Why is ISS dissing Macquarie?

Posted by Marc Hodak on July 6, 2007 under Executive compensation | Comments are off for this article

First Chanos, the short-seller made famous by his Enron call, and now ISS. Chanos is concerned that Macquarie might be creating a false impression of high and growing earnings which may not be sustainable. ISS’s complaint is that Macquarie’s executives don’t have the right incentives to sustain those earnings. I can’t evaluate Chano’s concern, but I can shed some light on ISS’s:

Should the gains prove fleeting, an executive would have little exposure to that future downside risk…

ISS also criticizes the company for giving executives 74.2% of their total pay as cash. ISS argues that corporate executives should receive a bigger chunk of [it] in company stock that can’t be sold right away — an incentive for them to keep earnings growth brisk.

Of the US$25.6 million that Macquarie Chief Executive Allan Moss was paid in the fiscal year that ended on March 31, 87% was in his bonus check and 4.2% in Macquarie stock. By contrast, of Citigroup Chief Executive Charles Prince’s $25.98 million, nearly 44% was in Citigroup stock.

And what, exactly, is driving Mr. Moss’s bonus? According to Macquarie’s Remuneration Report, their executives’ bonus plan is based on “growing net profit after tax and sustaining a high return on equity.” ISS’s concern is accountability for future earnings, but Macquarie’s incentive plan has been relatively unchanged since 1985; their performance standard is highly likely to be net profit and ROE for the foreseeable future. Sounds pretty shareholder-friendly to me. In fact, such a results-focused plan is exactly what research shows yields the best results for shareholders. And Macquarie has done extremely well with their plan, better than Citigroup or any of it’s major peers.

Macquarie’s bonus plan stands in stark contrast to Citigroup’s. Prince’s bonuses are based on multiple financial and non-financial criteria, subjectively assessed by the board. The criteria and performance thresholds get reviewed each year and are subject to change. This is the type of unfocused, discretionary, shifting plan that the same research shows to be of least value to the shareholders. Furthermore, unlike Mr. Prince’s bonus, a good portion of Macquarie’s is deferred and forfeitable. Mr. Prince may elect to defer some of his cash, but he can’t lose any of it, even if he leaves involuntarily.

Perhaps ISS’s qualm is that Macquarie’s executives should have more equity. So how much equity does a CEO need? Macquarie’s chief has nearly one million shares and options. Is that enough? A five percent gain or loss in Macquarie’s stock price would swing his personal wealth by about $4 million. Citibank’s Prince has 2.6 million shares. So, how much difference does it make to his alignment that he got another 0.2 million last year?

By the way, most of Prince’s equity grant was not performance-based. The board awarded it to “increase retention.” I suppose that means they needed to give him that award to keep him at the helm versus, say, jumping over to JP Morgan, or retiring. As if. And, unlike Citibank, Macquarie’s guidelines prohibit hedging of executive’s shares.

So what exactly does ISS have against Macquarie’s incentive compensation that they might want it to look more like Citigroup’s?