WHEN the directors of Commonwealth Bank peer down on their employers, the bank’s shareholders, from the podium at the Brisbane Convention Centre in two weeks’ time, they may feel a tad sheepish. The occasion is the annual meeting, the one time each year when the owners get to quiz the stewards of their company – and the stewards have been playing fast and loose with the owners’ capital once again.
Once again they have been lavishing it, undeservingly, on executives already remunerated fully and fatly.
We don’t make this claim based on some tired and wishy-washy notion such as ”the shareholder return has failed to match the rise in pay year after year”. Nothing as corny as that.
Rather, we point readers to Commonwealth Bank’s own pay and performance metrics. Directors have changed the hurdles for approving executive pay to make it easier for a bunch of zero exercise-price options to vest.
And it is this breaching of performance metrics – its own metrics – that imperils CBA’s remuneration report this year. Proxy advisers and shareholders will surely be on to it. As evinced by the outcry over Downer EDI and Boart Longyear in 2010 – not to mention Shell in Britain – changing the performance criteria to allow options to vest is not liked one little bit.
Any self-respecting shareholder is bound to knock this impending ”rem report” on the head as it should be a first principle that directors at least stick to their own promises on pay, if not society’s expectations.
But the devil is in the detail, just as the remuneration consultants and their clients would have it. And that is where we should proceed.
In the notice of meeting for the 2008 annual meeting, the performance hurdles for the bank’s top executives were based on beating rival banks on customer service.
CBA had to exceed peers ANZ, Westpac, St George and National Australia Bank on certain customer satisfaction surveys and so forth.
The options would begin vesting if CBA ranked third in the group of five. It only had to be middling to bring in the millions, mediocre you might say.
It didn’t have to come first in the customer service surveys stakes. And to that end directors set aside up to $36.1 million. If CBA’s profits grew more than the average of its peer banks, the pool would grow to that level. And so it did.
By crunch time in 2011, however – the terms of the deal were based on the period from July 1, 2008, to June 30, 2011 – the bank had ranked fourth in the customer service stakes. CBA needed to rank third, in the middle of the pack, before executives could begin sharing in that $36.1 million profit pool.
Nonetheless, the board ”reviewed” the situation. It found that coming fourth was good enough and, according to page 86 of the annual report, decided that it would exercise its ”discretion to determine that 25 per cent of the available pool will vest”.
”This will result in a total distribution of $8.5 million during the 2012 financial year.”
Proponents of extreme pay may wonder that the bankers did not simply go the whole hog and help themselves to the full $36.1 million. It’s a drop in the ocean, after all, compared with a $6 billion profit.
But surely even most directors would adhere to the view that a company should stick to the rules it has itself struck, with its shareholders’ approval. If not, it is a slippery slope indeed.
As for departing chief executive Ralph Norris, who was paid tens of millions to run an institution underpinned by the taxpayers via the government guarantees, he picked up another $2.89 million at the board’s discretion.
This is at odds with the notice of meeting in 2008, which said: ”In the absence of substantial and sustained improvement (in customer service), no vesting will occur at all.”
The backdrop is that, during Norris’s reign, customer service did improve at CBA, quite markedly. It improved at all the banks. They were ”coming off a low base” would be one way to look at it.
During the 1990s, amid the digitisation of banking, customer service had deteriorated. It had to get better as it could hardly have got worse. All the major banks recognised this and did something about it.
CBA has already handed down its 2011 profit results – a 12.9 per cent rise in net profit to $6.39 billion.
The other three of the big four banks report over the next few days and together the four, on the latest stockbroker estimates, should deliver a combined net profit of $24 billion.
Even against the tide of receding credit growth the banks have done a sterling job for shareholders, keeping costs down and profits ticking along. Indeed, net interest margins (a good measure of bank profitability) are tipped to remain stable, despite the pressure on loans volumes.
The fact that the banks are so profitable year in year out, that they do such a good job for shareholders, conveys the advantages enjoyed by the entire industry. Still we will hear, in some way, as the bankers come forward with their results over the next few days, the usual rhetoric about how ”tough” it is ”out there”.
One can only hope that one of their PR experts can take the picture beyond ”tough” this year, beyond ”challenging”.
Anyone for ”harrowing”?