny in recent years has been the disclosure of executive salary packages in annual reports under ever tighter accounting regulations. The result? The remuneration market has become a transparent one with full information-access available to both industry professionals and shareholders alike. Armed with this information, either party can then act accordingly.
For example, as the proud owner of 40,000 shares in emerging gold player Avoca Resources, I can either agree or disagree with the remuneration packages paid to the managing director, the wider board or the senior management. And when the opportunity arises, I can bring the full weight of my 40,000 shares to bear in a vote on the issue – else buy or sell shares on market in either endorsement or protest.
Conversely, as industry professionals, there's nothing to stop you (or me) negotiating with the boss for a pay packet in line with suitable peers in other companies. Of course, the smart move in this game is to choose one's peers carefully – Forget any notion of using that statistically valid sampling technique you learnt about way back at University.
The lesson? There are both positive and negative consequences to the disclosure of executive salaries. The reporting regulations that were intended to inform and protect shareholders have served as a basis for an upward spiralling in executive remuneration (Some would say a positive for managers – but a negative for shareholders). I doubt that this was their intention at the outset.
But the intrigue goes further: If a company chooses to pay cash bonuses to its managers then there is little a shareholder can do until the time such bonuses are revealed. Then it's simply a case of choosing whether to buy, sell or hold. This is in contrast to the case when a company proposes to grant shares or options as part-remuneration: a shareholder vote is called for.
A recent high-profile example has been the circus that erupted over the on-again, off-again, on-again executive package of Michael Kiernan, the high profile head of Perth-based Consolidated Minerals (CSM).
Opinion on that specific issue appears clearly divided: loyal retail shareholders at CSM want Kiernan to stay – they've seen the company grow tenfold in five years and pay strong dividends along the way.
They were more than willing to see further equity granted as a significant part of the managing director's overall package. After all, isn't that the whole point – aligning shareholder and management interests in a rising share price?
In the Kiernan case however, some unnamed institutions baulked at the apparent $21 million price for a five-year contract, and their brinkmanship led the outspoken mining identity to call time to his career at CSM in June next year: The entire five-year deal was withdrawn from shareholder vote - though latest news will see revised one-year terms agreed with Kiernan from June 2006. So watch that space!
In the general case, it is not hard to predict the response of shareholders. When times are good, the issue of large salary packages (with or without accompanying shares & options) to managers and directors is likely to be welcomed. There's plenty of good cheer to go around. (It is for this reason I fail to understand the response of the CSM institutional shareholders).
Conversely when times are tough, shareholders are likely to object more to large cash payments to managers and directors (either as base pay or bonuses) than to apparently generous share issues. After all, when times are tough, an issue of shares often far looks less attractive than a wad of banknotes.
So the message from this commentator (and shareholder) is that salary packaging that includes a significant upside in shares and options (suitably linked to share price performance) is a good thing.
In a hot labour market, I'd rather hold shares in companies where the key managers are enticed to still be around for a few years time. Waiting for shares to fully vest is one way to keep them.
Oh, and as for the MD at Avoca Resources, the latest annual report reveals a $331,000 salary package of which $75,000 was in share options. My view? Good value for a company with a share price around 20 cents back in January and over 60 cents now. I'll vote my 40,000 shares in favour of another 200% rise again next year please.
As a guideline, a survey of 14 junior explorers with market capitalisations of $35 million and below returned an average 2004 managing director salary of $225,000: You can expect that number to rise this year!
