Telstra apologises to shareholders over executive pay

Telstra has apologised to shareholders for not meeting their expectations on pay, in a bid to avert an AGM revolt.

Telstra chairman John Mullen and CEO Andrew Penn during last year’s Telstra's AGM. Pic: Aaron Francis

Telstra chairman John Mullen has apologised to shareholders for not meeting their expectations when it comes to the pay packets of its senior executives, in a bid to avert a shareholder revolt at the telco’s upcoming annual general meeting.

In a letter to the shareholders today, Mr Mullen acknowledged that a large number of shareholders were disappointed with how much Telstra’s management had been paid in a year where the telco’s stock has hit a seven-year low.

“It has been a challenging year for Telstra as we address significant market pressures, the impact of the NBN and increased competition,” he said.

“We set what we believed was a demanding plan for our management team in the face of these challenges and even though many of these were met, we recognise that this has not translated into positive outcomes for our shareholders.”

The unprecedented move, the first in Telstra’s history, comes after a number of proxy firms urged shareholders to lodge a protest vote against Telstra’s board.

While Telstra (TLS) last year cut executive bonus by 30 per cent and rolled existing short-term and long-term incentive arrangements of senior management into one simplified version, the measures haven’t been enough to quell shareholder anger.

“We recognise that despite this action by the board, some shareholders still feel that our remuneration outcomes were either not sufficiently transparent or resulted in higher payouts than shareholders felt were reasonable,” Mr Mullen said.

“With hindsight, we recognise we perhaps did not provide enough transparency around some of the metrics that we adopted to measure management performance and the reasons as to why these were chosen. For this we apologise.”

He added that Telstra’s board has moved to further align the bonus structure to performance as the telco embarks on its “Telstra 2022” strategic overhaul.

“The board has enhanced the performance measures for the FY19 executive variable remuneration plan (EVP) to focus performance against delivery of the new plan,” he said.

“As a board we are deeply disappointed that some shareholders are critical of our FY18 EVP outcomes.”

“However we still believe that our EVP is the right structure to align management incentives with shareholder interests,” he added.

Much of the anger is focused at the pay packet of Telstra boss Andrew Penn, who is on track to earn $4.5 million this year, with a fixed salary of $2.38m plus $2.14m in bonuses. His total compensation of $4.5m is lower than the $5.6m in 2017.

Proxy advisers ISS, CGI Glass Lewis and Ownership Matters have all raised alarm about the current remuneration system, warning reforms don’t go far enough.

According to ISS, there was still considerable misalignment between executive pay outcomes and the company’s performance.

“The CEO’s fixed remuneration increased in FY18, which is higher than market median, and variable remuneration remained largely unchanged, indicating a deepening misalignment between pay and performance,” ISS said.

The core issue for Telstra is the ongoing deterioration of its business, with margins both in the fixed broadband and mobile market under ongoing pressure.

Telstra has already cut its dividend from 31 cents to 22 cents and there are considerable doubts around whether its “Telstra 2022” strategy will be enough for the telco to maintain the dividend in the long-term.

Citi analyst David Kaynes last month said that Telstra may need to borrow more money if it’s serious about maintaining the 22 cents a share dividend.

“Telstra trades on a FY19 dividend yield of 5 per cent, declining to 3.5 per cent by FY21 and we do not believe the company will generate sufficient cash flow to maintain a 22cps dividend in the long term,” Mr Kaynes said.

However, Telstra does have some support in the market with the Australian Shareholders Association (ASA) giving the board the benefit of the doubt.

According to the ASA, the action taken by the board was a step in the right direction.

“While you could argue for a greater cut, this has to be balanced against the impact such an arbitrary move could have on senior executives’ belief in the veracity of the bonus system,” ASA said in its report.