Executive Pay
The latest battle in Australian corporate governance is unlikely to end quickly or quietly, if at all.
Directors have already slammed the Productivity Commission’s recommendations in its draft report on executive pay, which argued for enormous and unprecedented powers to limit excess. And yet, the report drew criticism for not coming down heavily enough on exorbitant pay levels.
Whatever direction the final report ends up taking, the growing concern about corporate largesse at the expense of shareholders will not go away.
The Commission’s report coincides with worldwide anger at soaring executive pay at a time when investors have been taking a bath.
A 19-point plan prepared by the G20’s Financial Stability Board in September calls for executive bonuses to be scaled back, subject to annual reviews, and decoupled from short-term share price movements.
The G20 proposals require at least 40% of each executive's bonus to be deferred over a number of years, rising to 60% for the bonuses of the most senior executives.
The deferral period would be at least three years with at least half paid in the form of shares or share-like instruments rather than cash.
Australia has had extensive input into the G20 report. Treasurer Wayne Swan, who accompanied Prime Minister Kevin Rudd to the G20 summit at the US city of Pittsburgh, has said that the G20's recommendations were based on recent work by the Australian Prudential Regulation Authority.
In effect, the Australian Government has put boards on notice.
Backlash
At the same time, boards of publicly listed companies can expect a backlash from shareholders during this year’s annual general meetings season.
There are two reasons for this: a spate of diluting capital raisings favouring large institutional investors and the granting of executive pay rises at a time of the steepest falls in annual profit in decades.
Proxy advisers expect executive pay will be a major issue that this year’s meetings which have started this month and which will continue until the beginning of December.
The Australian Council of Super Investors has raised concerns about companies still not disclosing short-term performance hurdles, often a key determinant of executive pay increases.
Quite clearly, there have been some outrageous examples of corporate payouts rewarding business leaders at the expense of shareholders. (See accompanying box).
According to the Productivity Commission’s report, executive pay for the top 100 companies grew at an average 8-9% per year between 1993-2008, amounting to an increase of as much as 250% during the period.
The amount of money earned by chief executives was 17 times average earnings in 1993, soaring to 50 times in 2008. CEOs of the top 20 companies earned an average $10 million. That is 150 times what the average wage earner makes.
The most contentious part of the report is the “two strikes” proposal where, in the words of the Commission, “all board members (other than executives) should face re-election if two consecutive remuneration reports receive ‘no’ votes above (a) specified threshold.”
The commission has also recommended changing the Corporations Act to ensure that “where a company’s remuneration report receives a ‘no’ vote of 25 per cent or more, the board be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if they have not been addressed, the reasons why.”
Another proposal is for board remuneration committees to have at least three members, all of whom would be non-executive directors with a majority being independent.
The commission also wants executives prohibited from voting on their own pay packets. It said the value of executive shareholdings and take-home pay should also be disclosed
Falling short
Perhaps not surprisingly, the Productivity Commission report has been criticised from all sides.
Greens leader Bob Brown has attacked the report for squibbing on the issue of profligate payouts. Brown has called for a $5 million pay cap and says the Commission failed to tie CEO payments to any performance criteria.
ACTU president Sharan Burrow said that salaries of company chiefs should be limited to a maximum 10 times the average earnings of employees within that company, and that companies should be taxed at a higher rate for paying CEO salaries over $1 million.
And there is a question whether the “two strikes” proposal would actually work. Company endorsed directors are rarely voted off the board and the Productivity Commission is unlikely to change that.
On the other side of the debate, directors have attacked the proposal as unworkable.
Australian Institute of Company Directors chief executive officer John Colvin said the present system of non-binding votes has worked very well because boards took them seriously and responded to shareholder concerns.
The “two strikes” policy would destabilise boards because the second vote against a remuneration package would ultimately become a vote against the board.
Another big concern is that it while 25% of the shareholders might disapprove of a pay scheme, there are 75% who would not have this problem.
That allows a small proportion of shareholders to trigger ‘strike two’ and therefore put the entire board up for re-election, not just the one-third of directors who would normally have to stand for election at their company’s annual general meeting.
“It would disenfranchise the majority, up to 75% depending on the threshold decided, who vote in favour and could see the remuneration report become a battleground for a wide range of issues and interests that may have nothing to do with remuneration,” Mr Colvin said.
We can expect the Productivity Commission to come under pressure to lift the threshold from 25% to a higher level.
Non-binding
The Commission rejected any suggestion of making the shareholders’ vote binding. The productivity commission report said this call was impractical.
“A binding shareholder vote on the remuneration report, though supported by many, would be unworkable given the report’s complexity and coverage, and would compromise the board’s authority to negotiate with executives,” the Commission said.
Still, there are suggestions that binding votes might have a place. The Australian Council of Super Investors has argued that while binding votes are not required for remuneration policy, there was a need to have one on all executive share incentives and options, and any payment greater than one year’s salary on termination.
ACSI chief executive Ann Byrne says that while the ‘two strikes’ rule has its pros and cons, the proposal itself is worth considering.
In sum, the Productivity Commission recommendations go some way to address the issue of executive payouts but it left more than a few loose ends.
While we are yet to see what the final set of proposals will look like, nobody expects it will put an end to the massive payouts that have created such public outrage – nor the debate itself.
Any list of corporate pay-packets is likely to spark discussion about what constitutes excessive remuneration. Still, here’s a summary of some of the more controversial.
In April 2008, outgoing Transurban chief executive Kim Edwards received a generous $16 million in remuneration, including a gob-smacking $5.2 million termination payment. That was followed by a $3 million sign-on fee for new CEO Chris Lynch.
Shareholders weren’t that lucky. Two months later under new management, the company announced that previous shareholder distributions of 58 cents were “substantially in excess of operating cash flow per security”, and were halved. Transurban’s share price now sits at $4.14 compared with $6.60 on the day of Edwards’ retirement.
Another example is the size of the pay packet given to former AGL chief executive Paul Anthony. When he signed on, Anthony received $1.64 million in cash and approximately $4.7 million of AGL Energy shares held in escrow for two years.
That was on top of a $1.56 million cash bonus during his first year of tenure. The company listed in October 2006. Then 12 months later, he was sacked following a profit downgrade.
Shareholders later learned in the company’s annual report that Anthony had been sent off with a $5.1 million termination payment.
In 2008, Consolidated Media, John Alexander in 2008 received a $15 million golden parachute. This was the equivalent of 468% of his annual salary.
Other examples of largesse include Leighton Holdings CEO Wal King's total remuneration package. It fell 25% in fiscal 2008-09, yet he remains the country's second-highest paid CEO with a total package for the year at $12.5 million.
Macquarie Group CEO, Allan Moss, received $24.76 million, while Westfield Group CEO, Frank Lowy is ranked third-highest paid boss, with remuneration totalling $16.2 million.
