For the struggling Domino’s Pizza franchisee working their guts out in the suburbs, the idea that chief executive Don Meij could top a list of Australia’s best-paid CEOs with a $36.8 million salary will be a bitter pill.
Investors who have watched the company’s shares fall around 40 per cent in the past two years might feel similarly aggrieved.
But while we do not wish to defend Meij against the worthy criticisms of Domino’s dealings with its franchises and its growth strategy, there is an argument that Meij’s position on top of the Australian Council of Superannuation Investors’ list of best-paid CEOs isn’t necessarily a sign that executive pay is out of control.
The report, which lashes pay levels, has been compiled on “realised pay,” which takes the remuneration every company has in its annual report and adjusts it for the cash they receive from exercising share options and grants.
Meij’s pay looks so big because during the 2017 financial year (which the report covers) he exercised options worth $35.7 million.
There is no doubt that is an extraordinary sum given the issues the company has had. But it does need to be seen in some context.
The options Meij exercised on September 2, 2016, were granted on November 1, 2013, and had an exercise price of $14.90.
There is certainly an argument that the exercise price was too low. The stock was trading at $15.28 on November 1, 2013, although it had traded as low as $12.60 two months earlier, and averaged $11.43 for the prior year.
Nevertheless, when Meij did exercise his rights to convert those options to shares in 2016 – at a cost of almost $9 million – the Domino’s share price was sitting at $74.47.
So yes, Meij’s options were valuable – but only because the value of the company had risen almost five times in less than three years.
All investors who held stock during that period, including ACSI’s super fund backers, enjoyed the fruits of Meij’s labour.
And when that fruit started to go bad – as it did in the back half of 2016, when the stock started its retreat from $80 a share as issues with the franchise network emerged – then Meij paid a penalty, electing to forgo his bonus that year.
Medium-term gain (through stock), short-term pain (through bonuses) would seem to be pretty much what investors want.
ACSI chief executive Louise Davidson says it is good to see more CEO paid tied up in shares, as this aligns executives with investors. But she says there are legitimate questions about vesting conditions around options and the sheer quantum of shares awarded.
This is particularly true in the context of flat wage growth across the community.
More broadly, the report suggests fixing one pay problem can create another.
Median fixed pay across the ASX 100 fell during 2017-18 and has fallen 2 per cent over five years.
But the ACSI raises good questions about whether “at risk” pay for incentives is really at as much risk as investors think.
Of the top 100 CEOs, only six of the 80 CEOs eligible for a bonus didn’t get it. They included Meij and Commonwealth Bank’s Ian Narev.
The median cash bonus rose 8.7 per cent to $1.11m, and median bonus awarded rose 18.8 per cent to $1.76m, the highest since 2010-11.
While the ASX 100 did produce a total shareholder return of 16.7 per cent, according to Bloomberg, there is an argument that the exceptional propensity of bonuses to be paid does raise questions as to whether they are being paid for just good performance, or really great performance.
Davidson is right when she says continuing to improve disclosure around bonuses – and increasing scrutiny of the hurdles involved – will benefit all investors.