Telecom signals mixed on paying for performance

By BRUCE SHEPPARD

The Shareholders Association has proposed several shareholder initiatives for the Telecom annual meeting in Wellington on Thursday relating to executive and directors' pay.

The board has recommended that all of these resolutions should be defeated.

The first association resolution proposes a review of directors' fees; the second an abolition of retirement allowances in their present form; the third proposes a review of pay arrangements of executives; and the final resolution proposes that the executive share option programme be curtailed until the review in resolution three is completed.

For three consecutive years Telecom's free cash flow has been in decline.

This may have something to do with how Telecom pays its team of people, hence the Shareholders Association's initiative in proposing the third resolution.

This is: "That this meeting recommend that the board review the remuneration strategy for key executives, to ensure that the strategy includes appropriate incentives for the creation of long-term shareholder value, and that the results of this review be reported to shareholders."

The board of Telecom opposes this resolution and states: "The board already regularly reviews remuneration strategy for key executives to ensure the strategy and framework includes appropriate incentives."

Based on the company's annual report, shareholders can be forgiven for suspecting that this is a rather hollow promise.

Consider the statistics in the table below, which is from Telecom's 2002 annual report.

The table suggests that there is an inverse correlation between what the company's employees get paid and what they produce.

Employees in the New Zealand internet and directories division produce the highest return on assets and get paid the least.

The employees in the NZ wireline division, who produce the highest cash contribution per employee and deliver the second highest return on assets, get paid below the average for the entire company.

But the highest paid employees are engaged in the division that produces the worst return on assets and they only generate enough free cash to pay 19 per cent of their own wages.

Yet the company states that it regularly reviews wage strategy.

Proxies close on Tuesday at 2.30pm and it will be interesting to see how the institutions react to these initiatives from small shareholders.

The board's recommendation that shareholders oppose this initiative is interesting in the circumstances.

The shareholders could be forgiven for suspecting that boards oppose everything that isn't initiated by them.

* Brian Gaynor returns from holiday on Wednesday.