Telstra executive pay in the firing line from shareholders

Telstra is facing a showdown with investors over pay for its top executives after influential advisory groups called for shareholders to vote down executive pay arrangements at the struggling telco's annual general meeting next week.

The rebuke over executive pay comes just months after chief executive Andy Penn - who is set to earn $4.5 million this year - unveiled a radical strategy to revive the company's fortunes, including an overhaul of his senior management team, and plans to cut $2.5 billion in costs and 8000 jobs.

Telstra CEO Andy Penn has a tough job.Credit: Arsineh Houspian

A Telstra spokesman said the company was "aware a number of proxy advisor firms have recommended against Telstra’s remuneration report and a number of investors have also indicated a vote against".

"While we will not know the result until the annual general meeting, we are therefore expecting a material vote against the report ... which is naturally of great concern," he said.

"The board will be doing everything it can to address the concerns raised by investors both in respect of the previous 2018 financial year as well as the current year going forward."

The Telstra spokesman said the telco had "consulted widely on the new incentive plan put to shareholders" and it was strongly endorsed at the last annual general meeting. It would not adjust its remuneration ahead of the meeting but discussions would continue once the results of the vote were known.

Telstra is one of the most widely held retail stocks in Australia, with 1.4 million retail shareholders. The company has suffered through a tumultuous period as it grapples with the implementation of the national broadband network (NBN) and intensifying competition from rival mobile providers.

Over the past two years, its shares have fallen 37.5 per cent compared with an 11 per cent rise for the broader market. The company cut its dividend in February, marking the first substantial change in the cherished payout since the telco floated on the sharemarket, with analysts expecting it could fall even further.

However, after touching seven-year lows, the stock has rebounded since Mr Penn unveiled his new strategy to be down 9 per cent over the past year.

Mr Penn will be paid a fixed salary of $2.38 million in 2018, plus bonuses totalling $2.14 million. His total compensation of $4.518 million compares to pay of $5.66 million in 2017.

Proxy adviser CGI Glass Lewis put out a report describing Telstra's remuneration policies and practices as "problematic" and recommended a vote against. In particular, the advisory firm had complaints about the combined incentive scheme - the Executive Variable Remuneration Plan (EVP).

"The overall EVP outcome for FY2018 ... does not appear consistent with the company's overall performance for the year, which was lacklustre in the face of 'rapidly reducing' margins stemming from the rollout of the national broadband network," CGI said in its report.

"In all, we would think such an overall result should not result in an incentive outcome near 'target' performance."

Proxy advisers ISS and Ownership Matters have also recommended voting against the remuneration report.

However, the Australian Shareholders' Association said it would recommend investors vote for Telstra's remuneration report, which "complies very well with ASA disclosure requirements".

Under laws passed in 2011, companies receive a "first strike" if 25 per cent of shareholders vote against a company's remuneration report. A second strike can trigger a board spill.

Struggling wealth giant AMP suffered a first strike against its remuneration report earlier this year. Commonwealth Bank suffered one in 2016.

Telstra non-executive director Craig Dunn was specifically mentioned by CGI in its report for his role as a non-executive director at Westpac Banking Corp since 2015. Mr Dunn is also on Westpac's risk committee.

The banking royal commission featured "multiple open findings of potential misconduct and conduct falling below community standards and expectations" and as a result, the report says, CGI believes Mr Dunn "shares responsibility in relation to any misconduct and conduct falling below community standards and expectations at the bank".

CGI said some of the commission findings were in dispute and some of the agreed findings were not "sufficiently material" to warrant votes against Mr Dunn, but it would monitor the issue "going forward".

It also said Telstra's heavy reliance on "net promoter scores" - a value used to measure and track customer loyalty - raised questions as an internal measure rated its performance highly while a third-party measure was significantly lower.

Adjustments made to the remuneration report to account for impacts such as a delay by the NBN in connecting customers in November were not seen as a concern.