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The Curious Case of Telstra’s Remuneration Report

15102018_Telstra

The Curious Case of Telstra’s Remuneration Report

As a general observation, my view is that remuneration for top listed company executives is nothing short of generous. Boards and shareholders of all stripes seem happy to shovel cash at senior managers in hope of attracting and retaining exceptional talent; the sort of talent that will drive shareholder returns beyond those of comparable companies. This logic may have some superficial appeal, but I take issue with it for a couple of reasons.

Firstly, while it might make sense at the individual company level, it starts to break down in aggregate. By definition, not all listed companies can attract and retain exceptional managerial talent. Some of the management teams out there (approximately half I would guess) are below average, but it’s very rare that you see a remuneration policy that states: “we recognise that our management team is less than world class, and unlikely to become so any time soon, even if we give them more money.”

If all companies are paying to attract above average talent, then a lot of them are paying for something they are not getting.

Secondly, and more importantly, there is a limit to what management can realistically achieve.  An ordinary manager at the helm of a business with structural competitive advantage in a rapidly-growing market probably will deliver good earnings results, and an enthusiastic share market will likely ascribe lofty multiples to those earnings. An excellent manager in a structurally-challenged business, or one on the wrong end of regulatory or technological change, probably will not.

So, as a rule I’m all in favour of greater restraint in respect of management remuneration. I think there are too many examples of managers being paid eye-watering salaries and bonuses, essentially just for being in the right place at the right time.

Which brings us to the case of Telstra, where the company has this week faced a proxy advisor and shareholder revolt against its 2018 remuneration report. According to the AFR: “…proxy advisors have said, given Telstra’s poor performance, executives should have felt more pain.”

Lurking within this seemingly non-controversial sentiment, I think, is more of the same erroneous conflation of company performance and management performance: “…given Telstra’s poor performance, executives should have felt more pain.”

Tesltra’s share price performance has clearly been woeful. However, much of that, I think can be attributed to things outside management control. Included among these are decisions by previous governments to (after selling Telstra to the public) resect Telstra’s hugely valuable fixed line network and put in place a very expensive National Broadband Network, on which fixed line resellers struggle to make any margin after wholesale charges. I think that most of the Telstra share price decline in recent years is the market coming to recognise the impact of this, perhaps combined with the unwind of a somewhat expensive share price to begin with.

As to management performance, it is not easy to discern exactly how well the team is doing, but, as we have written previously, we believe that the T22 strategy outlined by management in June is the right strategy. If well executed, we think it should add considerable value to the business.

It is also a challenging strategy to execute well, involving dramatic simplification of the business, and extensive, painful cuts to staffing levels.

As far as I’m concerned, if the management team can deliver everything it has set out to deliver with this strategy, it can pretty much name its price.

The Montgomery Funds own shares in Telstra. This article was prepared 12 October 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Telstra should seek financial advice.

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Tim joined Montgomery as Head of Research and Portfolio Manager of The Montgomery Fund in July 2012. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Before joining Gresham Partners, Tim worked for McKinsey & Company for four years, where he was involved in strategic consulting in both Australia and Denmark.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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8 Comments

  1. I note the following comment from the Chairman of Telstra, John Mullen, following the strike against their remuneration report –

    “I personally believe that executive salaries are too high across the board, but 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,”

    I couldn’t agree more with this statement, but am not holding my breath that corporate Australia will follow through.

    Unfortunately all we can do, as retail shareholders, is vote against each company’s report individually. To date, my vote has been swamped by the institutional vote. It is really up to the large institutions and fund managers to get on board.

    • An interesting thought in there, Greg. Currently we can vote only on a specific company remuneration report. What if we could vote on the aggregate level of executive remuneration accross the entire ASX200…

      • As an index fund investor should be able to do, or at least direct where their votes go ! (which means, “not to the chair” by default, as some lazy fund managers do).

      • That would be an interesting situation Tim. I seem to remember that Norway? or another Scandinavian country voted to restrain their aggregate executive remuneration a few years ago. Unfortunately, it would probably require our pollies to get on board.

  2. I remember seeing someone years ago – I think it was Stephen Mayne – who said about board remuneration that “they say ‘if you pay peanuts, you get monkeys’….well, by that measure, Babcock and Brown should have been a standout performer but instead, it crashed and burned”.

    i.e. throwing more money at people, there’s a certain point at which paying more does not yield more outperformance, if indeed it even correlated or “guaranteed” it in the first place…I use the two terms very loosely.

  3. Well said Tim,

    I wonder with some of these executives if they are more in it for the fun of the game rather than to make money. If the usual whingers keep to the mantra ‘poor performance, executives should have felt more pain’ (and they mean financial) one cannot expect humiliated executives to play the game in a way which is strategic and where they are inclined to take calculated risks and where their goal is to really make the company perform over the longer term.

    In a sense the mantra needs to be ‘we want you to do the best for the company you can and we will renumerate you because we think you are the best persons for the job and let them do their job’. Its hard to tell but I can’t see obvious problems with this management group and in my book I would rather them make decisions based on integrity, intuition and values and the fun of playing the game rather than on the financial pain or gain they might feel.

  4. Thanks Tim, a well articulated article.

    My thoughts are that, in aggregate, management remuneration has grown to obscene levels.
    Surely most managers are doing the best job they can, (and if not should not be there there). Paying ever increasing amounts of money only adds to the expense line and detracts from shareholder returns.

    My main gripe is that management remuneration structures are asymmetric. Managers take the extra money when things go well, but don’t take a pay cut when things go bad. This free call option on the businesses performance has led , over time, to exorbitant salaries. All up, no down.

    Although it may seem harsh to penalise management for business performance that may be out of their control, if you don’t have a mechanism to control the growth in salaries, you get the situation we now find ourselves in.

    • I agree, but the phrase “Although it may seem harsh to penalise management for business performance that may be out of their control”; well, none of us has a mechanism to control business performance (which to me, is a stock price that goes up over the long term, as a function of the overall financial performance of that business).

      However, to SOME extent, management do have a mechanism to influence the share price through making good business decisions and to a much larger extent, the function of business performance from which the share price flows.

      They might not be able to control what the market thinks of their business (and with it, the share price), but they can at least do their best to run a profitable business. Anyone can lose or waste money, it’s not hard.

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