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ISS: South32 execs did nothing to earn bonuses

Whichever way South32 Ltd. plays it, the company's executives should not have been paid bonuses for the 2016 financial year, according to Institutional Shareholder Services, or ISS.

Not only did the diversified miner, which was spun out of BHP Billiton Group in May 2015, lose billions, but the share price tumbled over 17% during the fiscal year, underlying EBIT slumped 64% year over year and four workers were killed in its operations.

However, CEO Graham Kerr received total remuneration of A$7.4 million, including a A$1.0 million cash bonus and A$4.6 million worth of share-based rights, for the 2016 financial year.

Meanwhile, president and COO for Africa Mike Fraser was paid A$5.9 million, including a A$903,000 cash bonus and A$4.4 million worth of share-based rights, despite the four fatalities occurring at the South African operations that he is responsible for.

ISS advised shareholders to vote against South32's remuneration report ahead of the Nov. 24 annual general meeting in Perth, Australia, and was joined by the Australian Shareholders' Association in voting their proxies against the report.

The ASX 300 company narrowly escaped a first strike with less than the required 25% of shareholders voting against the remuneration report.

"If you talk about South32, there's a particular issue there — it lost US$1.3 billion," Vasili Kolesnikoff, head of Australia & New Zealand research for ISS, told S&P Global Market Intelligence.

"Now if you were a shareholder in something that lost US$1.3 billion, would you really be throwing out millions of dollars to people saying you've done a really good job?"

"The head of South Africa for South32, I think his bonus was reduced by about A$200,000. What's a life worth?"

"Four people died, you lost US$1.3 billion, on an underlying basis your results were still 60% down, I must be missing something, but how can this be a good result for those types of dollar bonuses?"

Paid thousands extra to sit on a plane

Chairman David Crawford was very vocal at the AGM about ISS' report on South32's shortcomings, including on the topic of his own pay.

Crawford claimed ISS got it wrong on the amount he and other executives were paid.

However, a close look at South32's 2016 annual report shows that although his board and committee fees amounted to A$550,000 including superannuation benefits, the chairman actually reaped further benefits of A$95,000.

According to the annual report, if a board member spends more than three hours but less than 10 hours on a plane, they are paid an extra A$7,840, and for air travel greater than 10 hours, they receive A$16,800. In fiscal 2016, Crawford also received an additional A$5,000 for his wife to travel with him.

"So when they have to go between locations, shareholders obviously have to pay for it," Kolesnikoff said. "Effectively what he is saying is A$550,000 is not enough, and then in his travel to go and do his job, if he has to travel from Melbourne, where he lives, to Perth to go to head office or a board meeting or whatever it is, that's not part of the job, that's extra."

"I would have thought that most normal Australians would be concerned with that because no one else gets money for sitting on a plane."

The big problem with the large miners, according to ISS, is that most have "soft" targets, based on things like health and safety and production, rather than "rigorous" targets tied to financial performance.

"A lot of the targets we see are non-financial, some people call them soft targets," Kolesnikoff said. "They are not linked to any bottom line financial result."

ISS suggests 80% of a company's targets should be tied to financial outcomes like net profit, EBIT and earnings, and the remaining 20% should be based on other outcomes related to things like health and safety and production.

"The bonuses are always the same, and basically what's happening is the boards are picking targets that are achievable, that don't necessarily have any bearing on whether the company made any money or not," Kolesnikoff told S&P.

"It's designed to pay out large bonuses in spite of performance and that's why you see a lot of commonalty year in, year out on bonuses."