Schwab: Dixon's "termination" anything but

Adam Schwab writes:

Earlier this week Qantas confessed to shareholders that it had paid former CEO Geoff Dixon $10.7 million for five months work in 2008. Not only were the payments by any standards extremely high but they were also largely unwarranted. In fact, it appears that Qantas either misled shareholders in 2006 (when it revealed the terms of Dixon's employment agreement) or it made payments to Dixon that were far above what he was contractually owed.

In August 2006, Qantas announced that it had reached new contractual terms with Dixon (then CEO) and former chief financial officer Peter Gregg. At the time, Qantas chairperson Margaret Jackson claimed that "with the airline continuing to face tough operating conditions, with historically high fuel prices and increasing competition, the board is delighted that Peter and Geoff have agreed to continue in their current roles ... [Dixon's] leadership and experience have been invaluable ... with Qantas out-performing most of its peers in the global airline industry."

Within months, Dixon would team with private equity players (including Texas Pacific, Macquarie and Allco) to try to purchase Qantas from shareholders. The bid would fail. During the subsequent 18 months, Qantas' unparalleled safety record would be badly tarnished and the company's share price would drastically under-perform. Coincidentally, during that time, Dixon became one of the highest-paid CEOs in Australia and one of the world's highest-paid aviation executives.

In 2006 Qantas outlined the terms of Dixon's renewed contract, noting that that Dixon's fixed remuneration would be "$2.31 million pa inclusive of superannuation and subject to annual review". In 2008, Dixon would be paid fixed pay of $2.3 million, in accordance with his contract. However, in 2009, despite working only five months as CEO (and another four allegedly as a consultant, Dixon received fixed pay of $1.9 million -- annualised, that is equal to $4.6 million (even if Dixon received the same pay as a consultant than when he was CEO, he would have effectively received an annualised figure of $2.5 million).

Qantas also appeared to confuse Dixon's resignation with what it seemed to think was a "termination". In 2006, Qantas noted that "Qantas may terminate the CEO's employment at any time by giving 12 months written notice ... or paying in lieu." (Alternatively, Dixon could give Qantas six months notice of his retirement). On July 28,  2008, Qantas announced that:

Geoff Dixon would step down as Qantas Chief Executive Officer after Qantas' Annual General meeting on 28 November 2008 ... [Qantas Chairman, Leigh] Clifford praised Geoff Dixon who he said, together with his team, has led Qantas through numerous challenges since his appointment in ... 2000. ( Emphasis added )

That does not in any way sound like Geoff Dixon was terminated, rather, that Dixon retired, the words step down certainly imply that the decision was Dixon's and Dixon's alone.

However, despite Dixon ostensibly retiring, Qantas claimed deep in its 2009 annual report that "Mr Dixon worked for nine months of the 12 months notice provided ... on termination, the remaining three months of FAR was paid in lieu of notice." Qantas appears to have been under the impression that it fired Dixon, even though in 2008, it noted specifically that Dixon stepped down and proceeded to praise his performance. Some may find it somewhat contradictory that Qantas will often vigorously pursue legal action to minimise redundancy payments to ordinary workers, but happily pay their former, unsuccessful CEO a termination payment when he was not actually terminated. A Qantas spokesperson was unable to explain the inconsistency, possibly because there was no reasonable explanation for it.

Not only did Qantas pay Dixon a termination payment after he resigned, but it also paid $3 million as a result of changes to superannuation laws. This payment in itself was extraordinary (rarely would a company ever compensate an employee for retrospective tax changes) -- but in Dixon's case it is even more given Dixon's 2006 contract noted that "PAYE and superannuation tax obligations will be met by Mr Dixon , and employer tax obligations met by Qantas." When questioned by Crikey , Qantas again was unable to explain how two years after telling shareholders that Dixon was responsible for superannuation obligations, the company would make a $3 million payment for those very same obligations.

Another mystery was share-based payments made to Dixon. In 2006, Qantas noted that should Dixon retire, "there would be no right to payment under the Performance Cash Plan." However, in 2009, Qantas noted that Dixon was paid $1.4 million under the Performance Cash Plan (new CEO Alan Joyce was paid only $284,772 under the plan).

Dixon also received $319,544 under Qantas' long-term incentive plan -- despite the plan notionally containing earnings-per-share and total shareholder return hurdles. Given Qantas earnings-per-share dropped 88.6% last year, either Dixon received a payment by mistake or Qantas set its targets a little too low. Despite having 24 hours to provide a rationale to Crikey for the payment, Qantas was unable to come up with a feasible explanation.

Last year, more than 40% of Qantas shareholders rejected its remuneration report. This year, the airline paid its under-performing former CEO millions of dollars that  he was not contractually entitled to. Qantas clearly did not take that warning on board. How to stop such behaviour? Qantas shareholders should vote against not only the remuneration report, but also the re-election of James Strong, the chairman of Qantas' remuneration committee, which devised the very generous payments to Dixon.