2012 Human Capital Conference23–26 October                          Remuneration as a lever for                          c...
Disclaimer►   Ernst & Young refers to the global organization of member firms of    Ernst Y    E t & Young Global Li it d ...
Presenters►   Dharma Chandran    Leighton Holdings Limited    dharma.chandran@leighton.com.au►   Mike Hogan    Ernst & You...
Session overview1.       Influencing behaviors to support fundamental change                   g                pp        ...
Influencing behaviors to supportfundamental change
Remuneration: importance vs. attention►   Poorly designed remuneration p          y      g                  plans can lead...
The balance in measurement emphasis:an illustration         Objective                                 Shareholder         ...
What are companies doing or thinkingabout?          “Skin in                          ►     Short-term incentive deferral ...
Case study: Leighton Holdings Limited
Strategic management company governingsemi autonomoussemi-autonomous operating companies                                  ...
Internal and external drivers for change►   Project challenges:       j           g    ►     Two major public-private part...
A new team►   New Chairman appointed                    pp►   Third CEO in 12 months appointed August 2011►   Executive te...
From old to new: refreshed remunerationapproachFixed                       Individually negotiated                        ...
Response to change►   Positive feedback from all institutional shareholders/proxy                                         ...
Implementation approach                               ►    Medium-term incentive discontinued                             ...
Rollout of leadership development programWhy?          The quality and capability of our leaders is critical to successful...
The journey continues1. Develop and rollout new g         p                 group HR and remuneration                     ...
Key takeaways►   Understanding the issues                g    ►     The key: clearly identify the issues then focus on dev...
QuestionsPage 19     Remuneration as a lever for cultural change
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EY Human Capital Conference 2012: Remuneration as a lever for cultural change

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This case study illustrates how Leighton Holdings Limited’s refreshed remuneration approach supported cultural change.

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EY Human Capital Conference 2012: Remuneration as a lever for cultural change

  1. 1. 2012 Human Capital Conference23–26 October Remuneration as a lever for cultural change
  2. 2. Disclaimer► Ernst & Young refers to the global organization of member firms of Ernst Y E t & Young Global Li it d each of which i a separate l Gl b l Limited, h f hi h is t legal entity. l tit Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US.► This Thi presentation i ( ) 2012 E t & Y t ti is (c) Ernst Young LLP All rights reserved. N LLP. i ht d No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, photocopying transmission recording rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or d st but o o t s o o a y o t e ate a e e s p o b ted and s distribution of this form or any of the material herein is prohibited a d is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP.Page 2 Remuneration as a lever for cultural change
  3. 3. Presenters► Dharma Chandran Leighton Holdings Limited dharma.chandran@leighton.com.au► Mike Hogan Ernst & Young Australia michael.hogan@au.ey.com @Page 3 Remuneration as a lever for cultural change
  4. 4. Session overview1. Influencing behaviors to support fundamental change g pp g2. Case study: Leighton Holdings LimitedPage 4 Remuneration as a lever for cultural change
  5. 5. Influencing behaviors to supportfundamental change
  6. 6. Remuneration: importance vs. attention► Poorly designed remuneration p y g plans can lead to negative g outcomes in any situation.► Typically, remuneration is No. 3 to No. 5 on yp y “attraction/retention” considerations.► Remuneration can be an immediate change lever to redirect emphasis. Public focus on performance/reward linkPage 6 Remuneration as a lever for cultural change
  7. 7. The balance in measurement emphasis:an illustration Objective Shareholder Safety Profit return Risk-adjusted Risk Return on capital Subjective Behavior Non-financial FinancialPage 7 Remuneration as a lever for cultural change
  8. 8. What are companies doing or thinkingabout? “Skin in ► Short-term incentive deferral into the game” equity ► Material misstatements, behaviors, Clawback undue risk ► Reward policies approval processes policies, Governance ► Exercise judgment processes ► Increased remuneration committee/ I d ti itt / board involvement — policiesPage 8 Remuneration as a lever for cultural change
  9. 9. Case study: Leighton Holdings Limited
  10. 10. Strategic management company governingsemi autonomoussemi-autonomous operating companies Leighton Holdings Leighton Holdings g g ► 55,000 employees ► US$22 billion revenue Leighton Leighton Leighton Asia, India HLG Leighton L i ht John J h Middl ht Leighton L i East Middle E t Asia, India A i I di & Leighton L i ht Thiess and (45% Contractors Holland & Africa Properties Offshore Properties (LMEA) Offshore (LAIO) holding) (LAIO)Page 10 Remuneration as a lever for cultural change
  11. 11. Internal and external drivers for change► Project challenges: j g ► Two major public-private partnership projects (each experiencing cost blowouts)► Financial challenges: Fi i l h ll ► AU$408.8 million loss in 2011 ► Share price fell by 50% in one year ► Further 2012 earnings downgrade of AU$254m► HR challenges: g ► Excessive executive remuneration (especially for CEO of 23 years) ► CEO and senior executive succession ► Board turnover Resulted in negative external perception g p pPage 11 Remuneration as a lever for cultural change
  12. 12. A new team► New Chairman appointed pp► Third CEO in 12 months appointed August 2011► Executive team refresh, including new Chief Risk Officer, Group General Counsel and Chief Human Resources Officer► HR team in Holdings for the first time directly reporting to CEO, with mandate to review remuneration and succession planning i l iPage 12 Remuneration as a lever for cultural change
  13. 13. From old to new: refreshed remunerationapproachFixed Individually negotiated y g Reference to market data, ,remuneration default positioning policyShort-term Discretionary, cash-based,incentive profit-based pool fit b d l % of TFR*, KPIs**, deferral Discretionary, cash-based, cash based,Medium-termM di t Discontinued Di i dincentive based on profit growth Irregular grants of options I l t f ti % of TFR* annual grants TFR*,Long-term (every 2 to 3 years) of share rightsincentiveService/ Individual contractual Discontinued and replacedretention payments with equity where possible*Total fi d*T t l fixed remuneration ti** Key performance indicatorsPage 13 Remuneration as a lever for cultural change
  14. 14. Response to change► Positive feedback from all institutional shareholders/proxy p y advisory groups consulted to date► More positive p p public view“Executive pay changes introduced ... recognized the need p y g g to align executives’ interests with those of shareholders” — Australian Financial Review, February 2012“Finally aligned ... with modern governance standards” — The Australian, February 2012Page 14 Remuneration as a lever for cultural change
  15. 15. Implementation approach ► Medium-term incentive discontinued and no further service and retention Abolition grants (except with explicit committee approval) l) ► New contracts Substitution ► Shift in mix toward longer-term and equity-based remuneration q y ► Service and retention payments Buyout B t replaced by equity grants where possiblePage 15 Remuneration as a lever for cultural change
  16. 16. Rollout of leadership development programWhy? The quality and capability of our leaders is critical to successfully meet business challenges and execute our new strategyWho? The group’s top 75 leaders group s ► Move to a performance cultureObjectives? ► Define leadership capability needs; gain insight into each leader’s strengths and development opportunities ► Inform succession plans with robust and comparative data; input into risk management processes ► Comply phased approach has beenrequirements Ongoing. A with corporate governance adopted to rollout theWhen? program; conducted in four p p g phases over a six-month p period.Page 16 Remuneration as a lever for cultural change
  17. 17. The journey continues1. Develop and rollout new g p group HR and remuneration p policies2. Institutionalize and harmonize changes across group globally3. Embed new, enhanced governance practices4. Continue leadership development — three-year journeyPage 17 Remuneration as a lever for cultural change
  18. 18. Key takeaways► Understanding the issues g ► The key: clearly identify the issues then focus on developing and implementing solutions to deliver change► Focus on key levers of change ► In any given year, can only focus on a limited number of levers of change► Senior support ► Objectives only achieved with “champions of change” at the top champions change level, including Board and CEOPage 18 Remuneration as a lever for cultural change
  19. 19. QuestionsPage 19 Remuneration as a lever for cultural change

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