Australia: executive remuneration - Productivity Commission discussion draft published

The Productivity Commission has published its discussion draft Executive Remuneration in Australia. The Commission was asked by the Government to consider, inter alia, the effectiveness of the existing framework for the oversight, accountability and transparency of remuneration practices in Australia. The Commission is recommending changes concerning remuneration committees and the consequences of the 'say on pay' shareholder vote. 

The draft's overview contains the following key points (the draft contains much more detail and provides an excellent overview of the issues):

• Strong growth in executive remuneration and instances of large payments, despite poor company performance, have fuelled and continue to fuel community concerns that executive remuneration is out of control.
• Executive pay for larger companies appears to have grown most strongly from the mid-90s to 2000, and increased by over another 50 per cent in real terms to 2007.
• Remuneration fell in 2007-08, but it is unclear whether this decline has continued. Virtually all recent growth has come from performance pay.
• In practice, executive pay varies greatly across Australia’s 2000 public companies. For the top 20 CEOs, it averages almost $10 million (150 times AWE) compared to less than $200 000 for CEOs of the smallest companies (3 times AWE). Generally speaking, Australian executives appear to be paid in line with smaller European countries but below the UK and USA (the latter being a global outlier).
• Globalisation, increased company size, and the shift to incentive pay structures have been major drivers of executive remuneration increases — companies compete to hire the best person for the job, and try to structure pay to maximise the executive’s contribution to company performance.
• However, some trend and specific pay outcomes appear inconsistent with an efficient executive labour market. Incentive pay ‘imported’ from the United States and introduced without appropriate hurdles led to substantial pay rises in the 1990s, partly for ‘good luck’. Increasing complexity in pay arrangements in subsequent years also may have delivered ‘upside’ unanticipated by boards. Large termination payments could indicate compliant boards.
• Instances of excessive payments and perceived inappropriate behaviour can reduce public confidence in the corporate sector and impact on equity markets. But the way forward is not to by-pass the central role of boards by capping pay, which would have adverse impacts on the economy.
• The corporate governance framework should be strengthened, including by: [a] removing conflicts of interest through more independent remuneration committees, and improved processes for use of remuneration consultants; [b] promoting accountability and engagement through enhanced disclosure and strengthening the consequences for boards of shareholders’ ‘say on pay’".

With regard to this final point, the Commission recommends:

The Corporations Act 2001 should be amended to require that where a company’s remuneration report receives a ‘no’ vote of 25 per cent or higher, 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. If the company’s subsequent remuneration report receives a ‘no’ vote above a prescribed threshold, all elected board members be required to submit for re-election (a ‘two strikes’ test) at either: [a] an extraordinary general meeting or [b] the next annual general meeting".