Thursday, May 19, 2011

Larger Incentives for Sky City CEO Make Sense

There is nothing like a good and appropriate incentive to get an individual to do a better job and in the case of Sky City Entertainment Group [SKC.NZX] CEO Nigel Morrison , to retain his services for a longer period.

The Sky City board announced yesterday that Morrison's incentive package will be sweetened to potentially triple his current incentive package which currently sits at interest free loans to purchase $1.2 million shares based on hitting a number of financial targets.

The new deal allows Morrison to receive SKC shares worth up to $3.6 million immediately rather than wait for 2-3 years as per the old plan. This incentive is based on the company’s financials for the six month period to 31 December 2010, which were announced to the market on 16 February 2011. Incentives based under a long-term incentive plan are in addition to his salary, which was stated in last year's annual report as $2,556,408.

Now it is not often that I champion increased pay packages for CEO's and boards (you can bet other executives will be getting bigger pay packages in the near future) but under Morrison's tenure profit for the company has risen from $102 million before his appointment to a record $129 million to June 30 2011 (see 2010 Annual Report) so his bonus for results and retaining him for the medium term is a very good move by the board and one that other boards should look to to incentivise CEOs.

My only gripes are that given his track record of raising profit by 30% in 3 years the potential tripling of his pay appears mostly for retaining him rather than his past results and that the board sought a waivier from the NZX rather than consulting owners like myself who would have gladly voted some sort of increase in incentive.

Nigel Morrison therefore will be under intense pressure to deliver big increases in profit over the next 3 years and I can only see one more big result coming in 2012 full year to 3o June due to the 2011 Rugby World Cup before he will have to spend some big money either buying another casino somewhere in Australasia or spending much larger sums that he already is to increase foot traffic through his casinos.

Of course this sort of incentive does have the risk that the CEO will take bigger risks to get his bonus but he does have a track record of good results wherever he has been in charge and as he is an accountant by trade they tend to be completely focsed on the bottomline before anything else and that cannot be a bad thing at all where shareholders moola is concerned.


Disc: I own SKC shares in the Share Investor Portfolio


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