No danger money, just big, big bonuses

by | Oct 4, 2012 | Business

A tragic coincidence at Origin Energy raises the question: would linking executive pay to safety lessen the risks?

It was 9am on the Stena Clyde drill rig in Bass Strait when things went horribly wrong.

Workers had been trying to free the drill pipe from the seabed for three days when part of the drilling equipment sprung loose and killed a man instantly. Another, also struck by the rotating tong, died on the way to hospital.

One was a 60-year-old from Scotland, the other a 32-year-old man from the Northern Territory.

That was six weeks ago, Monday, August 27. There were seven men present in the immediate vicinity on the rig when the tragedy struck, including the two who died. All are traumatised. Sources say it could have easily been them.

The operator, Origin Energy, shut down the rig and flew all the workers back to the mainland.

Just four days earlier, Origin had handed down a 33 per cent rise in profit to $893 million for the 2011-12 financial year.

Accounts, dividends, statutory reports had all been signed off; as had bonuses. Origin was coining it.

Key management personnel would receive $5.8 million in cash bonuses.

Adding up the bonuses

Chief executive Grant King, one of the most respected and successful executives in the Australian market, picked up 78 per cent of his eligible bonus, or $2.35 million as part of his $8.35 million package for the year.

The average executive in Origin’s key managment ranks received 75 per cent of their eligible bonus, a reward that is 60 per cent based on financial metrics and 40 per cent on individual metrics.

The individual metrics include an allowance for safety (embedded in the Short Term Incentives structure of the package).

Origin’s non-executive directors don’t get bonuses but they do get additional board fees for sitting on committees.

In the 2012 year, directors picked up $100,000 in additional fees for sitting on Origin’s Health, Safety and Environment Committee. The breakdown: $40,000 for the chair of the committee and $20,000 each for the three other directors.

It is a bitter coincidence that just a few weeks after the bonuses were allocated, two such terrible fatalities were to occur in the Otway Basin. Accidents happen regularly in mining, in industry generally, and especially in the operation of heavy equipment.

No blame can be foisted on executives of Origin. But the “incident” as these fatalities are inevitably labelled, serves to draw attention to the difficult nexus between financial incentives and safety.

Would penalties lessen the risks?

The point of this story to not score points on the size of executive pay. In financial terms, and in comparison to their peers, King and his Origin executives have earned their large salaries for performing well for shareholders. In the sphere of corporate social responsibility, Origin has is widely commended for its leadership.

Yet the Otway Basin tragedy is a timely reminder that while Australia’s safety record has improved over the decades, the matter of financial incentives and safety in corporate Australia must be under constant review.

A number of questions arise.

As Origin takes safety very seriously, is its response to the Otway incident tokenistic?

Is it appropriate that bonuses, linked to safety benchmarks, are still paid?

Why are directors on the Health, Safety and Environment Committee drawing any fees at all?

Did Grant King and other senior executives get any of their safety bonuses for the year? We don’t know from the publicly available materials what portion of Origin’s Short Term Incentive program (STIs) is attributable to safety. But is it enough, seeing as the most that the CEO can sacrifice is 22 per cent?

It should be noted that this means 22 per cent of the executive bonus, not salary. We are not talking about penalties here, though perhaps we should be. We are not talking about docking wages for safety failures.

But we are merely discussing the discount on a million-dollar bonus.

Linking safety to pay is a fraught issue. In the Otway Basin tragedy, high levels of bonuses were paid just prior to the incident. Overall however, the amounts are relatively minor when compared with overall executive pay.

Is withdrawing part of a bonus sufficient then to deter risky or negligent behaviour?

If people really do come first, as the corporate rhetoric strongly attests throughout the mining sector, should there be a system where the whole bonus is eliminated in the event of a fatality?

Or would this merely drive risky practices undercover and encourage non-reporting? If a bonus is at stake and the reporting of a near-miss would jeopardise it, would every incident be reported?

More red tape is not the answer

If there is any utility in linking pay to safety, surely it would be logical that there should be a stick as well as a carrot, and that that stick should be big enough to influence behaviour.

More red tape is hardly the answer. It is the culture of a company that mostly determines behaviour and instituting more reporting mechanisms can lead to people hiding things and under-reporting. Management needs to know about every near-miss, every potential danger.

A culture of open reporting is desirable as the near-misses are as important as the incidents themselves.

According to the Minerals Council’s 2012 year in review, the industry recorded seven fatalities in 2010-11 and two in 2012 before that document’s publication. There were seven deaths in 2009-10 and an abnormally high 18 fatalities the year before in 2008-09.

That was the year when BHP had its terrible five fatalities in the Pilbara. It was the worst year since 19 deaths in 1999-00, and it was well up on the 2007-08 year when four workers died. The tragic human cost of its “annus horribilis” also brought a financial cost to BHP with its iron ore operations coming in well under budget, partly as a result of the deaths.

Origin too, having shut down its Stena Clyde drilling rig in the wake of the August fatalities in the Otway Basin, will incur costly work outages, albeit not such as to affect overall profits by much.

The good news is that things are better than they used to be. The rate of fatalities is down, despite the proliferation of mine workers due to the boom. During the mid-1990s, fatal injuries averaged 26 deaths per year.

And compared with other developed countries, including the US, Australia’s performance on safety is far superior.

Unlike financial metrics however, which mean profit and loss, this is about life and death. Although accidents may be inevitable, not even one death is acceptable.


Michael West

Michael West

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

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