Just what is the most appropriate level of executive pay and what is the best approach to aligning interests between executives and shareholders? This little gem of an extract comes from a submission to Australia’s Productivity Commission made in 2009 by Ian Crichton of CRA Plan Managers, a remuneration consultant, may provide some insight.
“I am only half joking when I say that, as a remuneration consultant, you only know the point at which your advice is appropriately balanced is when everyone is unhappy! That is, if shareholders are happy, but the Board and executives are not, then the structure or size of the remuneration package is probably inadequate or unbalanced, whereas if a senior executive is happy and the Board and/or shareholders are not, then the remuneration package is probably too high or the performance conditions are too soft, and so on.
If you extend this logic to also include Governments and the interests of the wider community, the Commission can see that there are a lot of people to make unhappy to get the balance right!
It is our view that a healthy tension should always exist between all these ‘vested’ interests. It is virtually impossible to have everyone’s interests completely aligned. What is important is that no one group is ignored and that an attempt to balance the competing interests is addressed.”
He also comments on the non-binding remuneration report vote:
“This requirement has led to tension, mostly healthy, between the Board and management and proxy advisors, particularly in regard to long term equity incentives at least in the top ASX 300 companies. While this tension has mostly been positive, it may give ‘outsiders’ and undue influence on complex and sensitive remuneration determinations. That is, some Boards may simply do what gives the least grief with proxy advisors rather than doing what is best in a remuneration strategy sense.”
This is not just an issue in Australia – the Manifest/MM&K Executive Director Total Remuneration Survey 2010 notes that:
“It is not an easy task to retain and motivate the CEO and top executives without excessive pay and also meet the other numerous desires and guidelines of investors. Remuneration Committees are struggling to walk the fine line between incentivising their CEOs with tough targets, and motivating and retaining their services. Many Remuneration Committees seem loath to upset their CEOs and this results in targets that are easy to attain, lower than market expectations and incentive plans that focus on short term objectives.”
Voting patterns in the UK suggests that some companies are ignoring consistent annual dissent levels of over 20% and seem unperturbed as long as the remuneration report vote is passed. So what level of dissent should we consider to equate to a “healthy tension” and at what point should alarm bells ring for Remuneration Committees?
Further Reading
CRA submission to Productivity Commission
Manifest/MM&K Executive Director Total Remuneration Survey 2010
Last Updated: 18 August 2010