(article published in The Australian)

Excerpt from Original Article

ANOTHER day, another kick in the guts for local investors who can only watch the market tank in sympathy with Wall Street. With fear again dominating investment decision-making, there's a dearth of sensible metrics to go by. But we suggest a reliable alternative measure: the correlation (or lack of) between executive pay and long-term performance.

The issue again reared its ugly visage last week when Pacific Brands said it would sack 1850 staff and rationalise its brands, thus inviting unflattering comparisons with chief executive Sue Morphet's $1.86million salary in 2007-08.

However, maverick remuneration consultant Greg Brogan says there are more worthy targets to pick on. Brogan, of Executive Pay Systems, has tracked the correlation (or lack of) between executive pay and performance.

As a rule of thumb, Brogan says, large listed companies have jacked up executive pay at three to five times the rate of performance improvement (according to measures such as return on equity, share price and total shareholder returns).

In the case of Pacific Brands (PBG, 18c), CEO pay climbed a cumulative 50 per cent in the three years to June 30, 2008 (Morphet was made CEO in January of that year). PacBrands' TSR improved by 22 per cent over that period.

Over at Telstra (TLS, $3.44), Sol Trujillo's pay climbed a cumulative 80 per cent over that period, but the telco's TSR retreated 10 per cent.

Brogan describes PacBrands's pay discrepancy as "unimpressive", but better than the average. "Telstra, on the other hand, is a singularly lamentable example of a company which would have great difficulty justifying remuneration decisions ... based on their own published performance data."

As at June 30 last year, Pacific Brands was trading at $1.78 and Telstra was trading at $4.20. In an equitable world Sue and Sol's pay would have been trimmed since then to reflect the commensurate dive in shareholder value, but we're not holding our breath.

Disturbingly, Brogan says, the Telstra/PacBrands excesses aren't that out of whack: half of the top 200 -- including Lend Lease, CSR and Tabcorp -- did worse than PacBrands.

Brogan says: "If (Kevin) Rudd, (Malcolm) Turnbull and (ACTU chief Sharan) Burrow are going to be fair about this, they had better invest in a couple of tonnes of tar and be prepared to spread the feathers around liberally."

Conversely, Brogan says, the companies with a positive correlation between pay and performance have been weathering the financial crisis. In four notable examples -- CSL, BlueScope (BSL, $2.22), BHP and Woolworths -- performance has increased faster than top-level pay. In the case of BlueScope, management's worth will be tested by the recent TSR erosion as the steel downturn takes hold.

Criterion is already on record with its view of CSL, BHP and Woolworths as a long-term buy. As for BlueScope, a loss-making second half beckons and we'll opt for a hold.

We're comfortable with last week's sell call on PacBrands. We maintain Telstra as a buy, but agree that companies which care about shareholder returns don't become embroiled in regular pay controversies.

Brogan says boards rely on pay experts to rubber-stamp executive pay, when they should be taking a more active role. "Boards for too long have put too much weight on market data provided by remuneration consultants, when they have always been in the position to assess performance for themselves," he says.