By Peter Ker
BHP Billiton shareholders have been advised to closely monitor the company's short-term incentive structure in the wake of a dramatic fall in full-year profits during the 2015 financial year.
The alert was raised by proxy adviser CGI Glass Lewis, whose assessment of BHP has been sent to institutional investors in the miner in recent days.
BHP Billiton chief executive Andrew Mackenzie's pay has been described as fair when compared with peers at rival miners.Credit: Arsineh Houspian
CGI was mostly supportive of BHP's remuneration package. It has recommended shareholders approve all motions at the annual general meetings that will be held in Australia and Britain over the next five weeks.
However, CGI pointed BHP shareholders to the short-term bonus paid to chief executive Andrew Mackenzie, and, in particular, the part that was linked to the company's attributable profit result in the 2015 financial year.
CGI noted that Mr Mackenzie's bonus for that item had declined much less than the company's profit did in the 2015 financial year, and could be a sign of a disconnect.
"Whereas actual performance reduced by 86 per cent, the CEO's payout under this component only declined by 23 per cent from the prior year," CGI said in a note to BHP shareholders.
"In general, continued payouts despite a significant deterioration in results may indicate a disconnect between pay and performance."
CGI acknowledged that the 86 per cent fall in BHP's attributable profit to $US1.91 billion ($2.6 billion) was largely driven by factors outside of Mr Mackenzie's control, namely commodity prices.
It was also affected by the South32 demerger, in which numerous cash-generating businesses were divested in May 2015.
Despite those factors, CGI said BHP shareholders would be within their rights to challenge the payout.
"In light of the significant reduction in both profit performance and the target utilised to assess such performance, shareholders may reasonably question the appropriateness of the payout under this component, and we believe a more complete explanation of the process employed in setting the hurdle and assessing performance would be appropriate," the adviser said.
In the annual report filed by BHP last month, the impact of the attributable profit on remuneration was explained thus:
"While attributable profit fell from $US13.8 billion in FY2014 to $US1.9 billion in FY15, controllable financial performance was largely in line with targets."
Mr Mackenzie accepted a smaller fixed remuneration than his predecessor, Marius Kloppers, on becoming chief executive in 2013. His fixed remuneration ($US1.7 million) has not changed since.
Mr Mackenzie earned $US4.58 million during the year to June 30, 2015, lower than the $US7.98 million he earned in the previous year.
CGI said Mr Mackenzie's pay was fair when compared with peers at rival big miners.
"The chief executive received remuneration in line with corresponding levels at the company's UK and European peers," CGI said in its report.
BHP's London annual general meeting will be held on October 22, while the Australian meeting will be held in Perth on November 19.