What does it take for bosses not to get their bonus?

Written By: - Date published: 11:26 am, September 13th, 2018 - 17 comments
Categories: business, capitalism, economy, Economy, employment, farming - Tags: ,

Fonterra’s $196 million loss for the June year – the first loss in the co-op’s 17-year history and a staggering reversal of last year’s $745m profit – failed to seriously dent the remuneration of its former CEO Theo Spierings.

Spierings has retained the same out-sized $8m-plus remuneration he was paid last year, raising questions not just of greed but whether bonuses actually work.
The question is: what does it take for CEOs to lose their bonus? Why is it that all risk lies with the shareholders? Why does poor performance by a company not result in CEO and top management bonuses being clawed back? And why do employment protection laws apply to those on enormous salaries so despite espousing the ideology of taking risk, it doesn’t apply to them.

Instead, what we see is that these enormous bonuses continuing to be paid despite regular abysmal performance.

Many of the KPIs that earn CEOs bonuses are just the normal things CEOs should be expected to do excellently.

Spierings’ pay last year led to calls to reign in levels of chief executive remuneration and caused angst amongst many of Fonterra’s farmer-investors.

Almost $4.2m of what he received in 2018 related to bonuses, albeit some that were earned in the previous year. But it included a short-term bonus of $979,702 (versus $1.18m in 2017). Under Fonterra’s pay scheme he could have earned up to $1.48m worth of short-term incentives.

In 2017, he earned a long-term bonus of $4.3m. He may still get some long-term bonuses paid next financial year. Nothing would surprise.

The co-op said its normalised earnings before interest and tax was $902m, down 22 per cent. But for a big company to claim “normalised’ earnings is a nonsense.

For big operations, every year will include “abnormal” events.

But even on a so-called normalised basis, gross margins fell to 15.4 per cent from 16.9 per cent. Hardly, something bonuses should be paid for. Return on capital fell to 6.3 per cent from 8.3 per cent, while its gearing ratio (debt to equity) bumped up to 48.4 percent from 44.3 percent.

The average loss relating to farmers’ ownership of Fonterra for the co-op’s 10,000-odd farmer-owners amounts to $8,000.

The abnormals were a $405m writedown in investment in Beingmate in China – an investment that can certainly be sheeted home to Spierings’ management, and a $183m payment to Danone from the botulism scare, an event that was incredibly poorly managed by the company and its PR firm.

No pay details have been disclosed of interim chief executive Miles Hurrell, who took up his position last month.

Hurrell said, “there’s no two ways about it, these results don’t meet the standards we need to live up to. In 2018, we did not meet the promises we made to farmers and unit holders.”

What he didn’t add is that we will pay our CEO and top managers their bonuses anyway.

This year, Fletcher Building, what was our second largest majority locally-owned business with any international competitive impact, made similar catastrophic losses – a $190m loss for the June year.

Its former CEO, Mark Adamson, was paid a $2.9m “exit package”. Although he forfeited $8m of bonuses held in a long-term share scheme, my question is why should a CEO who has overseen a loss of ~$5 billion in shareholder value not just be sent down the road, no questions asked?

Part of the trouble lies in the fact that people on very high salaries get the same employment protection that ordinary workers receive. I would argue that the law should be changed so that once an employee receives remuneration of over ten times, or even five times, the average income, he/she should be prepared to take the responsibility that they live or die by their performance.

As a former businesses reporter, time and again I would see bosses fired for incompetence but paid enormous “golden parachutes”. Once, after a CEO of Tower was sacked but paid a $4m golden parachute, I asked if the same conditions would be put in place for the replacement; chair Colin Beyer said: “Of course, we have to remain competitive”.

It was pigs at the trough closing ranks.

(Simon Louisson is a former journalist who reported for The Wall Street Journal, AP Dow Jones Newswires, the New Zealand Press Association and Reuters and has been a political and media adviser to the Green Party).

17 comments on “What does it take for bosses not to get their bonus?”

  1. Gabby 1

    The CEO Club seem to have achieved provider capture.

  2. KJT 2

    Even the shareholders can avoid a lot of the risk.
    Like voting for excessive borrowing to extract dividends, then having no liability for the company collapse.

    It is staff and suppliers who have to wear the losses, while owners and managers, scarper.

  3. Bill 3

    I’d guess…if they gave voice to their social conscience they’d lose their bonus. That said, their social conscience was sucked under by a pool of filthy lucre long ago – so it ain’t gonna be happening.

    But that’s a large reason they get paid what they do.

    They’re willing to head up companies and organisations that do terrible things, and they’re willing to be the smiling apologists for whatever it is the company or org does and to generally keep it all under wraps or “in house”.

    Can you imagine the CEO of something like Fonterra standing up and calling a spade a spade when it comes to water pollution, land degradation, or whatever else sits on the raft of environmental damage that floats atop their profits?

    They are paid to maintain a culture that successfully punts the company as some quite nice and wonderful to have financial or business asset, while neutralising any criticism that may be “incoming” on their environmental record, or their employment practices, or any of their various dodgy dealings….

    And after it’s all done, well it takes a lot of money to distract the poor poppets from any potential guilty feelings that might see them “spill the beans” on the shit they encountered, or witnessed, or managed while they sat in that ‘overseers’ chair. 😉

    We’re told their salaries all are about financial performance? We believe it?

  4. KJT 4

    If it takes a pay of, millions, to motivate someone to do their job properly, perhaps they are recruiting from the wrong people?

    Certainly the quality of management has dropped as salaries have sky rocketed, and the idea took hold, that someone totally ignorant in the field the company is in, can manage it.

  5. Dennis Frank 5

    Bonuses derive from contracts, so responsibility lies with who authorises those contracts. In a corporation, that’s the board, right? So, with all due respect to Simon for helping the Greens, his analyst doesn’t get to the crux of the issue.

    At board level, decisions are made in accord with mutual perceptions of what’s best for the corp, as regards future prospects, and whether profits suffice to satisfy shareholders despite the payment of bonuses. Takes a lot to generate a shareholder revolt. So the reason bonuses have become automatic is due to the board consensus that it is required by the current market situation. Capitalist class interests prevail.

    • Grantoc 5.1

      With respect Dennis, bonus’s for CEO’s/executives have not become automatic.

      I recently undertook a review of a CEO’s performance on behalf of a board in order to determine whether or not the CEO should receive any incentive reward, as part of the work that I do. The CEO’s incentive plan consisted of a number of objectives and KPI’s that the board and the CEO had agreed to at the start of the cycle. They related to the achievement of the organisation’s strategic goals. The quantum of the incentive reward for the CEO was determined by the quality of the CEO’s performance. For some objectives his performance was not up to expectations, and he got little or no payment; for other objectives he performed up to and beyond expectations and he received an incentive reward in recognition of this.

      The situation I describe above is typically what happens in most organsations. There are exceptions but that what they are, exceptions.

      Payment of bonus or incentives is hardly ever automatic and it defies the logic of having them in the first place. It would be stupid of any board to agree to this. In a CEO’s employment agreement bonuses are typically described as ‘at risk’ pay and it is stated that they are conditional upon certain objectives being met.

      • RedBaronCV 5.1.1

        which still leaves the question – why is there not a minus bonus for the not achieved areas ? Other wise the CEO risk is all 0 to +ve territory – no chance of a downgrade overall.

        • Phil 5.1.1.1

          why is there not a minus bonus for the not achieved areas ?

          I suspect the answer is probably something to do with employment law?

          CEO’s are still employees, after all. I doubt that “you haven’t achieved your targets, so you’re going to have to pay back some salary” is looked upon fondly in employment court.

      • Phil 5.1.2

        Hi Grantoc,

        I’m curious if your review included any consideration of ‘gateway’ incentives?

        For those unfamiliar, gateway incentives are designed to ensure a staff member works toward both their quantitative targets (e.g. $x sales or company profit of $y mln) as well as behavioral/qualitative targets (e.g. complied with the organisation code of conduct at all times throughout the year, filed all paperwork to the appropriate standard, minimal number of process errors, etc).

        While quantitative incentives usually scale with performance, the behavioral gateway incentives are typically binary. That is to say, even if you nail all your sales targets during the year, the gateway to any incentive payment may be closed if your behaviors were not up to scratch.

        This type of incentive/bonus framework is now common in most financial institutions.

  6. Herodotus 6

    Re “normalised profits” I took great interest in fletcher buildings result ( being a worker) that the normalised profits for bonus calculations excluded costs associated with the earth quake yet all following years the remedial work and building materials sold by the company were normalised. Lesson: bad results are abnormal, good results are normal 🤑

  7. Dukeofurl 7

    What baffles me why do business journalists talk about company results which mostly give profit on accrual basis as if its a cash basis

    “The average loss relating to farmers’ ownership of Fonterra for the co-op’s 10,000-odd farmer-owners amounts to $8,000.”
    really?
    When the numbers that matter is given here:
    “normalised earnings before interest and tax was $902m, down 22 per cent. ‘

    Doesnt sound like a $8k loss because there was no such thing.

    Fonterra is doubly hard to report on because its a Cooperative and the owners are mostly paid in their milk price. A Coop wouldnt normally have a profit at all and all its surplus goes to the farmer suppliers without any tax paid.

    But for a $20 bill company its shows in the gross margins which are 15.5%. Thats $3.2 bill territory.
    Business journalists are doing a bad job when they talk about accounting write offs as individual shareholder losses. That is swap between accrual and cash accounting as though they are the same thing.

  8. Incognito 8

    CEO remuneration packages are big part of the company gloss & PR. It’s like bolting on a big muffler, a big spoiler, and mags and pretend to have a powerful racing car while in fact it is a sad excuse for hoon-wreck to be. People are so easily fooled by shine & gloss (all the glitters is gold). It’s also known as make-believe.

  9. gsays 9

    It’s not just CEOs of large companies where these sort of inequities occur.

    I work in a small business (30 employees, 10 of them full time), there is secure car parking available next door.
    This is for the exclusive use of the general manager and two owners.
    No one else to use them any if they are not being used.
    Leaving the rest of the staff, in the shadow of minimum wage to pay up to $12 a day in fees.

    • RedBaronCV 9.1

      And then there are the joys of working for those that get a bonus. Incentivizes a lot of plain awful downwards behavior.

  10. KJT 10

    https://www.blogger.com/blogger.g?blogID=8242873948775998562#editor/target=post;postID=5019555867712783018;onPublishedMenu=allposts;onClosedMenu=allposts;postNum=94;src=postname

    “One of the corollaries or supporting ideologies behind Neo-Liberalism is the cult of Management.

    The idea that individual shareholders, managers or directors are the main contributors to the success of a corporation, and thence the economy. And deserve the greatest share of the rewards. The jobs and income of all other employees and State servants is a generous charitable gift from these people.

    Except, maybe in the case of genuine entrepreneurs, we all know this is not true.”

  11. SaveNZ 11

    Great to see another quality piece SIMON LOUISSON…

    There seems something abhorrent in a new wave of corporate bosses who are hired in often from overseas at great rates and run the business into the ground by lowering wages in real terms, hiring moron group thinkers from a decade ago financial crisis culture, and making many people outside of that self promoting, anti employee culture redundant and not innovating at all or seeing the future.

    A ten year old can see that you need to have quality IT for example in a modern business, but why pay 8 million (Fonterra) or 5 million (Fletchers) for example to a boss that also manages to screw it up???

    There is little to no strategy going on and little to no management going on in these cases, but still the business community keeps the mantras going… pay the bosses exceptionally to keep competitive, don’t worry about cultural fit, overseas people are better in all cases, pay most other people to do the work poorly and celebrate underpaying employees and ripping them off and giving them no rights under poor managers and then wonder why the business is suddenly not competitive and the company is a shambles within a few years under that approach?

    The top most valuable company in the world is Apple whose founder worked for a salary of $1 at one point and the top 5 most valuable companies are technology.

    When you look at Amazon, a tech retailer – even a company that has an old school way of working aka retail, make value through technology… and often the tech side becomes more profitable than the retail side…

    So as the NZ government goes further and further down the low wage, bums on seats at cheap rates, old school style of commodity business, and attract B grade or less managers at high rates and give them cart blanche to destroy the NZ culture that caused them to be great in the first place and replace old workers with new cheaper contractors often from overseas, NZ as a country are having to use asset sales to keep the Ponzi going and increasingly are not even in control as we recruit bosses that don’t seem to return any value to our shores to run and operate our businesses at the top end, while turning a blind eye to the scams both financial or immigration based blooming smaller business operating concurrently plus the tax scandals like Cadbury who can transfer wealth, replace it with debt and then make everyone redundant shortly after taking over.

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