JB Hi Fi’s executive remuneration process delivers significant long-term value to shareholders

About JB Hi-Fi Limited

JB Hi-Fi Limited (JB Hi-Fi, the Group, ASX: JBH) is a leading retailer of technology and consumer electronics and home appliances in Australia and New Zealand. The Group operates 327 stores at sites located in most Australian States and employs 15,000 people. Established in the Melbourne suburb of Keilor East in 1974, JB Hi-Fi listed on the ASX in October 2003. The $1.55 Initial Public Offering (IPO) share price commenced trading at $2.20.

Remuneration Report requires shareholder approval

The Corporations Act requires ASX listed companies to present a Remuneration Report to

shareholders at every Annual General Meeting detailing the nature and amount of remuneration paid to Key Management Personnel (KMP). The Remuneration Report must explain and justify the performance hurdles applied in determining the remuneration paid to KMP. The performance hurdles may be a mix of financial and non-financial performance conditions and the Remuneration Report must explain why the performance conditions have been chosen so that shareholders can assess whether the performance measures are appropriate to the Company’s circumstances.

The shareholder vote on the Remuneration Report is non-binding on the Board and so is considered ‘advisory’ in nature. However, a no vote comes as a clear message from shareholders and proxy advisors that the current executive remuneration structure is unacceptable. The no vote threshold is 25 percent, which gives shareholders considerable say over executive remuneration levels. The Corporations Act provides that Boards must face being spilled if more than 25 percent of shareholder votes are against the executive pay level set out in the Remuneration Report at two consecutive Company Annual General Meetings. If that occurs, shareholders at the second AGM will vote to decide whether the Directors must stand for re-election. This is called a spill resolution and if passed with at least a 50 percent majority, a ‘spill’ meeting must take place within 90 days of the AGM, requiring Directors to stand for re-election

JB Hi Fi Executive Remuneration hurdles and shareholder outcomes

The JB Hi Fi Board know that what gets measured, gets done. JB Hi Fi’s key performance measure is earnings per share (EPS) and so it should not come as a surprise that the Group’s 4-year EPS compound annual growth rate to FY2023 was 22 percent per annum, in that EPS increased from $2.17 per share to $4.80 per share. The Board’s EPS growth rate target for this period was between 14.5 and 17.3 per cent. The Group’s share price increased from $25.85 to $43.75, and shareholder annual dividends increased from $1.57 to $3.82 per share during this period. Between July 2018 and

June 2023, the JB Hi Fi share price grew at a compound annual growth rate of 14.2 percent, compared to the ASX 200 compound annual growth rate over the same period of 3.1 percent. The strong correlation between Group financial performance and its Key Management Personnel reward structure is reflected in JB Hi Fi’s share price growth.

Lessons learned

The JB Hi Fi executive remuneration reward structure is heavily weighted toward equity in the Group rather than cash and this explains the Group’s history of a strong shareholder return bias in its decision-making.

Twenty-five percent of remuneration is paid in cash and seventy-five percent is paid in deferred shares, with one third released from dealing restrictions each year over a three-year period. This ensures that share price performance of shares owned by executives is aligned with the experience of shareholders over the medium term. Also, it goes some way in imposing consequences on decision-makers for being wrong, rather than financial pain caused by poor decision-making being borne solely by shareholders.

One of the strongest features of the JB Hi Fi executive remuneration structure is that share options are not a significant component of remuneration. It is often (incorrectly) stated that options put managers and shareholders in the same ‘boat’. In practice however, the ‘boats’ are far different because unlike a shareholder who has contributed cash for their equity capital, a fixed-price option holder bears no capital outlay at all and so has no downside. A loose analogy is a person who is happy to accept a lottery ticket as a gift but would never outlay their cash to buy one!

This clear and transparent remuneration process that puts Group executives in the same ‘boat’ as shareholders builds trust and market confidence and should continue to support JB HI Fi share price outperformance at least over the medium term.