Australia is proposing some innovative steps to address concerns about executive pay. This week, the Productivity Commission released a detailed discussion document outlining a series of reforms which it hopes will improve board accountability, remove conflicts of interest and enhance shareholder engagement on remuneration.
While the Commission doesn’t consider that Australia is suffering from a systemic failure in reward setting, there is concern that the more egregious cases of ‘reward for failure’, are inconsistent with an efficient executive labour market and could reflect weak or complicit boards. Two key points drawn out in the discussion paper are that incentive pay had been ‘imported’ from the United States and introduced without appropriate hurdles. This lead to substantial pay rises in the 1990s, partly for ‘good luck’. Secondly that the increasing complexity of pay arrangements in subsequent years also may have delivered ‘upside’ unanticipated by boards.
The Discussion Draft reveals marked differences across public companies. For the top 20 CEOs, pay averages almost AU$10 million, or 150 times average weekly earnings, whereas CEOs’ pay at the smallest 500 companies averages around AU$180 000. For Australia’s largest 100 companies, executive pay grew by more than 250 per cent in real terms since 1993, before falling in 2007-08. The Commission is therefore proposing a package of changes to the Corporations Act and ASX listing rules, including:
- barring executives from sitting on remuneration committees requiring that remuneration consultants report to boards independently of management;
- prohibiting directors and executives voting their shares and any undirected proxies on remuneration issues; and
- strengthening shareholders’ ‘say on pay’ by requiring boards to face re-election if shareholders’ concerns on consecutive remuneration reports are ignored — a ‘two strikes’ rule.
The ‘two strikes’ rule would be implemented via The Corporations Act 2001 such that where a remuneration report receives more 25 per cent or higher votes against, the board would be required to report back to shareholders in the subsequent remuneration report explaining how shareholder concerns were addressed and, if not then why not. If the subsequent remuneration report receives a ‘no’ vote above a prescribed threshold, all elected board members be required to submit for re-election at either: [a] an extraordinary general meeting or [b] the next annual general meeting.
While some markets are keen to impose salary caps, the inquiry’s chairman Gary Banks said: ‘we concluded that the way forward is not to impose salary caps, which would be unworkable and have harmful economic impacts. Rather regulatory and corporate governance reforms are needed to strengthen the integrity of pay-setting by boards and ensure that they engage effectively with their shareholders.’
Shareholders will have an opportunity to make their case to the Commission at a public hearings in late October – November before a final report to government by 19 December.