KEY POINTS:
The NZX board is likely to face considerable difficulty in coming up with a bonus scheme that satisfies both Mark Weldon and the shareholders.
Mere tweaks to the package are unlikely to placate the institutional investors who protested vehemently to the board this week about the package and forced directors to withdraw it yesterday.
Shareholders had three main problems with the scheme: that it was too generous and Weldon would end up with too much of the company, that the hurdles to achieve the bonus were too low, and that three years was too short a timeframe.
As for Weldon, he's been put in a difficult position.
If he achieved all of his targets, he stood to gain a minimum of $3.3 million over three years on top of his annual salary and bonus of $900,000. And there was potential for him to earn considerably more.
Now he faces the prospect of having his bonus cut considerably, perhaps by seven figures. And it's likely to be harder for him to earn and take him longer. Even with all the good will in the world, that's likely to leave a bitter taste.
The board has strongly linked this incentive package with the future growth of the NZX.
"There are three things. Have you got the right strategy, have you got the right CEO to deliver that strategy and are the CEO's incentives aligned to shareholders?" said Nigel Williams, NZX deputy chairman and a member of the NZX board remuneration committee, this week. "Mark has led the company and delivered very good growth. We want to consider all the views but we also want to ensure that NZX investors enjoy that growth in the future."
The question that raises is: what does it mean if the package is cut? That the CEO won't be as incentivised to grow the company?
Certainly Weldon indicated yesterday that he remained committed to the NZX, saying "thinking of the big picture and how to move the market forward is what matters".
It is surprising that the board - with sharemarket heavyweights such as Neil Paviour-Smith and chairman Simon Allen - so misjudged shareholder reaction in the first place.
Even the independent report the board commissioned highlighted problems, while concluding that overall the scheme was fair.
"The proposed changes, in comparison to the current scheme, appear to benefit the incumbent rather than the company," wrote Helene M. Higbee of remuneration specialists Higbee Schaffler.
It is unfortunate that the board created this mess. Weldon is generally, although not universally, considered to have done a good job at the NZX.
Another bargain?
Shareholders will be asking what, if anything, The Warehouse has learned after the company said it was thinking about having another tilt at the Australian market.
A little over a year after The Warehouse extracted itself from its previous Australian venture, chief executive Ian Morrice said yesterday that the company was looking at the assets of Australia's Coles Group, the country's second-largest retailer.
Coles is expected to be broken up, giving The Warehouse a chance to buy stationery business Officeworks or discount clothing chain Target.
Having lost around $400 million in Australia through the purchase of 115 Clint's Crazy Bargains and Silly Solly's stores in 2000, shareholders will be rightly nervous about the company once again glancing across the Tasman.
It's only natural that when New Zealand businesses look at expansion, they look to Australia. With a potential market five times the size of the local one, it is the next logical step for many businesses.
But the question is how they choose to do it. There are two ways: by acquisition or by organic growth.
Those businesses that have made acquisitions in Australia have generally not done well. Apart from The Warehouse, think Telecom's purchase of AAPT and Restaurant Brands' purchase of Pizza Hut Victoria.
And of course, let's not forget Air New Zealand's disastrous purchase of Ansett.
Compare these with New Zealand businesses that have done well - jewellery chain Michael Hill and children's clothing retailer Pumpkin Patch, which earn well over half of their revenue in Australia, and transport company Mainfreight, which is on the way to earning half of its revenue there.
(Ironically Pumpkin Patch is now run by the man who was in charge of The Warehouse when it last went into Australia - Greg Muir.)
What these three businesses have in common is that they grew organically in Australia. Each of them just put a toe in the water rather than diving in by purchasing a sizeable - and often struggling - business in Australia.
This means the cost of failure is not so great. When Hallenstein Glasson decided to pull out of the Australian menswear market in 2003 because its Hallensteins stores weren't working, it was no big deal.
The company had only four Hallensteins stores in Melbourne and said the costs of exiting the businesses were not material. That's a lot less than The Warehouse's $400 million.
Morrice was responsible for getting The Warehouse out of Australia, when it sold in November 2005. Shareholders will be hoping he remembers that as he contemplates another purchase.
* Christopher Niesche is business editor of the Herald.
