The golden milk pot - counting the cost of the Irish co-op structure

Revelations on the pay structure at Ornua and transparency on co-op board and senior management pay have generated much heated discussion between dairy farmers at a time when they are producing milk at or below the cost of production.

If we compare seven of our largest Irish milk processors with dairy processors in Holland or New Zealand, we can clearly see that Irish dairy farmers are funding a structure that is far more costly.

If we break it down and compare the figures on cow numbers, it costs about €25 per cow to fund board and senior management pay in Ireland, €5 per cow in Holland and €2 per cow in New Zealand.

In Ireland, for board members and senior management we pay about €5m per one billion litres of milk processed, while Dutch and Kiwi farmers pay €720,000 and €640,000 per billion litres processed respectively. The difference is mind-blowing and starkly highlights the challenge for the Irish dairy industry in terms of centralisation of our processing and marketing structures.

If we break it down and compare the figures on cow numbers, it costs about €25 per cow to fund board and senior management pay in Ireland, €5 per cow in Holland and €2 per cow in New Zealand.

It’s a brave person who would try telling a dairy farmer at six in the morning as the rain belts against the roof of the parlour, and wind numbs the fingers that any executive is worth millions in his pay packet.

Details revealed recently show the board members of Ornua each received on average €36,350 per year. The senior management and the boss at Ornua share over €4m in wages.

Published annual accounts show eight of the people around the Ornua board table are already getting a six-figure management wage from their respective co-ops. Farmers are asking why pay them on the double – is it not part of the job specification they sign up to? Secondly, are we clear the other board members attending on behalf of dairy farmers have the interests of the Irish dairy industry at heart rather than local interests? This is a multibillion euro international business. We need experienced international people around the board table.

In terms of representation, Irish dairy farmers in the eight companies analysed fund over €3m in board fees when we total the amount of money paid to board members (see chart).

Yes, paid by dairy farmers, and in most cases going back to board members. The range goes from €845,000 for the board of Kerry Group to zero for the board of Lakeland. Some will question including the remuneration in Kerry and Glanbia as these are billion euro multinational businesses and Glanbia is involved in processing more milk outside of Ireland. Some will argue to leave Glanbia and Kerry out altogether. Choose as you wish.

No pay for board members is not the answer, as board members have a very important and onerous task that takes up valuable time and expertise. They should be rewarded. After all, they are directors in companies turning over €1bn in some instances.

In New Zealand, the 14 members of the board of Fonterra who process over 21 billion litres globally are paid the equivalent of €1.5m. Similarly, the 12-member board of FrieslandCampina, the co-op that processes over 11 billion litres of milk in Holland, is remunerated to the tune of €1.1m. Effectively, in both these companies the elected representatives dedicate most of their time to the company and travel the world building links, generating goodwill, observing potential markets for dairy products and governing.

When we compare the cost of senior executive management in Ireland we come to a grand total of close to €33m. Of this, €15m relates to Glanbia plc and Kerry Group plc. As yet we don’t know the senior management fees at Glanbia Ingredients Ireland. For the purposes of this article and the summary international comparisons, I assume a €3m cost to both Kerry and Glanbia for senior management of the dairy processing arms of the business. So it means when comparing senior management fees rather than €33m I’m using a figure of €23m.

In comparison, the five-person executive team in FrieslandCampina are paid €6.9m for leading a team of employees in many different countries. Similarly, the top 10 paid executives in Fonterra are paid a grand total of €12m to manage businesses and brands worldwide. Now of course we are not comparing like with like, and in Ireland alone we have a multitude of different ownership and business structures. But the bottom line is dairy farmer income in all three countries (Ireland, Holland and New Zealand) is dependent on the margin and investment each of these dairy businesses can generate. In Europe, FrieslandCampina is a leader in returns to the farmer and has both an effective base price topped up with transparent added value for farmer owners.

Farmers must drive change

Over the last number of years we have been talking about the extra costs associated with layers of management and multiple board members of different processing units. Now that we can put real numbers on the cost of this duplication, it is clear Irish dairy farmers are funding a highly paid executive and representation structure compared with other dairy-producing companies. This pay continues in 2016 despite the dairy farmer taking all the business risk to produce the milk below the cost of production.

I fully agree that an effective remuneration framework is an important consideration in attracting and retaining talent, driving change, and motivating employees to succeed. However, paying multiple people over the odds for representation and executive management is taking significant money out of milk cheques or potential investment. Now the figures are public, it’s up to dairy farmers to drive change.

I have no problem with anyone getting paid over €1m for a year’s work if they deliver multiples of that for the business. If he/she is delivering in terms of business growth and long-term milk price growth, is committed and works hard. Often executives in these roles have to travel the world leaving behind family, friends and relations.

In the case of Ornua, similar to other representative board seats, I have to ask should the remuneration go to the organisation/co-op they represent, especially if in their capacity as CEO it should be part of the job description. The duplication within the Irish industry is depending on the same 1m dairy cows to pay the bills.

The recent revelations on pay structure put real numbers on the extent of the extra costs of duplication of governance and senior management. We include some assumptions for comparison purposes in this article which we will clarify as soon as they are published.

Empowered with these figures, dairy farmers are the ones who can drive change. Farmers own most of these businesses.

Many of the individual processing businesses have or are implementing lean management systems, but are Irish board members serious about the lack of lean management within the entire Irish dairy industry? The industry urgently needs to address the costly multi-management and administration that silently adds to the cost base.