REMUNERATION REPORT
1. POLICY AND STRUCTURE
1.1 BOARD POLICY SETTING
The Board oversees the BlueScope Steel Human Resources strategy, both directly and through the Remuneration and Organisation Committee of the Board. The purpose of the Committee as set out in its charter is "... to assist the Board to ensure that the Company:
- Has a human resources strategy aligned to the overall business strategy, which supports 'Our Bond';
- Has coherent remuneration policies that are observed and that enable it to attract and retain executives and Directors who will create value for shareholders;
- Fairly and responsibly rewards executives having regard to the performance of the Company, the creation of value for shareholders, the performance of the executive and the external remuneration environment;and
- Plans and implements the development and succession of executive management."
As part of its charter the Committee considers remuneration strategy, policies and practices applicable to Non-Executive Directors, the Managing Director and Chief Executive Officer, senior managers and employees generally.
Input to the Committee's operations is sought from the Managing Director and Chief Executive Officer and the Executive Vice President People and Performance, who both may attend Committee meetings by invitation. In addition, advice is received from independent expert advisers in a number of areas including:
- Remuneration benchmarking
- Short-term incentives
- Long-term incentives
- Contract terms
Remuneration consultants who provided advice to the Board during the year ended 30 June 2006 are set out below:
- Hay Group Pty Limited - data only
- John Egan - Directors and Senior Executive remuneration advice
- PricewaterhouseCoopers - Executive remuneration data/advice
The Board recognises that the Company operates in a highly competitive global environment and that the performance of the Company depends on the quality of its people.
The Company's approach to remuneration for Non-Executive Directors and employees, with particular reference to salaried employees and senior managers is set out below.
1.2 Non-Executive Directors' Remuneration
Fees and payments to Non-Executive Directors reflect the demands which are made on, and the responsibilities of, the Directors. Non-Executive Directors' fees and payments are reviewed annually. The Board seeks the advice of an expert external remuneration consultant to ensure that fees and payments to Non-Executive Directors, the Chairman of the Board and the Chairman of Committees of the Board reflect their duties and are in line with the market. The Chairman and the Deputy Chairman of the Board are not present at any discussions relating to the determination of their own remuneration.
Non-Executive Directors do not receive share rights or other performance-based rewards. Non-Executive Directors are expected to accumulate over time a shareholding in the Company at least equivalent in value to their annual remuneration. Non-Executive Directors are required to salary sacrifice a minimum of 10% of their remuneration each year and be provided with BlueScope Steel shares (instead of cash fees), which are acquired on-market in the approved policy windows. Shareholders approved this arrangement at the 2003 Annual General Meeting, and Non-Executive Directors commenced participation in this arrangement in January 2004.
The current annual base fees for Non-Executive Directors are as follows:
- Chairman - $450,000
- Deputy Chairman - $235,000
- Directors - $150,000
The remuneration of the Chairman and Deputy Chairman is inclusive of Board Committee fees. Other Non-Executive Directors who chair a Board Committee receive additional yearly fees and members of the Audit and Risk Committee also receive an additional yearly fee on the basis of advice from the remuneration consultant. The current annual Committee Chair fees are as follows:
- Remuneration and Organisation Committee - $20,000
- Audit and Risk Committee - $30,000
- Health, Safety, Environment and Community Committee - $15,000 (currently chaired by the Deputy Chairman of the Board so no fee is paid).
Members of the Audit and Risk Committee (other than the Deputy Chairman of the Board and the Chairman of the Committee) receive a fee of $15,000 per annum.
Mr Tan (a resident of Singapore) receives a travel and representation allowance recognising his involvement in representing the Board in activities with BlueScope Steel's Asian business and the significant travel requirement imposed in respect of his attendance at meetings. This allowance is currently $20,000 per annum.
Non-Executive Directors' fees are determined within an aggregate Directors' fees pool limit, which is approved by shareholders. The maximum fee pool limit is $2,250,000 per annum (inclusive of superannuation) as approved by shareholders at the Annual General Meeting in 2005.
Compulsory superannuation contributions capped at $12,686 are paid on behalf of each Director. Non-Executive Directors do not receive any other retirement benefits.
Non-Executive Directors' fees and payments were reviewed in January 2006 and these arrangements will be next reviewed by an independent expert in January 2007.
1.3 SALARIED EMPLOYEES
1.3.1 Principles
BlueScope Steel has approximately 9,300 salaried employees. Other employees are covered by Collective Agreements or statutory instruments in the countries in which BlueScope Steel operates.
BlueScope Steel's remuneration and reward practices aim to attract, motivate and retain talent of the highest calibre and support "Our Bond" by creating distinguishable differences in remuneration, consistent with performance.
The Company's salaried remuneration framework is designed to:
- Make a clear link between rewarding employees and the creation of value for the shareholders and the business.
- Recognise and reward individual performance and accountability for key job goals.
- Provide distinguishable remuneration differences between levels.
- Maintain a competitive remuneration level relative to the markets in which the Company operates.
The framework is built on an appropriate mix of base salary/pay (including work and expense related allowances), variable pay/short-term incentives and long-term equity participation opportunities.
1.3.2 Base Salary/Pay
Base salary/pay is determined by reference to the scope and nature of an individual's role, performance, experience, work requirements and market data.
Market data is obtained from external sources to establish appropriate guidelines for positions, with the goal to pay slightly above median.
1.3.3 Variable Pay and Short Term Incentives
Most employees have access to a variable/at risk component of remuneration in the form of a performance related pay, or other variable pay schemes in which reward is at risk. All senior managers and many salaried employees participate in a formal Short Term Incentive Plan (STI).
The STI is an annual "at risk" cash bonus scheme which is structured to deliver total remuneration in the upper quartile for the respective market group when stretch performance is attained. STI awards are not an entitlement but rather the reward for overall company results and the individual or team contribution to performance. The scheme is applied at the discretion of the Board which has established rules and protocols to ensure that STI payments are aligned with the organisation and individual performance outcomes. Target STI levels are set having regard to appropriate levels in the market and range from 10% of base salary through to 100% at CEO level. These levels are reviewed annually. For outstanding results, participants may receive a further 50% of their target bonus amount.
Goals are established for each participant under the following categories which are drawn from the "Our Bond" charter. Each year objectives are selected to focus on key areas which underpin the achievement of outstanding performance including:
- Shareholder Value Delivery - financial performance measures are used including Net Profit After Tax, Cash Flow, and Earnings Before Interest and Tax. Company-wide financial performance goals are predetermined by the Board with the goals for the combined individual businesses required to exceed the overall goal. A minimum of 30% of STI Plans at senior manager level (with 60% at CEO level), is based on BlueScope Steel-wide financials. For other participants, 20% of the plan is based on BlueScope Steel corporate financials.
- Zero Harm - safety and environmental performance measures, including Lost Time Injury Frequency Rates, Medical Treatment Injury Frequency Rates and environmental measures.
- Business Excellence - performance measures for the financial year ended 30 June 2006 were focused on delivery performance, days of inventory and quality measures.
- Strategy - implementation of specific longer-term strategic initiatives.
STI Plans are developed using a balanced approach to Financial/ Shareholder value and key performance indicator (KPI) metrics. At the senior executive level, 60% of the STI award is based on financial/shareholder value measures with 40% based on KPI metrics. For other participants, 50% of the STI award is based on financial/shareholder value measures and 50% is based on KPI metrics.
Predetermined performance conditions including threshold, target and stretch hurdles are set for each Plan and are assessed against these conditions using quantified and verifiable measures or an assessment of value contribution. Target levels are set for particular periods having regard to the desired result for each goal. Corresponding threshold and stretch ranges are set taking into account the degree of stretch inherent in the target. The threshold is the minimum performance level for which a payment will be made for each particular goal or period. The stretch is the maximum level. Consequently, if threshold is not reached, no payment is made in respect of that goal. The Board retains the discretion to adjust any STI payments in exceptional circumstances.
1.3.4 Equity-based Opportunities
The Board gives consideration each year to the creation of opportunities for employees to participate as equity owners in the Company based on Company performance and other relevant factors. Shareholder approval is sought for any shares or share rights to be granted to the Managing Director and Chief Executive Officer.
a) Employee Share Plans
From time to time employees are invited to participate in a General Employee Share Plan.
A Plan has been offered to all employees each year since 2003. For the 2006 year, the plan has been deferred and will be offered to eligible employees in March 2007 subject to satisfactory Company performance in the half year to 31 December 2006.
The allocation of shares to employees under such schemes and the form of the offer is at the discretion of the Board and is considered (subject to Company performance) on a year by year basis.
In the 2005 financial year, in Australia, New Zealand and USA the plan provided for employees to purchase shares from their after tax pay via payroll deduction (minimum of A$100 to a maximum of A$500) and for every share purchased by the employee the Company provided two shares at no additional cost to the employee.
In countries where payroll deductions are not practicable employees were awarded 60 ordinary BlueScope Steel shares (or a reward of equal value in countries where the issue of shares is not practicable).
The aim of the Plan is, in recognition of Company performance, to assist employees to build a stake in the Company by enabling each eligible employee to acquire a parcel of shares. Employees who become shareholders have the potential to benefit from dividends paid on the shares, growth in the market value of their shares and any bonus shares or rights issues the Board of Directors may approve from time to time.
b) Long Term Incentive Plan - Approach
Consideration is also given on an annual basis to the award of share rights to senior managers under the Long Term Incentive Plan. The Long Term Incentive Plan is designed to reward senior managers for long-term value creation. It is part of the Company's overall recognition and retention strategy having regard to the long term incentives awarded to senior managers in the markets in which the Company operates.
The decision to make an award of share rights is made annually by the Board. Individual participation is determined based on the:
- Strategic significance of the role and outcomes achieved.
- Impact on strategic outcomes in terms of special achievements or requirements.
- Future potential and succession planning requirements.
- Performance and personal effectiveness in achieving outstanding results.
Participating employees in BlueScope Steel's Long Term Incentive Plan are specifically excluded from selling, assigning, charging or mortgaging their share rights. It is BlueScope Steel policy and it is stated in the terms of the awards that the share rights are personal to the employee. Accordingly employees are specifically excluded from transferring any risk or benefit from the share rights to any other party. So called "cap and collar" deals cannot be made and could not in the past be made over BlueScope Steel share rights.
Details of the award under the Plan since the demerger are set out below. In summary, the main features of the Plan are as follows:
- The awards are generally made in the form of share rights (with the exception of part of the July 2002 award as set out below). Share rights are a right to acquire an ordinary share in BlueScope Steel at a later date subject to the satisfaction of certain performance criteria.
- The vesting of share rights under the Plan requires a sustained performance over a number of years (usually three) with a hurdle based on Total Shareholder Return (TSR) relative to the TSR of the companies in the S&P/ASX 100 index at the award grant date. The hurdles have been set to underpin the creation of superior TSR in the context of the top 100 Australian companies.
- The share rights available for exercise are contingent on BlueScope Steel's ranking - TSR percentile with either a stepped vesting (2002 awards) or a sliding scale (2003, 2004 and 2005 awards) with the minimum ranking for vesting being the 51st percentile. With sliding scale vesting the total number of share rights that vest for a senior manager increase proportionally as BlueScope Steel's TSR percentile ranking increases. The sliding scale appropriately balances short and long term risk in the short and long term incentive schemes.
- Given the potential volatility of the Company's earnings and the cyclical nature of the markets in which the Company operates, provision is generally made for limited retesting on a predetermined based.
- Any share rights which do not vest, lapse on resignation or termination for cause or at the expiry of the relevant performance period, whichever comes first.
- The Board has discretion to vest share rights in the event of a change in control. The Board has determined that any outstanding share rights can vest before the end of the performance period if a "change in control" occurs. Vesting at this time will depend upon early testing of the relevant performance hurdles at that time. A "change of control" is generally an entity acquiring unconditionally more than 50% of the issued shares of the Company.
- External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine, for accounting purposes, the value of the executive share rights at grant date for each award. The valuation has been made using the binomial option pricing model using standard option pricing inputs such as the underlying stock price, exercise price, expected dividends, expected risk-free interest rates and expected share price volatility. In addition, specific factors in relation to the likely achievement of performance hurdles have been taken into account.
In September 2005, 228 senior and high-potential managers were invited to participate in the Long Term Incentive Plan.
c) Long Term Incentive Plan - Outline of Specific Awards
(i) July 2002 Award
All share rights have now been exercised or lapsed under this award.
(ii) September 2002 Award
This award vested on 1 October 2005. The table below details those Share Rights which have been exercised or lapsed as per the rules of the award.
Share Rights must be exercised prior to 1 October 2006, otherwise they lapse.
In April 2006 the Remuneration and Organisation Committee approved a change in the exercise date for five New Zealand executives holding a total of 158,200 Share Rights under this Plan. The exercise date was extended to 30 September 2007 which is the end of the holding lock on shares acquired under the September 2002 award.
DETAILS OF THE SEPTEMBER 2002 AWARD
| NIL PRICED SHARE RIGHTS | |
|---|---|
| Grant Date | 30 September 2002 |
| Exercise Date (subject to vesting requirements) | From 1 October 2005 |
| Expiry Date | 30 September 2006 |
| Share Rights Granted | 4,751,500 |
| Number of Participants at Grant Date | 119 |
| Number of current Participants | 5 |
| Exercise Price | Nil |
| Fair Value Estimate at Grant Date | $4,656,470 |
| Share Rights Lapsed since Grant Date | 375,592 |
(iii) September 2003 Award
VESTING REQUIREMENTS
| TSR PERFORMANCE HURDLE | % OF SHARE RIGHTS THAT VEST |
|---|---|
| 75th - 100th percentile | 100% |
| 51st - < 75th percentile | A minimum of 52% plus a further 2% for each increased percentage ranking. Any unvested Share Rights will be carried over to be assessed at subsequent performance periods. |
| < 51st percentile | All Share Rights will be carried over to be assessed at subsequent performance periods. |
The TSR ranking of the September 2003 award was at the 69th percentile when compared with the comparator group on 30 June 2006. If that TSR ranking were to apply on 30 September 2006, then 88% of the share rights held by eligible participants would vest at that time.
If the performance hurdles are not, or are only partially met, on 30 September 2006, four subsequent performance periods will apply for eligible participants. The subsequent performance periods commence on 1 October 2003 and end on 31 March 2007, 30 September 2007, 31 March 2008 and 30 September 2008 respectively. Vesting at a subsequent performance period will only occur if the vesting requirements have been met and any previous percentile rankings are exceeded.
DETAILS OF THE SEPTEMBER 2003 AWARD
| NIL PRICED SHARE RIGHTS | |
|---|---|
| Grant Date | 24 October 2003 (All executives excluding Managing Director and Chief Executive Officer) |
| 13 November 2003 (Managing Director and Chief Executive Officer) |
|
| Exercise Date (subject to vesting requirements) | From 1 October 2006 |
| Expiry Date | 30 September 2008 |
| Share Rights Granted | 3,183,800 |
| Number of Participants at Grant Date | 144 |
| Number of current Participants | 138 |
| Exercise Price | Nil |
| Fair Value Estimate at Grant Date | $9,678,752 |
| Share Rights Lapsed since Grant Date | 207,692 |
(iv) September 2004 Award
VESTING REQUIREMENTS
| TSR PERFORMANCE HURDLE | % OF SHARE RIGHTS THAT VEST |
|---|---|
| 75th – 100th percentile | 100% |
| 51st – < 75th percentile | A minimum of 52% plus a further 2% for each percentage ranking. Any unvested Share Rights will be carried over to be assessed at subsequent performance periods. |
| < 51st percentile | All Share Rights will be carried over to be assessed at subsequent performance periods. |
If the performance hurdles are not met at the end of the first performance period (or are only partially met), four subsequent performance periods will apply. The subsequent performance periods commence on 1 September 2004 and end on 29 February 2008, 31 August 2008, 28 February 2009 and 31 August 2009 respectively. Vesting at a subsequent performance period will only occur if the vesting requirements have been met and any previous percentile rankings are exceeded.
DETAILS OF THE SEPTEMBER 2004 AWARD
| NIL PRICED SHARE RIGHTS | |
|---|---|
| Grant Date1 | 31 August 2004 |
| Exercise Date (subject to vesting requirements) | From 1 September 2007 |
| Expiry Date | 31 October 2009 |
| Share Rights Granted | 2,306,400 |
| Number of Participants at Grant Date | 201 |
| Number of current Participants | 190 |
| Exercise Price | Nil |
| Fair Value Estimate at Grant Date | $11,139,912 |
| Share Rights Lapsed since Grant Date | 138,789 |
1. The award granted on 31 August 2004 to the Managing Director and Chief Executive Officer was subject to shareholder approval at the 2004 Annual General Meeting.
v) September 2005 Award
VESTING REQUIREMENTS
| TSR PERFORMANCE HURDLE | % OF SHARE RIGHTS THAT VEST |
|---|---|
| 75th – 100th percentile | 100% |
| 51st – < 75th percentile | A minimum of 52% plus a further 2% for each percentage ranking. Any unvested Share Rights will be carried over to be assessed at subsequent performance periods. |
| < 51st percentile | All Share Rights will be carried over to be assessed at subsequent performance periods. |
If the performance hurdles are not met at the end of the first performance period (or are only partially met), four subsequent performance periods will apply. The subsequent performance periods commence on 1 September 2005 and end on 28 February 2009, 31 August 2009, 28 February 2010 and 31 August 2010 respectively. Vesting at a subsequent performance period will only occur if the vesting requirements have been met and any previous percentile rankings are exceeded.
DETAILS OF THE SEPTEMBER 2005 AWARD
| NIL PRICED SHARE RIGHTS | |
|---|---|
| Grant Date1 | 18 November 2005 |
| Exercise Date (subject to vesting requirements) | From 1 September 2008 |
| Expiry Date | 31 October 2010 |
| Share Rights Granted | 1,938,100 |
| Number of Participants at Grant Date | 228 |
| Number of current Participants | 222 |
| Exercise Price | Nil |
| Fair Value Estimate at Grant Date | $7,094,170 |
| Share Rights Lapsed since Grant Date | 69,083 |
1. The award granted to the Managing Director and Chief Executive Officer was subject to shareholder approval at the 2005 Annual General Meeting.
d) Special Share Rights Awards
Special Share Rights are awarded by the Board from time to time to meet specific or exceptional demands. In 2004, special share rights were awarded to two executives to facilitate the effective integration and turn around of the North America Coated and Building Products business, the effective integration of the China operations of BlueScope Butler and successful completion of Asian capital expansion. The awards have been made in the form of share rights in two tranches which are vested on the achievement of specific performance objectives determined by the Managing Director and Chief Executive Officer and the Chairman of the Board. The performance hurdles set are tested at the end of each performance period (i.e. 30 June 2005 for Tranche 1 and 30 June 2006 for Tranche 2). Performance hurdles for Tranche 1 were not met and therefore did not vest. The unvested share rights were rolled over to Tranche 2. New performance hurdles were determined for the period 1 July 2005 to 30 June 2006. The performance hurdles for Tranche 2 were tested at the end of the performance period and were met in respect of the North America Coated and Building Products business but were not met in respect of the China operations and Asian capital expansion. Accordingly, the special share rights for Mr Lance Hockridge have vested in full and those for Mr Michael Courtnall have lapsed.
e) Employee Share Purchase Plan
Facility is also made available to Australian employees only at this stage, to be provided with shares at market price through salary sacrifice arrangements. Recent changes to the Plan have removed the opportunity to salary sacrifice from regular salary and wages and restricts this opportunity to salary sacrifice from incentives and bonuses only.
Under the purchase plan, shares can be provided on a tax deferred basis and therefore sale or transfer is restricted. Shares provided under the Plan are entitled to participate in dividends.
1.3.5 Superannuation
BlueScope Steel operates superannuation funds in Australia, New Zealand and North America for its employees. In these locations there are a combination of defined benefit and accumulation type plans. The defined benefit schemes are closed to new members.
Contributions are also made to other international superannuation plans for employees outside of Australia, New Zealand and North America.
1.3.6 Other Benefits
Additionally, executives are eligible to participate in an annual health assessment program designed to safeguard the Company against loss or long-term absence for health related reasons.
2 RELATIONSHIP BETWEEN COMPANY PERFORMANCE AND REMUNERATION
The graph set out to the right outlines the performance of BlueScope Steel in terms of Total Shareholder Return compared to the performance of the S&P/ASX 100 for the same period. The TSR Index for BlueScope Steel as at 30 June 2006 was 327.8 compared to 187.30 for the S&P/ASX 100.
An analysis of other Company performance and performance related remuneration data relating to the nominated senior corporate executives set out in Section 3 over the same period is set out in the following tables.
| BLUESCOPE STEEL LIMITED PERFORMANCE ANALYSIS | ||||||
|---|---|---|---|---|---|---|
| Measure | 30 June 2002 | 30 June 2003 | 30 June 2004 | 30 June 2005 | 30 June 2006 | Change/Increase from 30/6/02 to 30/6/06 |
| Share Price | $2.851 | $3.72 | $6.74 | $8.23 | $7.95 | |
| Change in Share Price $ | - | $0.87 | $3.02 | $1.49 | -$0.28 | $5.10 |
| Change in Share Price % | - | 30.5 | 81.2 | 22.1 | -3.4 | 179 |
| Dividend Per Share: | ||||||
| Ordinary (cents) | N/A | 22 | 30 | 42 | 44 | N/A |
| Special (cents) | N/A | 7 | 10 | 20 | - | N/A |
| Earnings Per Share (cents) | N/A | 57.1 | 77.8 | 134 | 47.9 | N/A |
| NPAT $ million | N/A | $452 | $584 | $982 | $338 | N/A |
| % movement | N/A | - | 29.2 | 68.1 | -66% | N/A |
| EBIT $ million | $160 | $611 | $818 | $1,388 | $556 | $396 |
| % movement | - | 282 | 34 | 70 | -59 | 347 |
| EBITDA $ million | $412 | $881 | $1,105 | $1,696 | $850 | $438 |
| % movement | - | 114 | 25 | 53 | -49 | 207 |
Note: Up until 30 June 2004, financial informaton is based on Australian Generally Accepted Accounting Principles (AGAAP). From 1 July 2004 financial information is based on Australian International Financial Reporting Standards (AIFRS).
1. Share Price as at 15 July 2002.
BLUESCOPE STEEL LIMITED PERFORMANCE RELATED REMUNERATION ANALYSIS FOR EXECUTIVE LEADERSHIP TEAM
| Measure | Year ended 30 June 2003 | Year ended 30 June 2004 | Year ended 30 June 2005 | Year ended 30 June 2006 |
|---|---|---|---|---|
| Average % change in Short Term Incentive Payments |
1st year | 11.0 | 16.5 | -70.1 |
| % Change in NPAT | 1st year | 29.2 | 68.1 | -65.6 |
The short-term incentive component of the remuneration strategy takes into account business unit financial performance and non-financial and strategic hurdles. Market consensus on future earnings is also taken into account in setting financial targets, these include forecast movements in steel prices, exchange rate and other external factors likely to impact financial performance. Short-term incentive payments for the year ended 30 June 2006 reflect the financial performance of the business.
Short-term incentive payments for the Executive Leadership Team as related to changes in NPAT are provided above to indicate the relationship between reward and the performance of the company.
In relation to long-term incentives, share price and earnings performance over the relevant performance period when measured against the companies in the S&P/ASX 100 index are the key factors impacting the value of long-term equity incentives and their likelihood of meeting the required hurdles for vesting. Company performance over the past 12 months has had an impact on the relative performance of Bluescope Steel Limited against other S&P/ASX 100 companies.
3 SPECIFIC REMUNERATION DETAILS
3.1 Key Management Personnel - Directors' Remuneration
Details of the audited remuneration for the year ended 30 June 2006 for each Non-Executive Director of BlueScope Steel is set out in the following table.
| 2006 | Short-term employee benefits |
Sub-Total $ |
Post-employment benefits1 $ | Total $ |
|
|---|---|---|---|---|---|
| Salary and Fees $ | Non-monetary $ | ||||
| G J Kraehe | 435,000 | 6,144 | 441,144 | 12,139 | 453,283 |
| R J McNeilly | 227,500 | - | 227,500 | 12,139 | 239,639 |
| D J Grady | 165,000 | - | 165,000 | 12,139 | 177,139 |
| H K McCann | 160,000 | - | 160,000 | 12,139 | 172,139 |
| P J Rizzo | 185,739 | - | 185,739 | 1,401 | 187,140 |
| Y P Tan | 165,000 | - | 165,000 | 12,139 | 177,139 |
| TOTAL | 1,338,239 | 6,144 | 1,344,383 | 62,096 | 1,406,479 |
| 2005 | Short-term employee benefits |
Sub-Total $ |
Post-employment benefits1 $ | Total $ |
|
|---|---|---|---|---|---|
| Salary and Fees $ | Non-monetary $ | ||||
| G J Kraehe | 378,115 | 6,678 | 384,793 | 11,585 | 396,378 |
| R J McNeilly | 187,423 | - | 187,423 | 11,585 | 199,008 |
| D J Grady | 146,038 | - | 146,038 | 11,585 | 157,623 |
| H K McCann | 141,038 | - | 141,038 | 11,585 | 152,623 |
| P J Rizzo | 167,623 | - | 167,623 | - | 167,623 |
| Y P Tan | 146,038 | - | 146,038 | 11,585 | 157,623 |
| TOTAL | 1,166,275 | 6,678 | 1,172,953 | 57,925 | 1,230,878 |
1. Post-employment benefits relate to superannuation arrangements.
3.2 Key Management Personnel - Executives' (including the Managing Director and Chief Executive Officer) remuneration
The Key Management Personnel of BlueScope Steel are those members of the Executive Leadership Team who have the authority and responsibility for planning, directing and controlling the activities of the Company.
The audited information contained in the following tables represent the annual remuneration for the year ended 30 June 2006 for the Key Management Personnel.
The aggregate remuneration of the Key Management Personnel of the Company is set out below.
| COMPANY | |||
|---|---|---|---|
| 2006 $ | 2005 $ | ||
| Short-term employee benefits |
6,754,470 | 9,589,924 | |
| Post-employment benefits | 654,657 | 579,683 | |
| Other long-term benefits |
209,891 | 184,006 | |
| Share-based payment |
2,070,548 | 1,362,427 | |
| TOTAL | 9,689,566 | 11,716,040 |
The remuneration of each member of the Key Management Personnel of the Company is set out on the following pages.
| 2006 | Short-term employee benefits | Share-based payments | |||||||
|---|---|---|---|---|---|---|---|---|---|
Salary & Fees $ |
Bonus $ |
Non-monetary $ |
Sub-total $ |
Post-employment benefits1 $ |
Other long-term employee benefits2 $ |
Shares & Units $ |
Options & Rights $ |
Total $ |
|
| EXECUTIVE DIRECTOR | |||||||||
| KC Adams | 1,575,685 | 413,250 | 6,350 | 1,995,285 | 201,400 | 56,374 | - | 630,067 | 2,883,126 |
| % Change from 2005 | -81 | -44 | |||||||
| KEY MANAGEMENT PERSONNEL EXECUTIVES | |||||||||
| L E Hockridge | 730,559 | 266,700 | 263,8813 | 1,261,140 | 92,750 | 28,884 | - | 549,447 | 1,932,221 |
| % Change from 2005 | -56 | -10 | |||||||
| N H Cornish | 611,831 | 141,600 | - | 753,431 | 78,175 | 88,439 | - | 171,655 | 1,091,700 |
| % Change from 2005 | -67 | -19 | |||||||
| K J Fagg | 550,676 | 168,498 | - | 719,174 | 77,162 | 16,365 | - | 188,901 | 1,001,602 |
| % Change from 2005 | -64 | -28 | |||||||
| B G Kruger | 590,673 | 60,480 | - | 651,153 | 74,200 | 58,009 | - | 183,806 | 967,168 |
| % Change from 2005 | -87 | -36 | |||||||
| I R Cummin | 431,678 | 125,460 | - | 557,138 | 59,769 | 11,627 | - | 180,127 | 808,661 |
| % Change from 2005 | -66 | -29 | |||||||
| P F O'Malley (commenced 19 December 2005) |
342,234 | 92,000 | - | 434,234 | 33,659 | 7,725 | 35,232 | 30,606 | 541,456 |
| % Change from 2005 | N/A | N/A | |||||||
| M Courtnall (retired 28 February 2006)4 | 379,698 | - | 3,217 | 382,915 | 37,542 | -57,532 | - | 100,707 | 463,632 |
| % Change from 2005 | N/A | N/A | |||||||
| TOTAL | 5,213,034 | 1,267,988 | 273,448 | 6,754,470 | 654,657 | 209,891 | 35,232 | 2,035,316 | 9,689,566 |
- Post-employment benefits relate to superannuation arrangements.
- This shows the movement in long service leave benefits during this year.
- These benefits relate to international assignment costs including accommodation, tax equalisation and medical arrangements.
- Mr Michael Courtnall retired on 28 February and a consultancy agreement for six months commencing 1 March 2006 was entered into under the total retention amount payable $90,000.
| 2005 | Short-term employee benefits | Share-based payments | |||||||
|---|---|---|---|---|---|---|---|---|---|
Salary & Fees $ |
Bonus $ |
Non-monetary $ |
Sub-total $ |
Post-employment benefits1 $ |
Other long-term employee benefits2 $ |
Shares & Units $ |
Options & Rights $ |
Total $ |
|
| $ | $ | $ | $ | $ | $ | $ | $ | $ | |
| EXECUTIVE DIRECTOR | |||||||||
| K C Adams | 1,440,036 | 2,131,250 | 8,301 | 3,579,587 | 180,975 | 48,192 | - | 492,899 | 4,301,653 |
| KEY MANAGEMENT PERSONNEL EXECUTIVES | |||||||||
| L E Hockridge | 672,553 | 600,000 | 131,7943 | 1,404,347 | 85,725 | 32,083 | - | 180,487 | 1,702,642 |
| N H Cornish | 499,441 | 430,000 | 1,318 | 930,759 | 60,960 | 37,767 | - | 130,658 | 1,160,144 |
| K J Fagg | 531,821 | 470,000 | - | 1,001,821 | 73,769 | 14,722 | - | 148,672 | 1,238,984 |
| B G Kruger | 552,098 | 470,000 | - | 1,022,098 | 67,310 | 48,821 | - | 143,276 | 1,281,505 |
| I R Cummin | 418,555 | 370,000 | 1,527 | 790,082 | 56,969 | 10,618 | - | 148,931 | 1,006,600 |
| P F O'Malley (commenced 19 December 2005) |
- | - | - | - | - | - | - | - | - |
| M Courtnall (retired 28 February 2006) | 439,544 | 380,000 | 41,686 | 861,230 | 53,975 | -8,197 | - | 117,504 | 1,024,512 |
| TOTAL | 4,554,048 | 4,851,250 | 184,626 | 9,589,924 | 579,683 | 184,006 | - | 1,362,427 | 11,716,040 |
It should be noted that during the year the following senior executive changes occurred:
| Name | Previous Position | New Position | Effective Date |
| Paul O'Malley | None | Chief Financial Officer | 19 December 2005 |
| Michael Courtnall | President Asian Building and Manufacturing Markets | Retired | 28 February 2006 |
| Kathryn Fagg | President Australian Building and Logistics Solutions | President Asian Building and Manufacturing Markets | 1 March 2006 |
Grants of cash bonuses, performance-related bonuses and share-based payment remuneration benefits
During the period performance-related cash bonuses were paid to the Key Management Personnel as disclosed in the table above under the Company's short-term incentive plan.
Eligibility to receive a bonus is subject to the terms and conditions of the plan, including a minimum of 6 months performance during the plan year and that employment during the period is not terminated for resignation or performance-related reasons.
Each KMP performance is measured against an agreed scorecard that contains both financial and non-financial KPIs. This process is further described at 1.3.3.
Mr Paul O'Malley was issued with 25,000 BlueScope Steel shares upon commencement with the Company in December 2005. These shares are restricted from being sold until 19 December 2008, and are forfeited in the event of resignation or termination for cause during that time.
Share Rights Holdings
Share Rights granted to the Key Management Personnel during the financial year ended 30 June 2006 were as follows:
| Name | % of Remuneration consisting of Share Rights 1 |
Value of Share Rights Granted during the Year at Grant Date 2 |
Value of Share Rights exercised during the year 3 |
Value of Share Rights at lapse date, tha lapsed during the year 4 |
|---|---|---|---|---|
| DIRECTORS | ||||
| K C Adams | 22% | 637,571 | 618,030 | - |
| KEY MANAGEMENT PERSONNEL EXECUTIVES | ||||
| L E Hockridge | 12% | 234,956 | 209,160 | - |
| B G Kruger | 19% | 187,887 | 159,642 | - |
| K J Fagg | 19% | 185,942 | 186,354 | - |
| N H Cornish | 18% | 198,001 | 159,642 | - |
| P F O'Malley5 | 37% | 198,390 | - | - |
| I Cummin | 18% | 144,319 | - | - |
| M Courtnall5 | 34% | 157,545 | 127,386 | 441,948 |
- This figure is calculated on the value of share rights awarded in the year ended 30 June 2006 as a percentage of the total value of all remuneration received in that same year.
- External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine the value of the Executive Share Rights. The valuation has been made using the binomial option pricing model using standard option pricing inputs such as the underlying stock price, exercise price, expected dividends, expected risk free interest rates and expected share price volatility. In addition, the likely achievement of performance hurdles of the share rights has been taken into account.
- External valuation advice from PricewaterhouseCoopers Securities Limited has been used to determine the value of the Executive Share Rights for the September 2002 award that were exercised in the year ended 30 June 2006.
- Due to Mr Courtnall's retirement during the year pro rata share rights held lapsed in accordance with the rules of the LTIP. In addition, 20,000 Share Rights under the Special Incentive Award lapsed as performance hurdles were not met.
- Calculation has been performed on pro rata salary.
The Share Rights awarded to Executives under the September 2002 Award vested at the 100% level in September 2005.
Details of the audited Share Rights holdings for year ending 30 June 2006 for the Key Management Personnel are set out below:
| 2006 | Share Rights Balance at 30 June 2005 |
Share Rights Granted in year ended 30 June 2006 |
Share Rights Vested in year ended 30 June 2006* |
Share Rights Lapsed in year ended 30 June 2006 |
Share Rights Balance at 30 June 2006 |
|---|---|---|---|---|---|
| DIRECTORS | |||||
| K C Adams | 945,000 | 163,900 | (490,500) | - | 618,400 |
| KEY MANAGEMENT PERSONNEL EXECUTIVES | |||||
| L E Hockridge | 331,800 | 100,400 | (206,000) | - | 226,200 |
| B G Kruger | 258,300 | 48,300 | (126,700) | - | 179,900 |
| K J Fagg | 284,400 | 47,800 | (147,900) | - | 184,300 |
| N H Cornish | 246,700 | 50,900 | (126,700) | - | 170,900 |
| M Courtnall | 209,000 | 60,500 | (101,100) | (87,931) | 80,469 |
| I R Cummin | 136,400 | 37,100 | - | - | 173,500 |
| P F O'Malley | - | 51,000 | - | - | 51,000 |
* Although these Share Rights vested in September 2005, the Shares acquired by participants are 'locked' and cannot be sold until 30 September 2007. These Shares are forfeited subject to certain cessation of employment events.
Comparative data for year ending 30 June 2005 for Key Management Personnel is set out below:
| 2005 | Share Rights Balance at 30 June 2004 |
Share Rights Granted in year ended 30 June 2005 |
Share Rights Vested in year ended 30 June 2005 |
Share Rights Lapsed in year ended 30 June 2005 |
Share Rights Balance at 30 June 2005 |
|---|---|---|---|---|---|
| DIRECTORS | |||||
| K C Adams | 1,448,800 | 181,200 | (685,000) | - | 945,000 |
| KEY MANAGEMENT PERSONNEL EXECUTIVES | |||||
| L E Hockridge | 552,900 | 68,700 | (289,800) | - | 331,800 |
| B G Kruger | 425,700 | 53,900 | (221,300) | - | 258,300 |
| K J Fagg | 488,700 | 53,900 | (258,200) | - | 284,400 |
| N H Cornish | 419,200 | 48,800 | (221,300) | - | 246,700 |
| M Courtnall | 342,300 | 43,200 | (176,500) | - | 209,000 |
| I R Cummin | 94,700 | 41,700 | - | - | 136,400 |
| P F O'Malley | - | - | - | - | - |
Share Holdings in BlueScope Steel Limited
The following table details the shares held by Directors, Key Management Personnel and other reportable executives as well as any related party interests in BlueScope Steel Limited as at 30 June 2006.
| Director or KMP | Ordinary shares held as at 30 June 2006* |
Ordinary shares held as at 30 June 2006* |
||
|---|---|---|---|---|
| NON EXECUTIVE DIRECTORS | ||||
| G J Kraehe | 125,004 | 109,676 | ||
| R J McNeilly | 541,887 | 524,130 | ||
| D J Grady | 50,685 | 36,358 | ||
| H K McCann | 31,185 | 21,913 | ||
| P J Rizzo | 32,024 | 24,702 | ||
| Y P Tan | 24,017 | 11,980 | ||
| DIRECTOR | ||||
| K C Adams | 2,346,381 | 1,825,881 | ||
| KEY MANAGEMENT PERSONNEL EXECUTIVES | ||||
| L E Hockridge | 509,851 | 343,701 | ||
| B G Kruger | 211,185 | 224,335 | ||
| K J Fagg | 148,400 | 258,550 | ||
| N H Cornish | 180,000 | 158,150 | ||
| M Courtnall (retired 28 February 2006) | 102,741 | 184,491 | ||
| I R Cummin | 106,089 | 68,378 | ||
| P F O'Malley | 25,000 | - | ||
* Including relevant interests in shares held by other persons or entities.
4 EMPLOYMENT CONTRACTS
4.1 Managing Director and Chief Executive Officer - Outline of Employment Contract
Outlined below are the key terms and conditions of employment contained within the employment contract for Mr Kirby Adams, the Managing Director and Chief Executive Officer.
Mr Adams' base employment contract conditions were agreed with BHP Billiton Limited prior to the demerger on 7 July 2002 and are regularly reviewed by the Board of BlueScope Steel. He receives an annual base payment of $1,600,000 with effect from 1 September 2006. This amount is reviewed on an annual basis in accordance with the Board's senior executive salary review policy. In addition, Mr Adams is eligible to participate in the Short Term Incentive Plan and, subject to shareholder approval, Long Term Incentive Plan awards.
Mr Adams may terminate the contract by giving three months' written notice, upon which he is entitled to his annual base pay, which has been accrued but not paid up to the date of termination, plus any vested awards under the Long Term Incentive Plan, and any other payments for which he is eligible under the Short Term Incentive Plan. The Company may terminate the contract by giving one months' written notice (or a payment in lieu of notice based on Mr Adams' annual base pay) and a gross termination payment equal to 24 months of Mr Adams' annual base pay, plus any applicable Short Term Incentive Plan and Long Term Incentive Plan awards, and reimbursement for the reasonable costs of relocation from Australia to the United States of America. The Company may also terminate the contract on 30 days' notice in the event of serious misconduct or a serious breach of the contract. In this event, Mr Adams is only entitled to his annual base pay which has accrued but not been paid up to the date of termination plus any vested Long Term Incentive Plan awards.
The Company has agreed with Mr Adams that he will be treated consistently with other senior executives in the event of a "Change of Control" of the Company. In addition, to facilitate orderly succession, if Mr Adams decides to leave the Company and, notwithstanding his contractual entitlement to give three months' notice, he provides 12 months' notice, the Board has reached an understanding with Mr Adams the key terms of which are that it intends to allow a two year period for vesting or exercise of any outstanding share rights held by him and Short Term Incentive payments will be assessed and paid on a pro rata basis.
4.2 Other Key Management Personnel
Remuneration and other terms of employment for the Key Management Personnel set out above are formalised in employment contracts which can be terminated with notice. Each of these agreements provides for the annual review of annual base payment, provision of performance-related cash bonuses, other benefits including annual health assessment, and participation, when eligible, in the Long Term Incentive Plan. The contracts provide for notice of three to six months for resignation by the executive or termination by the Company. In the event of termination by the Company other than for cause, a termination payment of 12 months pay or the Company Redundancy Policy, whichever is the greater, will apply. The Company Redundancy Policy provides for 14 weeks' pay plus 2.5 weeks for each year of service.
Agreements are also in place for Key Management Personnel detailing the approach the Company will take with respect to payment of their termination payments and with respect to exercising its discretion on the vesting of share rights in the event of a "Change of Control" of the organisation.
ENVIRONMENTAL REGULATION
BlueScope Steel's Health, Safety, Environment and Community (HSEC) Policy provides the foundation for the way in which the environment is managed at all levels of the organisation. BlueScope Steel cares for the environment and is committed to the efficient use of resources, reducing and preventing pollution and product stewardship.
BlueScope Steel has developed a compliance system to enable its environmental responsibilities to be appropriately managed. The environmental compliance system has been successfully implemented at a number of BlueScope Steel's operations, including Port Kembla, Illawarra Coated Products and Western Port. By the end of the 2005-2006 financial year, the compliance system was implemented at approximately 70 BlueScope Steel operations.
BlueScope Steel notified relevant authorities of 93 statutory non-compliances with environmental regulations during the reporting period. The Company received three fines during the reporting period. A $3,000 on-the-spot fine was imposed when waste material was transported in an unlicensed and unplacarded truck. A $32,358 (US$25,000) fine was imposed by the US Federal Aviation Association FAA, following a failure to adhere to the appropriate labelling and documentation requirements while transporting paint by air. A fine of $1,678 (US$1,250) was imposed when a stormwater sample was not taken in the designated time. There were no significant environmental incidents recorded during the reporting period.
The Port Kembla Steelworks has entered into voluntary agreements with the NSW Department of Environment and Conservation (DEC) to investigate possible land contamination of two areas within its site, the No.2 Steelworks and the Recycling Area. A Remediation Action Plan is being prepared for the Recycling Area and a proposal for a Stage 3 investigation of the No.2 Steelworks is being discussed with the DEC.
INDEMNIFICATION AND INSURANCE OF OFFICERS
BlueScope Steel has entered into directors' and officers' insurance policies and paid an insurance premium in respect of the insurance policies, to the extent permitted by the Corporations Act 2001. The insurance policies cover former Directors of BlueScope Steel along with the current Directors of BlueScope Steel (listed on the Directors Report page). Executive officers and employees of BlueScope Steel and its related bodies corporate are also covered
In accordance with Rule 21 of its Constitution, BlueScope Steel, to the maximum extent permitted by law:
- must indemnify any current or former Director or Company Secretary; and
- may indemnify current or former executive officers,
of BlueScope Steel or any of its subsidiaries, against all liabilities (and certain legal costs) incurred in those capacities to a person, including a liability incurred as a result of appointment or nomination by BlueScope Steel or its subsidiaries as a trustee or as a director, officer or employee of another corporation.
The current Directors of BlueScope Steel have each entered into an Access, Insurance and Indemnity Deed with BlueScope Steel. The Deed addresses the matters set out in Rule 21 of the Constitution and includes, among other things, provisions requiring BlueScope Steel to indemnify a Director to the extent to which they are not already indemnified as permitted under law, and to use its best endeavours to maintain an insurance policy covering a Director while they are in office and seven years after ceasing to be a Director.
The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors' and officers' liability insurance contract, as (in accordance with normal commercial practice) such disclosure is prohibited under the terms of the contract.
PROCEEDINGS ON BEHALF OF BLUESCOPE STEEL
As at the date of this report, there are no leave applications or proceedings brought on behalf of BlueScope Steel under section 237 of the Corporations Act 2001.
ROUNDING OF AMOUNTS
BlueScope Steel is a company of a kind referred to in Class Order 98/0100, issued by the Australian Securities and Investments Commission, relating to the "rounding off" of amounts in the Directors' Report. Amounts in the Directors' Report have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars.
AUDITOR
Ernst & Young was appointed as auditor for BlueScope Steel at the 2002 Annual General Meeting.
AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES
The Auditor's Independence Declaration for the year ended 30 June 2006 has been received from Ernst & Young. This is set out in the Directors' Report. Ernst & Young provided the following non-audit services during the year ended 30 June 2006:
- $567,000: international assignee employment taxation services, commencing 1 July 2006 these services have been outsourced to an alternative service provider;
- $242,000: country specific taxation compliance services in North America, New Zealand, Thailand, Malaysia, Vietnam, Singapore, Hong Kong and India; and
- $13,000: review of BlueScope Steel (Thailand) Board of Investment Report and Circular 12 Audit of the Vietnam coating line investment.
The Directors are satisfied that the provision of these non-audit services is compatible with the general standard of independence for auditors in accordance with the Corporations Act 2001. The nature and scope of each type of non-audit service provided is considered by the Directors not to have compromised auditor independence.
This report is made in accordance with a resolution of the Directors.
G J KRAEHE AO, CHAIRMAN
K C ADAMS, MANAGING DIRECTOR & CEO
Melbourne
18 August 2006
AUDITOR'S INDEPENDENCE DECLARATION TO THE DIRECTORS OF BLUESCOPE STEEL LIMITED
In relation to our audit of the financial report of BlueScope Steel for the year ended 30 June 2006, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.
ERNST & YOUNG
ALAN I BECKETT
Partner
Melbourne
18 August 2006
