BHPB leads the way as executive pay takes a hit BHP Billiton CEO Andrew Mackenzie is likely to earn closer to $US10 million if BHPB and its shareholders had a very good year. AUSTRALIA'S biggest company BHP Billiton has made a major statement on executive pay. Simply put, the BHPB board led by chairman Jac Nasser, has said the boom times are over, so executives should take a cut, a significant cut. And the board itself, while not taking a cut in its annual fees, will leave them unchanged for the third year in a row. Now, BHPB executives won't be crying poor. If BHPB had a spectacularly profitable year, the new CEO Andrew Mackenzie could earn as much as $US13 million this year. With our dollar now only US93c, that's an extra million - $14 million in total - in Aussie dollars. Or about what 175 reasonably well-paid average workers would get. In truth, there's almost certainly no way Mackenzie could end up being paid that much. He's more likely to earn closer to $US10 million if BHPB and its shareholders had a very good year. Even then, he would have to wait five years to know whether close to half that sum, notionally earned next year, would actually be paid to him. To give it its formal title, executive remuneration has not only gone arguably far too high, it has become extraordinarily complicated. Much like complex corporate foreign exchange transactions, it's doubtful whether even a company's board of directors really understands the finer points. With the change of CEOs from the departing Marius Kloppers to the incoming Mackenzie, BHPB has made a number of major stepdowns in not only his pay, but the pay of the cascading senior executives below him. First, the CEO's base pay has been cut 23 per cent to $US1.7 million, compared with Kloppers's. Pension contributions (by the company) have been cut from 40 per cent (of Kloppers's higher) base pay to 25 per cent of Mackenzie's lower base. Then there are two components linked to the company's performance. Mackenzie will only get them if BHPB outperforms its peer group of major miners. The short-term incentive can deliver him up to 240 per cent of his base pay; Kloppers could get up to 320 per cent. The long-term incentive is 400 per cent of base, or $US6.8 million. That looks hugely generous. Except, he doesn't get it for five years; and then only if BHPB outperforms over the five years. This adds up to an overall 25 per cent cut in Mackenzie's target pay relative to Kloppers. And the same cut has been applied to all the top executives. Very simply, BHPB is responding to its changed circumstances. That it won't make the spectacular profits it made at the peak of the boom. Two years ago, it made as much as the four big banks combined. And that it also can no longer plan on the sort of spectacular boom-time growth, which saw it try to take over its biggest competitor Rio Tinto. Yes, it will keep on investing, but Mackenzie is focused on consolidation and boosting productivity. The changeover to more sombre times was highlighted by the decision to effectively cut the salaries that had already been earned - by Kloppers, Mackenzie and all the senior executives, back in 2008. UNDER the long-term incentive, the five-year awards granted in 2008 should all have 100 per cent vested. That means they would now get paid them in full. This is because BHPB's RELATIVE return to its shareholders had far exceeded its peers. However, because of the fall in the BHPB share price from the pre-GFC boom levels, the total return to shareholders - although better than other miners - was actually NEGATIVE. So the remuneration committee of the board exercised its discretion to cut the award by 35 per cent. Kloppers could have got a payment of $US16 million, he got instead $US10.4 million. The same applied to Mackenzie. He could have got $US14 million, he got instead just $7.5 million. In his case, on top of losing 35 per cent of what he could have got, along with Kloppers and all the other senior executives, Mackenzie voluntarily gave up a further $US1.5 million that was part of a deferred "sign-on fee" when he joined BHPB in 2008. Arguably, if shareholders went backwards, the long-term incentive should have been structured to award executives zero. Or perhaps somethingless than 50 per cent compared with the 65 per cent they got. On the other hand, how many ordinary workers would be happy with having ANY of what they were entitled to, and had to wait five years to get, being withheld? And BHPB shareholders did do better than those in the other major global miners, even if it meant losing less money than them. The bigger problem with executive pay, is who is really responsible for great corporate performance; and indeed bad ones as well. The seeds of BHPB's spectacular profits in recent years were laid by CEOs and executives long gone - and who were paid much lower salaries - who took the company into the Pilbara and spent decades hard-grinding the business when prices were low. Sure, contemporary management had to run the business well. But they did win the lottery when China's growth exploded after 2003, and sent demand for iron ore and coal - and their prices - rocketing. The long-term incentive structure, both delaying payment and making it relative to how other companies perform - goes some way to muting this "lottery factor." But it's still there.