Figure 1: Percentage of CEOs whose remuneration increased, decreased or stayed the same

Does company size make a difference?

The largest companies awarded the smallest change in remuneration from 2013 to 2014.

Figure 2 shows actual TFR for both 2013 and 2014 (the log of market capitalisation is used to make the graph more readable) and confirms that TFR tends to have a direct and positive correlation to company size.

Figure 2: 2014 and 2013 fixed remuneration by company size

Table 4 summarises the median incumbent-weighted increases by company size groupings.

Table 4: Incumbent-weighted median increases by company size

The CEOs of the largest companies (Q4) experienced the smallest percentage change in TFR. The frequency of incentive awards was similar for both years, however, there was a significant increase in the size of LTI awards. The median same-incumbent increase in LTIs was 18%.

The CEOs of the smallest size group (Q1) experienced an increase in the size of STIs, which is a reversal of our 2013 findings, with a median increase of 9.3%. The frequency of STIs has remained consistent. Fixed remuneration increases have more than compensated for the reduction in incentive payments, resulting in a median TR increase of 4.5%

The 9.1% increase in TR for the Q2 group (second smallest) companies, is primarily attributable to a 9% increase in the median change in LTI value.

Variations across Sectors

There is significant variation in median pay increases across the various GICS sectors. Table 5 summarises median incumbent-weighted increases by sector.

Table 5: Incumbent-weighted median increases by company sector

The Industrials sector produced the lowest median increase in TFR. The Health Care sector CEOs experienced the highest median increase in TFR and the Materials sector experienced the largest increase in total remuneration. The increase in total remuneration for Materials CEOs was largely attributable to larger LTIs. The same was true in the Utilities and Financials sectors.

Most sectors show an increase in the frequency of incentive payments. Most notably, an increase in the frequency of STIs in the Consumer and Energy sectors.

Relationship with performance

Overall, increases in total remuneration appear to be related to the level of shareholder returns. Table 6 shows the average total shareholder return and ROE for the CEOs whose remuneration went down, up or stayed the same.

Table 6: Incumbent-weighted median increases and annual performance

Overall ranges of pay are steady

The range of performance pay and total remuneration has narrowed over the past two years, but is now relatively steady across the ASX300.

Figure 3 contrasts the 2014 and 2013 inter-quartile ranges for TFR, STI and LTI.

Figure 3: Inter-quartile ranges in remuneration for 2014 and 2013

Notes on methodology

CEOs were excluded if:

• Their remuneration was most recently disclosed prior to January 2014

• They were not in the CEO role for the whole of the past two financial years
• Their company was not in the ASX 300 for the whole of this period.

The following abbreviations are used in this document:

• TFR: Total Fixed Remuneration including salary, fringe benefits and superannuation
• STI: Short Term Incentives, which is pay contingent on performance measured within a 12 month period

• LTI: Long term Incentives, which is pay contingent on performance over a period greater than 12 months (typically 3 or more years)

• TR: Total Remuneration, which is the sum of the above.

Guerdon Associates applies a rigorous and consistent definition of STIs and LTIs throughout our analysis.  Therefore our results will be different from analyses reported in the media that have assumed that all equity compensation is long term, or that companies’ own definitions of ‘long-term’ are consistent across companies.  Both these assumptions are incorrect. We have also treated negative accounting values disclosed for equity grants as zero, rather than as genuinely reducing the CEO’s remuneration, to avoid nonsense situations where a CEO with fixed pay of, say, $1 million has ‘total remuneration’ of $800,000 because there is a negative $200,000 equity value disclosed.

To qualify as a LTI, an award must be performance-hurdled (to provide the incentive) with a performance period longer than 12 months (to be considered long-term). Therefore, time-vested grants of equity and retention incentives are deemed not to be at risk (i.e. not variable with performance).  Additionally, incentives with just a 12-month performance period are deemed to be STIs, even if the award is deferred for a longer period.

In 2014, there were very few instances of un-hurdled equity. One-off grants such as sign-on arrangement and IPO grants have been excluded from the analysis. Regular equity awards that form part of guaranteed pay are included in TFR. Some companies have previously included an un-hurdled element in their LTI grants, but now have performance tests on the whole grant. In these instances, the 2013 un-hurdled award has been included in the LTI for consistency.

Very small increases in fixed remuneration (less than 2.9%) are assumed to be due to variations in payroll timing or statutory FBT expenses. These are included in aggregated statistics, but when calculating the proportion of CEOs whose remuneration increased, these are assumed to have “stayed the same”.

There are two ways of estimating the change in remuneration over time.  One is to analyse the individual percentage change in remuneration (incumbent-weighted) and the other is to analyse the change in aggregated statistics, like sum or average, (remuneration-weighted). In the first case, the change in remuneration for each CEO has equal weighting in the analysis.  In the second, the changes in the remuneration of highly paid CEOs will have a stronger influence on the outcomes than the same remuneration change in a lower paid CEO.  Unless stated otherwise, we have used the incumbent-weighted method in our analysis.