Wesfarmers, one of the biggest conglomerates in Australia, saw concern from its shareholders with a negative response during the recent 2019 Annual General Meeting (AGM) that was held last November 14, 2019.

Although all resolutions were passed, there was a large number of shareholders that voted against the adoption of the remuneration report, resulting in a 21.45 percent disapproval. One of the biggest causes of the pessimistic response from shareholders was due to proxy advisor ISS advising investors to go against the remuneration report because of an "excessive" compensation plan.

Although Wesfarmers' demerger from Coles supermarket resulted in a 360 percent increase in after-tax profit to AUD 5.5 billion, the company will neither give incentive nor penalize its executives 1.

Shareholders were concerned over the pay for both Chief Executive Officer (CEO) Robert Scott and Independent Chairman Michael Chaney 2. Mr. Scott has received over AUD 4 million in total realized pay and Mr. Chaney has received AUD 780,000 in total compensation, which ISS claims is higher than its industry peers.

CGLytics Pay for Performance Analysis

According to our CGLytics analysis, Wesfarmers has a higher CEO total realized pay over three years than its three-year increase in total shareholder return (TSR), when compared against its country and industry peers.

This misalignment of the CEO pay compared to company performance may have been the cause of the company almost undergoing a first-strike. A first-strike occurs when 25 percent of shareholders vote against the adoption of the remuneration report and the company would need to either amend or justify its remuneration policies before the next AGM 3.

Not only was there concern over the CEO pay for Wesfarmers, but the ambiguous changes in awards policies 4. This was also seen as an issue for other proxy firms such as Glass Lewis and the Australian Shareholders' Association (ASA).

What is the KEEPP bonus scheme?

The 2016 and 2017 Key Executive Equity Performance Plan (KEEPP) bonus had been cancelled following the demerger of Coles supermarket, but a bonus will be rewarded with the same principles as KEEPP, however with different performance conditions.

The 2017 KEEPP Allocation for the CEO and the Chief Financial Officer (CFO) had the following performance metrics: 50 percent weighting on Wesfarmers relative to the TSR of the ASX 100 Index, 20 percent weighting on absolute Return on Equity (ROE) and 30 percent weighting on strategic measures.

Because of the demerger in 2018, the company has removed the performance condition on absolute ROE as it may have an impact on the targets of executives. The 2018 KEEPP allocation for the CEO and CFO is as follows: 60 percent weighting on the Wesfarmers' relative TSR against the S&P/ASX100 Index, 20 percent weighting on Wesfarmers' portfolio management and investment outcomes and 20 percent weighting on strategic measures. However, the company was not able to be fully transparent and clear in its disclosure of strategic measures and investment outcomes, only stating the improvement of data analytics and better progress in gender balance.

Wesfarmers underpays due to complications in payroll

After the release of the 2019 AGM results, another scandal arose when it came to light that Wesfarmers had underpaid up to 6,000 current and former employees of its industrial division, resulting in AUD 15 million or more in underpayments 5. The company stated that its cause was due to a defect in a payroll system. The company plans to expedite the sending of payments into the banks of underpaid current and former employees before the end of 2019, but is hindered by the complication of its payroll system 67.

Linking director pay to competency and expertise

Companies not only link executive pay to performance, but more often than not, companies also link director pay to competency and expertise 8. With the current events that Wesfarmers has experienced, it is suggested that the company would benefit from a board that can guide it towards its strategic direction, mitigate risk and oversee company performance.

According to our analysis (performend using the CGLytics application), Wesfarmers' board has strengths in the areas of 'advisory' and 'finance'. Wesfarmers recent acquisition of the Catch Group in 2019 (an e-commerce company that runs Catch.com.au, Mumgo, Grocery Run and Brands Exclusive), should see greater skills and expertise added in the area of 'technology', which is currently very low. 'Governance' experience, to spot and mitigate risks, is also worth looking at to ensure issues are resolved smoothly in the future.

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1 https://www.smh.com.au/business/companies/what-is-the-two-strikes-rule-20121008-278us.html

2 https://www.smh.com.au/business/companies/wesfarmers-faces-protest-vote-as-adviser-attacks-ceo-s-very-high-pay-20191105-p537hk.html

3 https://www.smh.com.au/business/companies/wesfarmers-faces-protest-vote-as-adviser-attacks-ceo-s-very-high-pay-20191105-p537hk.html

4 https://www.insideretail.com.au/news/wesfarmers-to-purchase-catch-group-201906

5 https://www.smh.com.au/business/companies/wesfarmers-faces-protest-vote-as-adviser-attacks-ceo-s-very-high-pay-20191105-p537hk.html

6 https://www.theguardian.com/australia-news/2019/oct/01/wesfarmers-workers-underpaid-15m-as-company-blames-inadvertent-errors

7 https://www.smh.com.au/business/companies/complex-payroll-holding-back-wesfarmers-payments-to-underpaid-staff-20191114-p53asm.html

8 https://hbswk.hbs.edu/item/how-should-pay-be-linked-to-performance

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