Telstra chairman John Mullen says "everybody is unhappy" with the pay of executives in Australia.
He was speaking at the AGM today about his deep disappointment at a backlash against the telco's remuneration report.
He says directors don't sit around like the Witches of Macbeth scheming how they can manipulate incentives to give big bonuses to highly paid senior executives.
Telstra chairman John Mullen, fighting back against a shareholder revolt against his board's bonus plan for senior management, says executives in Australia are paid too much.
"I personally believe that executive salaries are too high across the board," he says.
"Changing this takes time and needs to be embraced by all of corporate Australia, not just one company or one industry, as the marketplace for talent is international and is industry agnostic."
Mullen was speaking at the telco's annual general meeting about his deep disappointment at a shareholder backlash against the remuneration report, despite the board cutting executive bonuses by about one-third.
He says a substantial number of shareholders will not approve the remuneration report, meaning a first strike. This happens when 25% of votes are against the remuneration report. A second strike would mean an automatic spill of the board of directors.
“Some observers out there seem to think that directors sit around like the Witches of Macbeth scheming as to how they can manipulate incentive schemes to give improper benefit to already excessive executive salaries," he says.
CEO Andy Penn’s salary is lower than predecessor David Thodey’s. Penn last year received $4.5 million compared to $5.6 million the year before, according to Telstra's annual report.
"Andy himself has seen his actual remuneration drop by almost 50% over the last two years as the company has been under pressure," Mullen says.
"So we are not only reducing overall remuneration levels, but our remuneration clearly does flex downwards with shareholder outcomes, even when management has done a good job."
Mullen, a former CEO of Asciano and of DHL Express, says the whole question of remuneration has become the single most difficult issue for big company boards and has spawned a whole industry of consultants trying to make sense of executive pay.
When CEOs just got a big salary
"I am old enough to remember when a CEO just earned a big salary and that was it," Mullen says.
"Then over the years stakeholders felt that compensation had to be variable and depend on performance and so the schemes became more and more complicated.
"The end result of all this is that, although no doubt well-intentioned by all concerned, we have ended up with a situation where everybody is unhappy."
Mullen says no two shareholders seem to agree on what is the best solution so many don't feel that their interests are being properly protected.
Executives often get frustrated and just wait to the end of the year to find out whether they will receive any variable compensation or not.
This means their compensation is not driving behaviour, as was the original intent.
"On top of all that, society increasingly thinks that all big company executives are paid too much anyway," he says.
"I may sound a bit facetious but do not mean to be. This year, Telstra’s Remuneration Committee and Board spent a huge amount of time trying to get the 2018 result right.
"We thought that we had got it right. But then, even though we believed that management fairly earned their variable compensation at a level of 47% of maximum, the board was acutely aware of the pain that shareholders experienced in 2018."
The share price rules
He says share price cannot be the only metric by which management performance is evaluated.
"The reality is that external factors like the NBN are very substantial drivers of Telstra’s share price performance and we believe that the decline in the company’s financial performance and share price would have been far worse if management had not done an excellent job in such an environment," he says.
Telstra’s revenue is shrinking, squeezed by increasing competition and by the roll-out of the nbn eating into its fixed line business.
Telstra in August posted a 8.9% fall in full year profit to $3.53 billion as the telco faces the roll-out of the nbn network, meaning shrinking margins in the fixed-line market, and increasing competition in the mobile phone sector.
The company’s overall fixed line revenue — the money that comes from providing services over traditional phone lines to homes and offices — fell by 9.2% to $5.81 billion in 2018.
Telstra shares are down 2.2% today to $3.03. Two years ago, they were trading at $5.74.
"I would remind shareholders that Telstra’s share price decline over the 2 years to June 2018 was less than our two listed competitors, TPG and Vocus, who experienced similar NBN pressures to us, and Telstra has broadly maintained market share in fixed and mobile despite the competitive environment," says Mullen.
"It is even more important to incentivise our executives to perform strongly in bad times than in good times and if so, then we must draw a clear distinction between share price performance and management performance.
"If share price performance is really the only criterion used in measuring management performance, then in difficult times like today the payment of any variable compensation at all is going to meet with similar criticism.
"When the share price is up investors tend to be happy with the company’s strategy, support the Board, like the CEO and Management, and approve the Remuneration Report. This may also not be justified since as we all know, sometimes a rising tide lifts all boats."