Melbourne, Sep 17, 2007 AEST (ABN Newswire) - Shareholders of Melbourne-based Biotech Solagran (ASX: SLA) have approved a new investor-friendly approach to executive pay. The plan requires that the most senior Solagran executives put almost all of their income at risk on the basis of the amount of shareholder wealth created under their stewardship. Shareholders voted overwhelmingly to support the introduction of the plan at an EGM held yesterday.
Under the new approach, there will not be the base salary, short term incentive and long term incentive found in almost all executive reward schemes. Instead, the Board will set a Reward for Wealth Conservation (RWC) and a Bonus for Wealth Creation (BWC) for each executive.
The RWC will be set at $350,000 and $300,000 for the two most senior executives. They will be paid just one third of this throughout the year, with the remaining two thirds being retained by the company until the end of each year. It will only be paid in full if the company succeeds in conserving shareholder wealth.
This means delivering a Total Shareholder Return (TSR) from dividends and share price appreciation equal to 15 percent. If there are no dividend payments and no changes to capital structure during the year, then a TSR of 15 percent would require a 15 percent increase in fully diluted market capitalisation - from $260m in June 2007 to $300m in June 2008. Solagran's current market capitalisation is $250m on a fully diluted basis.
The performance kicker is the BWC. Each year, 1.5 percent of the wealth created for shareholders will be put into a bonus pool. In 2007-08, this means 1.5 percent of any increase in value over and above the $300m that must be achieved to conserve shareholder wealth.
Executives will be able to draw from this pool over a three year period, with each executive's drawing rights being proportional to the amount of RWC that he or she has put at risk - with scope for an adjustment based on individual performance. In this way, those that put the most at risk will have the most to gain if they perform well and the business creates wealth. It also provides an incentive for top performers to remain with the business.
In explaining the operation of the BWC, Solagran Director and KBA Chairman Denis Kilroy said it was important to remember that wealth creation was determined by the extent to which the return on the market value of the shareholders' investment exceeded that required to conserve wealth.
"For many companies, an annual share price increase of 5-10 percent won't constitute wealth conservation, let alone wealth creation" he said. "Unfortunately there are lots of schemes out there that fail to take this into account. They reward share price increases as if they represent wealth creation. This is particularly true with schemes involving options, which are often not aligned properly with the goal of shareholder wealth creation. Solagran will never use options as part of an incentive plan."
KBA has long been a vocal critic of existing approaches to executive reward. It has been particularly critical of the long-term incentives based on relative TSR employed by many companies. "Perhaps the most telling insight in relation to these schemes is that it is impossible for anyone to determine in advance how much executives will receive for a given level of wealth creation or destruction" Mr Kilroy said. "That's not fair to shareholders, and it is not fair to executives either."
When asked if the Solagran plan had application in other companies, Mr Kilroy indicated that the concept was applicable generally but the design parameters would vary, with a greater emphasis on reward for wealth conservation in most cases. "Solagran has far more embedded wealth creation potential than most other listed companies" he said. "In many companies, just conserving shareholder wealth can pose a real challenge - and some boards may feel it appropriate to reward executives handsomely for meeting that challenge."
Solagran's Board believes that the company has a fundamental responsibility to develop and execute strategies that will unlock the immense value they see embedded in the company's technology and intellectual property. So aligning its executive reward scheme so directly with the interests of its shareholders is both appropriate and necessary.
Solagran closed at $1.25 yesterday - up by more than 400 percent over the past 12 months. It touched $1.55 in July upon announcing that its drug Ropren had secured pharmaceutical registration in Russia as a treatment for chronic liver disease.
Contact
Denis Kilroy
Executive Director
Solagran Limited
TEL: +61 3 9820 2699
MOB: +61 411 222 844 (m)
www.solagran.com
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