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Anglo American's pay mess is self-inflicted wound

It could have been avoided had its remuneration committee remembered what long-term incentive plans are for

By Andy Critchlow

LONDON (Reuters Breakingviews) — Anglo American deserves the pasting handed out by shareholders on April 21. The mining group saw 42 per cent of its investors vote against its bonus policy for 2015, in a non-binding but still humiliating annual general meeting poll. It could all have been avoided had its remuneration committee remembered what long-term incentive plans (LTIPs) are for.

CEO Mark Cutifani's 3.4-million pound (C$6.3-million) pay package for 2015 is not especially egregious by the standards of the FTSE 100. Instead, shareholders' main beef, as outlined by lobby group Institutional Shareholder Services, was Cutifani's proposed LTIP for 2016. Last year, the Anglo boss received an award of 362,275 company shares, contingent on his hitting a series of operational and shareholder return targets. This year, the RemCom recommended more than doubling this amount, to 993,810.

According to ISS, the company did this because it reckoned the current commodities slump reduced the likelihood of the kind of windfall share price jumps that can inflate LTIP awards into huge sums. By offering more shares, it probably hoped to ensure Cutifani got a significant payout even if the shares didn't rise that much. If so, this was a duff move.

LTIPs are supposed to praise genuine outperformance, not be cyclical cushioned payouts — that's what salaries are for. By giving Cutifani some insurance, the RemCom gave off the curious impression that it was worried the CEO wouldn't succeed. Compounding the folly, the shares have gone up sharply since January — in part because of the sensible retrenchment plan undertaken by Cutifani last year.

Shares in the London-listed mining company have this year been the best performing of FTSE 100 sector peers like BHP Billiton and Rio Tinto. Amid a severe downturn in global demand for metals and commodities, Cutifani has cut costs aggressively and refocused the business to concentrate on core areas of strength like diamonds, copper and platinum.

Had the CEO been granted a measured uplift in his LTIP shares, Anglo's happy investors would no doubt have been delighted to sign it off. The fact that he would have received them at the bottom of the cycle — thus enabling a very tidy sum later down the line — would have been immaterial, as investors would have gained too. As it is, Anglo looks out of step.

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