Considered rem approach needed on site and in the boardroom

05 February 2019

Paydirt |

An imminent $103 billion of iron ore and battery minerals projects is set to put the squeeze back on Western Australia’s mining jobs market but companies are being urged to heed the lessons of previous booms.

Recruitment firm Robert Walters’ annual salary report, released in January, predicted professional salary increases of 3-8% in 2019 with some engineering roles set to demand more than 30% rises as the confluence of major projects sparks a skills shortage in WA.

The mining industry received heavy criticism from employee groups and investors alike during the last boom. Many critics argued a willingness to pay over-the-odds for scarce skills, coupled with an underinvestment in training, skewed the WA jobs market, creating a boom/bust environment for which the state economy, and the industry, eventually paid.

Nearly a decade on from the height of the “mining boom”, companies are beginning to redraw recruitment policies as the likes of BHP Ltd, Rio Tinto Ltd and Fortescue Metals Group Ltd embark on major iron ore projects and the WA lithium sector begins its major expansion.

They do so in a much changed political and financial climate and BDO Remuneration and Reward Managing Director Allan Feinberg believes miners cannot afford to be so profligate with salaries this time around.

“It is largely agreed that the current surge in mining activity is best characterised as a sustained recovery, not the boom/bust of the past,” Feinberg told Paydirt. “Many companies therefore understand that they need to build sustainable pay practices and not pay at any cost.

“The pay approach therefore needs to be constrained; we are seeing this – and with the exception of some anecdotal stories, scarce and business critical skills – we see general increases in pay being modest. Feedback from clientele indicates general increases of about 2.8 to 3.3% for 2019. However, there will be larger increases for critical skills as the skills shortage today is more focused around particular job functions.”

Amplifying the difficulty for miners looking for people is the strong demand generated by other sectors.

“In previous years, WA miners were able to attract many skills from Victoria, New South Wales and Queensland, however the current unprecedented boom cycle on the East Coast has severely impacted WA miners’ ability to attract these key skills,” Feinberg said. “In addition, government reforms to employer-sponsored skilled migration visas have restricted the ability of businesses to recruit these skills from overseas.”

BDO’s research indicated the installation of greater processing capacity – particularly from the lithium sector – would see increased demand for operation skills.

“With increased demand in operations comes the increased demand in processing, therefore, processing maintenance crews will be needed to improve or maintain the existing fixed plant,” Feinberg said. “We will continue to also see many consultants and specialised companies engaged for new plants, new sites and upgrades in this space as well. There will also be an increased demand for professional employees, in particular exploration geologists, maintenance engineers, mine engineers, project engineers and business improvement specialists.”

WA’s in-demand mining skills

  • Mechanical fitters to fuel the demand of upgrades, shutdowns and ongoing maintenance
  • Maintenance planners to maximise operations’ performance and ensure mechanical maintenance is carried out effectively
  • Both surface and underground heavy-duty diesel fitters: sought after for quite some time in WA and will continue to be in high demand given the lack of apprenticeships on offer in recent years
  • Reliability engineers to support maintenance and the move away from design and projects
  • Mechanical engineers and civil/structural engineers for upcoming new and existing plant and infrastructure upgrades
  • Project managers (project schedule) for the ongoing management of recently awarded contracts
  • Underground electricians and auto-electricians
  • Mobile equipment machine operators especially for Tier 2/3 mining companies (also for civil contracts)
  • Drillers are in critical demand considering the limited exploration undertaken in the past six years
  • Drill fitters given the increase in exploration and because it is a specialised maintenance role

After an AGM season which saw Australia’s banks and other financial services companies take a hammering from shareholders for their overly generous executive payouts, the country’s miners could consider to have come off lightly.

Paydirt analysis of 20 of Western Australia’s leading resources companies found only Mineral Resources Ltd received a strike against its remuneration report.

Good news then for the State’s miners but companies shouldn’t be resting on the laurels if they want to retain shareholder support and the best talent according to BDO’s Allan Feinberg.

“Do shareholders have a bona fide concern about executive pay? Yes,” Feinberg told Paydirt.

The recent AGM strikes against banks and financial services remuneration plans proved remuneration committees needed to be more responsive to investor concerns and not simply contend that they were operating in unique circumstances, Feinberg said.

“Executive remuneration is a growing reputational issue for a company and directors can no longer rely solely on the contractual nature of a remuneration payment,” he said. “Investors and wider stakeholders want directors to consider the issue of fairness, and the wider employee pay context should be considered when taking executive remuneration decisions. Companies must satisfactorily justify the level of remuneration paid to executives including increases, and remuneration committees should show restraint in relation to overall quantum.”

For most companies, incentive plans are based simply on standard industry practice, a dangerous assumption to make according to Feinberg.

“Many [long-term incentive] LTI plans we see are either based on what the company’s competitor is doing or represents all or mostly external market measures which the executive has no control over. This means that any commercially-minded executive will place no real value on that LTI as it’s a ‘lucky packet’.”

Feinberg said LTI plans based on external market measures were a contributing factor to many short-term incentives “paying out”.

“Quite simply, because the LTI is not going to ‘pay out’ and the board has to make it up somewhere in order to retain and motivate the individual,” he said. “The lesson is there is no point in setting highly leveraged and volatile pay packages. Less volatility and greater line of sight means you can offer less [in salary packages]. Better structured plans translate into less discretion being asserted by the board when it comes to ‘paying out’ executives.”

Companies offer revert to the granting of options to executives as a way of proving to shareholders that they have “skin in the game” but Feinberg believes this notion is a fallacy. As well as having the potential to dilute shareholder value, options also offer upside but little downside for executives.

“‘Skin in the game’ is when the executive owns equity in the business or they have a vested interest in the outcomes of the business,” he said. “This means that if the company loses value, then they too should feel some pain by having their personal wealth eroded with that of shareholders. Most LTI plans do not create that experience. They are based on the promise of a future reward and if that does not occur, there is no loss to the executive; that’s not ‘skin in the game’.”

Instead, companies should structure their executive remuneration strategies around long-term incentives that are clearly measurable. By doing so, companies are far more likely to appoint the “right kind” of executive.

“Executives are meant to manage businesses for the long term; this means that the bulk of the incentives should be based on long-term line-of-sight measures. If that does not suit the executive, that should be a telling indication to the board,” Feinberg said. “If the company circumstances warrant a short-term incentive, then a material portion of it should be deferred, say into equity via Zero Exercise Price Options, thus giving the executive skin-in-the-game and aligning their ‘pocket’ with shareholders.”

Shareholder concerns around executive pay:

  • The vehicle utilised (generally options), and the quantum of the option grants       
  • Ambiguity of performance measures; i.e. line-of-sight is not always clear
  • Dilution of shareholder value as a result of excessive market-based option grants
  • Management of the business for the short and medium-term and not the long- term. This is supported by “large” short-term cash-based incentive payments for meeting annual objectives with no recourse to “clawback” payments if the company’s fortunes change thereafter
  • Tenacity of short-term incentives performance objectives; i.e. is the executive team being incentivised to perform their jobs or does the incentive relate to above-average performances?
  • Executives have no “skin in the game”.