Business Success: Rio Tinto’s Compensation Strategy Analysis

Remuneration Policy

Rio Tinto’s compensation strategy is implemented to attract and retain a number of talented management in a competitive international market. They strive to engage their employees over the long term, to adopt diversity, and to deliver development opportunities and challenging work. Their people strategy is emphasized by their commitment to safety and their core values of integrity, respect, teamwork, and excellence. Rio Tinto’s remuneration is linked to management performance targets over both the short and long-term period.

This is to ensure that executive rewards are aligned to the delivery both of short-term priorities and long-term sustainable growth in shareholder value.

In order to assess the competitiveness of the packages they offer, they use other companies in the FTSE 30 (excluding financial services companies) as benchmarks. These companies typically have a similar global reach and involvement and are ordinarily other international natural and mining resources companies (Rio Tinto 2017).The outcomes of these benchmarking exercises form just part of Rio Tinto’s conception of appropriate remuneration packages, however, they would not expect either base salaries nor the expected outcome of their short and long-term incentive plans to deviate markedly from the median of these comparator groups.

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The actual outcome, therefore, relies on both business and individual performance.

Short-Term Incentive Plan Performance under the Short-Term Incentive Plan (STIP) is measured over one year and is based on a balanced scorecard inclusive of safety, financial and individual targets. Fifty percent of the STIP for executives is delivered in deferred shares that vest after three years.

Rio Tinto’s key performance indicators - injury frequency rate (AIFR), critical risk management (CRM) and lost time injury (LTI) - were measured and analyzed based on their STI of safety to be achieving below their ‘target’ in the 2017 financial year. As fatalities occurred in 2017, reductions to the safety results were applied. Furthermore, The CEO and the CFO reduced from 49.5% to 37% and 42% respectively (Rio Tinto 2017). These adjustments expose the level of oversight they had for safety leadership during the year. Correspondingly, descending adjustments were applied for certain other executives.

Long-Term Incentive PlansThe Long-Term Incentive Plan (LTIP) is measured over a period of five years and awards for performance are delivered in the form of shares. By 2018, performance will be measured in relation to the total shareholder return (TSR) of Rio Tinto relative to the MSCI World Index (50%) and to the Euromoney Global Mining Index (50%), highlighting the reason that the company strives for capital with mining and other global companies.Rio Tinto performed well against the Mining Index but under-performed with the MSCI World Index. The results show Rio Tinto was awarded 33.3% under these two components, out of a maximum of 66.7%. This result implies the strategic objective of executives should not excessively profit from windfall gains when commodity prices are high, nor suffer when they are low.