AWB (International) Limited (AWBI) has introduced a performance based remuneration model for pool management services supplied by AWB Limited (AWB).
In announcing the model, AWB’s Chief Executive, Mr Andrew Lindberg, said that the Board of AWBI had changed the current “cost plus” remuneration model to a more commercially based payment, designed to incentivise superior performance.
“In the past, AWB provided services to AWBI to operate the National Pool under an agreement which meant AWB was paid the actual cost of the services provided, plus a margin on those costs to provide a return on growers’ capital,” Mr Lindberg said.
“AWBI’s Board believes that the “cost plus” model provides little incentive to contain costs or improve performance. In fact, it could be argued it provided incentives to increase costs.
“Therefore we have developed a performance based remuneration model.
“AWBI will use performance benchmarks as the basis for a more effective and realistic pool management remuneration model for AWB.
“Recently, the Wheat Export Authority announced a performance monitoring framework to measure AWB’s management of the Single Desk.
“AWBI will use elements of this framework as the basis for the performance based remuneration model.
“It links AWB’s remuneration to its sales performance in the international marketplace for growers who deliver to the National Pool,” Mr Lindberg said.
The benchmarks are based on:
- global sales and marketing performance (US dollar prices);
- exchange rate hedging performance; and
- supply chain cost performance.
“Under the model, AWB will receive a base fee to cover its costs in operating the National Pool and an out-performance incentive payment if it out-performs the benchmarks plus a hurdle,” Mr Lindberg said.
The payment structure is based on a two-tiered remuneration model:
- a Base Fee of 1.5% of gross pool value (GPV) floored at $45 million and capped at $60 million. This is for the provision of pool management services; plus
- an Out-Performance Incentive payment of up to a further 1.5% of GPV for above benchmark plus hurdle performance.
The hurdle is US$5 and this reflects the freight advantage and inherent value of the Single Desk. This hurdle must be cleared before any out performance incentive payment is earned.
The Base Fee and the Out-Performance Incentive payment together will be capped at 3% of GPV.
“The performance based remuneration system gives AWB more incentive to generate greater financial returns for growers who deliver to the National Pool and as a result will also deliver better returns for shareholders,” Mr Lindberg said.
The remuneration arrangements clearly align the interests of AWB with pool outcomes and exposes AWB to the risks and costs borne by the National Pool.
Mr Lindberg said that the new performance model evolved through a rigorous testing and assessment process.
“The Board of AWBI considered a number remuneration models based on indicators to measure performance. Independent expert consultants advised the Board in the design and selection of the preferred model.
“This preferred model was independently reviewed by a leading asset management company and endorsed because it reflects industry best practice,” said Mr Lindberg.
The pool management services which AWB provides to the National Pool include:
- international sales and marketing (including international supply and demand analysis, market analysis, pricing strategy, marketing, international sales, and the provision of technical training to international customers);
- risk management services (including foreign exchange management and commodity hedging);
- grower services (including grain acquisition, grower payments, communication, and regional office services).
- managing the wheat supply chain (from farm gate to international customer); and
- research and development (to ensure Australia’s wheat growers stay abreast of seed variety and technology developments and ensure AWB delivers value added products to international customers).
“The model will take effect for the 2001/02 National Pool and beyond,” Mr Lindberg said.
The Board of AWBI believes the remuneration model will drive AWB to increase its investments in Pool operations to deliver better financial returns to pool participants,” Mr Lindberg said.
For further information contact:
Peter McBride, AWB Limited on (03) 9209 2174 or 0417 662 451