As noted in the Corporate Governance Statement, MIG is an externally managed vehicle comprising two Australian trusts and a Bermudan exempted mutual fund company:
- MIT(I)
- MIT(II)
- MIGIL.
The combined trustee/manager, known as a responsible entity, for each of the trusts is Macquarie Infrastructure Investment Management Limited (MIIML), a wholly owned subsidiary of Macquarie Group Limited (Macquarie). MIGIL is advised by a UK-based wholly owned subsidiary of Macquarie, Macquarie Capital Funds (Europe) Limited (MCFEL).
MIIML and MCFEL make available employees (including senior executives) to discharge their obligations to the relevant MIG entity. These staff are employed by entities in the Macquarie Group and made available to MIG through formalised resourcing arrangements with MIIML and MCFEL. Their remuneration is not a MIG expense. It is paid by the Macquarie Group. Instead MIG pays management fees to the Macquarie Group for providing management services. These fees are a MIG expense and are therefore disclosed below.
Under the Corporations Act, it is only Australian
listed companies that are required to prepare a remuneration report. Accordingly, MIG is not required to provide a remuneration report, or to have security holders participate on a non-binding advisory vote in respect of it.
However, in order to provide appropriate remuneration disclosure for MIG, we have set out below details of the management fees and non-executive director fees paid by the MIG entities, together with qualitative disclosure detailing how MCFEL and MIIML staff working on MIG are incentivised and their interests aligned with MIG.
Management fees
Under the terms of the trust constitutions and the advisory deed, MIIML and MCFEL are entitled to base and performance fees for acting as responsible entity and adviser respectively to the stapled entities that comprise MIG.
Base management and performance fees are calculated in accordance with a defined formula under the constitutions of MIT(I) and MIT(II) and the advisory agreement with MIGIL. The management fee structure is linked to market performance and, in the case of performance fees, ongoing outperformance against an external benchmark. The management fees paid or payable by MIG to MIIML and MCFEL for the financial year ending 30 June 2008 were:
| Base fee | A$67 million* |
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| Performance fee | Nil |
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| * Including non-recoverable GST. | |
The fee arrangements were fully disclosed to investors on fund inception and subsequent restructure and continue to be disclosed on the MIG website and in annual reports. Investors originally invested and continue to invest with this knowledge. The structure and level of the fee arrangements are consistent with those paid in the market in respect of similar externally managed vehicles and are not subject to review. Any changes to the structure of the fee provisions which would have the effect of increasing the fees would need to be approved by MIG stapled security holders.
Base fees
Base fees are calculated quarterly, with reference to the average market capitalisation of MIG over the last 10 trading days of the quarter. The base fee is calculated as 1.25% per annum of the market value of MIG at the end of each quarter up to a market value of A$3 billion. For the market value in excess of A$3 billion, the base fee is calculated as 1% per annum of the market value in excess of A$3 billion at the end of the quarter. For the purposes of calculating the base fee, the market value of MIG is determined as follows:
- The volume weighted average market capitalisation over the last 10 ASX trading days of each quarter (based on closing price), plus
- MIG corporate debt, plus
- Firm commitments for future investment, less
- Cash or cash equivalents.
The quantum of the base management fee can increase or decrease as a result of both the movement in the number of MIG securities on issue and any movement in the security price. Investors can effectively control the growth of securities on issue and therefore any base fee increases by factors such as deciding whether or not to support a capital raising involving the issue of new MIG securities.
As capital raisings are predominantly undertaken to fund new acquisitions or retire bridging debt for new acquisitions, MIIML and MCFEL are incentivised to ensure that each new investment is seen as disciplined and value accretive by the market in order to attract investor support for the raising and general ongoing support for the security price.
Performance fees
A performance fee is payable by MIG at 30 June each year in the event that the MIG accumulation index outperforms the S&P/ASX 300 Industrials Accumulation Index in any financial year, having made up for any underperformance in previous years.
The performance fee is 15% of the dollar amount of the net outperformance and is paid in three equal annual instalments. The second and third year instalments are only paid if MIG continues to outperform the relevant index on a cumulative basis over the relevant two- or three-year period.
Where MIG underperforms the benchmark a fee deficit exists. Before any future performance fees can be earned, all accumulated deficits from prior periods of underperformance must be eliminated, ensuring that any performance fees are paid as a result of sustained benchmark outperformance. This requirement for sustained outperformance creates a strong alignment of interest between MIIML, MCFEL and MIG security holders. Fees are apportioned between MIT(I), MIT(II) and MIGIL based on each entity’s share of the net assets of MIG. The net market values of the assets
are used in the calculation of this apportionment.
Reinvestment of fees
Under MIG’s constituent documents, independent directors of MIIML acting in the interests of stapled security holders have the discretion as to whether or not the base fee and performance fee is applied for a subscription in new MIG stapled securities.
Under ASX Listing Rule waiver requirements, the ability to reinvest base fees and performance fees is subject to MIG security holder approval every three years and
is seen by MIG as creating further alignment between MIG management and MIG security holders. These approvals will be tabled to MIG security holders for renewal at the forthcoming MIG 2008 AGM.
The issue price for the new MIG stapled securities is
the volume weighted average trading price of all MIG stapled securities traded on the ASX during the last
10 business days of the relevant quarter in respect of base fee securities, or the last 10 business days of the financial year when the instalment is paid in respect of performance fee securities.
Expense reimbursement
MCFEL and MIIML are also entitled to be reimbursed
for expenses incurred by them in relation to the proper performance of their duties, out of the assets of MIG. This includes routine ongoing expenses such as the third party costs of acquiring assets and managing them, as well as capital raising costs, registry, audit, insurance, compliance costs and other expenses as
set out in the trust constitutions and Advisory Deed.
Directors
No director of MIIML is remunerated by MIG. The independent and non-executive directors of MIIML
each receive fees of A$125,000 per annum from MIIML,
a wholly owned subsidiary of Macquarie, for acting
as directors. In addition, Mark Johnson as Chairman
of MIIML receives an additional A$25,000 per annum
from MIIML for acting as such. MIIML’s executive directors are employed and remunerated by the Macquarie Group.
Peter Dyer receives £40,000 per annum and Mark Johnson receives A$50,000 per annum for acting as directors of MIGIL. The independent directors each receive fees of US$40,000 per annum for acting as directors of MIGIL.
The fees paid to the independent and non-executive directors of MIIML and MIGIL are determined by reference to current market rates for directorships.
The level of fees is not related to the performance
of MIG. The boards of MIIML and MIGIL will consider remuneration payable to their independent and
non-executive directors from time to time. Remuneration for the independent and non-executive directors is approved by the boards and any increases are benchmarked to market based on external advice.
None of the MIIML or MIGIL independent and non-executive directors are entitled to MIG options or securities or to retirement benefits as part of their remuneration package.
The directors of MCFEL are employees of the
Macquarie Group and are remunerated by the Macquarie Group.
Executives
MIG management is employed by the Macquarie Group. Their remuneration is paid by Macquarie Group and is not re-charged to MIG. The remuneration of Macquarie executives that are involved in the management of MIG is not disclosed because the executives are not employed by MIG and their employment costs are borne by Macquarie Group.
While MIG management are Macquarie Group employees there is a strong alignment of interest between those employees and MIG investors. This is evidenced by Macquarie’s remuneration system which ensures that a significant amount of remuneration is at risk and solely dependent on performance. The remuneration package of all Macquarie Group executives consists of a base salary and an annual profit share allocation. The base salary is reviewed annually and the profit share allocation, which is not guaranteed, is based on performance.
Performance assessment of Macquarie Group employees takes place half-yearly. The MIIML and MIGIL boards, which comprise a majority of independent and non-executive directors, provide feedback in respect of the MIG CEO’s and CFO’s performance and can request that they be replaced
if not performing satisfactorily.
The levels of base salary for senior executives take into consideration the role of the individual and market conditions. However, the levels of base salary can be low compared to similar roles in non-investment banking companies.
The profit share allocations to executives provide substantial incentives for superior performance but low or no participation for less satisfactory outcomes. Profit share allocations are therefore highly variable and can comprise a high proportion of total remuneration in the case of superior performance. The level of profit share received by members of the MIG management team is driven predominantly by their individual contribution to the performance of MIG, taking into account the following elements:
- Operational performance of MIG’s underlying assets
- Management and leadership of MIG and the assets controlled by MIG
- Acquisitions and subsequent management of the assets purchased to ensure performance is in line with the acquisition business plans
- Effective capital management
- Maintenance of Macquarie’s reputation and track record in respect of its branded funds.
There is no formulaic approach to determining MIG management’s profit share allocation. It is completely discretionary and takes into account factors outlined above as well as input from the MIIML and MIGIL boards in the case of the MIG CEO and CFO.
MIG management may also receive Macquarie options as part of their remuneration package.
Alignment of interests
Further to the remuneration matters discussed
above, alignment between MIG security holders and
John Hughes, the CEO of MIG, and any other senior members of the MIG management team at Macquarie executive director level, is reflected in their profit share arrangements. In accordance with the profit share arrangements applicable to Macquarie executive directors, 20% of the profit share amounts each year for these staff is withheld and subject to restrictions. These retained profit share amounts vest after between five and 10 years.
In order to better align the interests of management with security holders, the retained profit share amounts of Mr Hughes and any other Macquarie executive directors in the MIG management team are notionally invested by Macquarie in MIG securities so that returns on these amounts are based on the MIG security price performance. The investment is described as ‘notional’ because these staff do not directly hold securities in relation to this investment. However, the value of the retained amounts will vary as if these amounts were directly invested in actual MIG securities.
Alignment between Macquarie and MIG security holders is also demonstrated through the interest the Macquarie Group holds in MIG. At 30 July 2008 the Macquarie Group held approximately A$1.083 billion*
in MIG securities, including those securities that have been acquired as part of the issue of MIG securities for the reinvestment of base fees and performance fees (discussed above).
MIG senior staff and directors of the MIG entities
also hold over A$11.8 million in MIG securities as at
30 July 2008.
* Includes both principal and fiduciary holdings.