You are a major Australian company, the leader in your sector, in most investors’ portfolios, and a favourite of international investors because of your high credit rating, solid revenues and cash flows and big dividend yield (around a fat 5.5% compared with Commonwealth bond yields around 1.85% or bank deposits around 2% to 3% at best).
But you’ve had a rough final six months of the financial year as growing reliability problems in your core networks cause system outages on repeated occasions, upsetting customers and sparking a storm of social media and other criticism.
Earnings end up flat to weak, revenue growth barely topped inflation at 1.5%, there’s some executive turnover, and yet the CEO gets a whacking great 16.7% lift in pay and other benefits for the year to June, including, wait for it, a 40% plus increase in the basic cash payment.
You are Telstra and the CEO is Andy Penn and once again the Telstra board struggles to get it right, that after a rough few months for Telstra with a series of network outages that outraged mobile, business and other customers to the point where not even a couple ’free data’ days were enough to cool those fevered brows, it sends the wrong message on executive remuneration, even if there are logical reasons for some of the increase in the CEO’s pay.
The network problems saw Mr Penn in the firing line, apologising time and time again for the recent network problems and promising to revamp the company’s spending on its networks over the next couple of years.
That was confirmed in the annual results and report released yesterday when the telco said it would investment $3 billion in its networks over the next three years. Sounds a nice, big and impressive number, but raises the question why wasn’t something of this size being spent on the networks in the past couple of years?
Part of the measure of a CEO these days is how a company’s shares have done. For Telstra it’s not good news.
The shares have not done well, rising just 0.36% for 2016 so far up to Tuesday, then down 1.6% yesterday to push the stock into a loss for the year so far. For the financial year to June 30, the shares fell more than 9% as big investors have wondered about the quality of the company’s assets, its management and board changes.
Earnings is another measure and there it has been a rough first year for Mr Penn. They eased in the year to June – but were down 9% in the second half on an earnings before interest and tax basis, to $6.310 billion from $6.559 billion.
That’s ignoring the $1.8 billion in profits from the sale of part of the company’s stake in Autohome, $1.5 billion of which will be used to run off-market and on-market share buybacks to keep shareholders happy (especially big greedy institutions).
Dividend was kept steady at 31 cents a share, which will keep all shareholders, especially smaller needy holders, happy (for the same reason why small bank shareholders would have appreciated the CBA’s decision to hold dividend at $4.20 a year and not trim it).
So not a year to be proud of. And yet Mr Penn’s total pay for the year to June rises 16.7% to $5.639 million from $4.834 million in 2014-15.
Now some of this rise no doubt reflects the first full year as the CEO (he started in that role at the end of the 2014-15 financial year). And that no doubt explains the 43.5% rise in his basic salary to $2.305 million from $1.606 million.
But what about the 57% jump in his long term share performance rights, to $1.587 million worth. That offset a small fall in short term performance shares to $458,445 from $465,562.
But surely $4.8 million is enough – why the need for $5.6 million? His weekly pay rises from just over $92,000 to $107,000. That’s considerably more than the overwhelming majority of Australian employees and salaried workers would get in a year. His 16.7% rise in his total salary was almost 8 times the expected rise in weekly wage costs.
Skewing performance rewards to the long term is certainly accepted practice in corporate remuneration, but the small fall in short term share rights is odd given the earnings slide in the second half and those repeated network problems.
There were acceptable reasons for his pay rise, but what message does it send to still smouldering customers. Let’s hope there are no repeat of the 2016 outages in the next year. Customers will be steaming and the Telstra board won’t have any acceptable reason for lifting the CEO’s pay.
The actual performance wasn’t too hot either.
Earnings Before Interest, Tax, Depreciation and Amortisation rose 2.5% to $10.5 billion in 2015-16, thanks to Telstra’s group’s network applications and services operations, which services the corporate market. But not its core growth business,mobile operations.
Telstra’s biggest division, retail, reported a 3.9% drop in underlying earnings to $9.22 billion, due to a fall in fixed voice profit margins and the impact of the migration of customers to the NBN network. The group’s mobile unit delivered a mixed performance, adding 560,000 retail mobile customers but mobile broadband revenue fell 2% (as Optus and Vodafone have lifted their game).
Telstra’s second biggest division, global enterprise and services, reported flat underlying earnings of $2.45 billion. Seeing Telstra yesterday Telstra forecast low-to-mid single-digit earnings growth in 2016-17, network reliability and service had better be on their best behaviour.
