Investors fight back over CEO pay checks

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Although there are companies-specific factors at play for Telstra and Tabcorp, and for investors backed other companies, executive pay packages, some of the most experienced directors in the world.

Tony Shepherd, a former President of the Business Council of Australia, says CEOs should be "well remunerated and well motivated," but agreed with Mullen that the executives are overpaid.

"CEO salaries and executive salaries, particularly in the larger companies, have been made with the responsibilities and the contribution that they are making," Shepherd says in an interview.

Lindsay Maxsted, chairman of Westphalia and Transurban and a director of BHP Billiton, acknowledges there is room for improvement.

Speaking from London this week, he says the issue is not the size of the pay packets, but the design of one specific component – the long-term incentive (LTI). He says we need to have a "mature debate" on whether or not they have long-term incentive schemes.

I do not think LTI is working for you shareholder, I do not think it is working for me, and here is my alternative to long-term incentive based on either fair value or face value, '"Maxsted says.

Tabcorp chair Paula Dwyer this week said the company would change its bonus structures, but also shot back after the company's "strike" – a vote of more than 25 percent against a compensation report. She said investors and proxy advisers, experts on the complex world of executive compensation, appeared to be working together to undermine company leadership.

"I feel that there are, in some ways, orchestrated views emerging," Ms Dwyer told the Australian Financial Review.

National Australia Bank, Commonwealth Bank, and Rio Tinto have been working on this issue.

Maxsted's opposite number at National Australia Bank, trained Treasury Secretary Ken Henry, said in late 2016 that "enough is enough," and the gulf between CEOs and ordinary workers.

At $ 4.36 million, the ASX100 CEO's pay is about 52 times the average wage of $ 82,436, according to the Australian Council for Superannuation Investors (ACSI) and the ABS. That compares with multiples of about 300 times in the United States and 180 times in the United Kingdom, Mullen said this week.

How did we get here?

The fact is, they are structured, they are structured, they have been a constant issue for boards of the global financial crisis, which sparked concerns.

But the roots of today's big pay packs go back much further.

A 2009 report by the Productivity Commission said the rapid growth in executive pay in the 1990s, after incentive pay schemes were imported from the United States. The commission's report said executive pay in the ASX100 grew from 17 times average earnings in 1993, to 42 times by 2009.

I just feel that though the things that come up in the royal commission have become so much more important than that.

Loiuse Davidson, Chief Executive of the Australian Council of Superannuation Investors.

As well as the move towards bonus-heavy pay packets, another change during this period was mandatory disclosure of executive pay in 1998 – which allowed the bosses to see what their peers were getting.

In 2004, non-binding shareholder votes were introduced on executive pay, and in 2011 the "two strike" rule was introduced. This shareholder votes more votes, than dictates that a company receives two more votes than its predecessor.

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As the system has evolved, so has its complexity.

As well as fixed salaries, they have been split into a short-term component and a long-term incentive.

More recently, the "metrics" on which executives are judged to have broadened their dimensions of shareholder return or profitability, to include customer satisfaction, or workplace diversity and inclusion.

To help big investors navigate the complex world of executive compensation, a full clbad of consultants known as proxy advisers has been created.

Tension between investors and boards over When Maxsted appointed Brian Hartzer as Westpac boss in 2015, for instance, it is an understanding that the banker has gotten away from the global financial crisis, and it was a time for a reset.

But what is changed, investors and advisers say, is a newfound impetus for greater accountability. And while previous debates have been about the structure of pay, there is also a growing focus on the overall quantum of compensation.

Several forces appear to be inflaming these tensions.

One of the royal commission in banking misconduct, which last month cast a question mark over executive bonus schemes by highlighting the banks' profit-driven incentive targets for staff. Kenneth Hayne concluded: "Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty."

Louise Davidson, chief executive officer of ACSI, which advises super funds on governance issues, says that Telstra nor Tabcorp has been caught up in the commission, it has been a "catalyst" for institutional investors to hold to executives to account.

"I just feel as though the things that come up in the royal commission are so deep that they are doing that," Davidson says.

Regnan, Alison George, also nominates the Royal Commission's "pervasive" influence in the minds of investors.

"It's coming to some of the thinking that is happening around the social license and the role of incentives within that," she says.

Sir Rod Eddington this week said a key lesson for the company was "quietly pushed aside rather than addressed," but he was confident that the business could win back public trust.

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"You've gotten to be welcomed by the communities and you've gotten pretty much done," Eddington said.

Another recurrent theme of Hayne's commissioner's inquiry has been accountability – and the need for consequences when things go wrong. Pay cuts – or at the very least, a loss of bonuses – are perhaps the most important consequences for executives.

But in recent years, some investors are looking for a lot of money, but they are not really "at risk," but part of the package. ACSI's annual CEO pay study reported 74 or the 80 CEOs eligible for a bonus in the ASX 100 received one.

Global investment giant State Street, which results in US $ 29 billion in the Australian sharemarket, has similar concerns.

Benjamin Colton, head of Asia-Pacific badet stewardship, State Street Global Advisors, says Australian executive pay design has changed "significantly," including some firms removing long-term incentive targets. Colton says this can lead management to make "risky" decisions to meet aggressive short-term targets.

"Colton says," This is a trend towards shifting its pay towards short-term priorities in response to cyclical changes and alarms.

Further raising the pressure on the boards is the sheer lack of wage growth for others in the community, with pay struggling to keep up with inflation.

It's all about the quantum, the structure of executive pay.

"There's a question about the amount of CEOs who are paid in my view, and particularly in a situation where you're seeing stagnation. There's a sense in the community that things are not working evenly for everyone, "says Davidson.

And it is not just on their behalf that they are under fire from their investors.

The growth of shareholder activism – which this week saw Origin Energy, NAB and Westpac review their membership of business lobby groups – may also be playing its part.

The head of responsible investment at the $ 12 billion Local Government Super fund, Bill Hartnett, says that it's a very important thing to be a captive to compensation consultant.

Yet, with a backlash, they say they are becoming healthy, because they are becoming more involved in the companies they own.

"Harnett says," It's a problem that we've seen for a long time, companies' compensation reports and their board director's appointments. "I do not really think about the performance of any company or any board."

Boards have the job of responding to these pressures, and often it comes to a head in the executive vote.

Telstra's Mullen argues. Underlining the tension, even Mullen balanced his criticism of high CEO by global market for talent.

Gordon Cairns, chairman of Woolworths and Origin Energy and a Macquarie Group director, says: "It's not a question of whether CEOs are overpaid but it's the company.

Director Lindsay Maxsted says the absolute amount of compensation is not the "main game," because investors are happy to pay for performance.

He points to Transurban, which he also chairs, where 87 percent of votes cast this month approved Scott Charlton.

"Clearly I get the point that the absolute million of dollars in a relative sense to the average wage is very high," said CEO, "very high expectations," says Maxsted.

"But the fact of the matter is a relative game, so we are talking about, are broad commercial organizations competing for talent."

What might change, if anything?

As CEO, it is also catching the eye of policymakers. Labor has promised to report to a ratio of CEO-to-employee in the United States and the United Kingdom.

When asked if governments had a role to play, Telstra's Mullen He said Australia's CEO-to-wage earner ratio of about 50 was "a lot," even if it was less than 300 times in the US and 180 times in the UK.

He then added an important qualifier – saying local companies still needed to pay to attract the right people.

It's a constant balance, on the one side .

Aside from measures that can improve transparency, exactly how can this situation be resolved?

There is general support, including from the BCA, which represents CEOs, for simpler remuneration reports that would be easier for shareholders to understand. Yet that alone seems unlikely to shift the dial on executive pay.

Directors, investors and chief executives all over the world.

Tony Shepherd stresses that boards have "absolutely no option" but to follow the guidance of the shareholders, including through the "strike" system, which he says has been a success. He is adamant it is no place for government to get deeply involved.

"I think about the rules of the game, and that's just a form of communism in my view, so that's not the answer. I think let the market work, let the shareholders express their views, make sure that boards honor the views of shareholders, "Shepherd says.

Australian Institute for Company Directors managing director Angus Armor argues companies need to design pay to suit their specific circumstances.

"Boards and other stakeholder groups, including proxies and investors, need to work together, and the result is understandable," he says.

ACSI's Davidson says there's a risk of "unintended consequences" She says the group supports simpler pay structures "in theory."

Maxsted says the debate should be about long-term incentives, which he says are most problematic for boards. He says this would be a fairly "narrow" debate that would not necessarily change how much CEOs end up getting.

"I think it is necessary to be a mature debtor, which is happening in the UK. the boards retaining discretion, then shares do accumulate for executives over time, "he says.

State Street's Colton says the "three strike" policy has been made accountable. But the board does not belong to the board, it says investors are limited in their ability to hold boards to account. In response, it is arguing for annual elections.

Whatever happens, the boards of companies on the receiving end of "strikes" have every incentive to deal with their investors concerns.

Failure to do so will leave them facing another backlash – bringing them closer to a board spill – in a year's time.

with Cole Latimer, Jennifer Duke and Colin Kruger