ACSI’s 14th study of CEO pay in the S&P/ASX100 (ASX100), and the fourth year of S&P/ASX200 (ASX200) CEOs emphasises what ACSI calls “realised pay”.

This is CEO pay that had vested, as opposed to CEO pay that had been granted. While we would prefer better precision in ACSI’s terminology to distinguish between “realised” pay and “realisable” pay, the underlying message is that disclosures frequently fail to report on the pay value that has vested. Of course it varies from the estimated fair value of the pay granted, which companies must disclose. But ACSI’s underlying message is that it is difficult to assess remuneration policy unless you know what the outcomes of the policy are. While it could be argued that the benefit of hindsight was not available to boards when they approved an executive remuneration policy, there is a growing investor expectation that directors exercise discretion if outcomes do not correlate with performance.

The reporting of the CEO’s vested pay value not a statutory reporting requirement in Australia, although it has recently become so in the UK and US. Therefore ACSI’s researcher, proxy adviser Ownership Matters, had to piece various reporting elements together to report on “realised” CEO pay, as Guerdon Associates has done in prior research (see HERE for example). In the Guerdon Associates study it was found that what we prefer to call “realisable” CEO pay was less than the reported statutory CEO pay. This is not the case this time around for the ACSI study, or at least parts of it.

While not wanting to necessarily weaken support for the concept, Guerdon Associates would prefer better precision in ACSI’s terminology. Some may consider that terminology is not substantive in the debate re executive pay. However, as readers may have observed in Guerdon Associates’ reporting on executive pay and governance matters over the past decade, terminology can distort perceptions of the issues and the solutions. The word “clawback,” for instance, usurped the correct terms of forfeiture and malus as politicians fought for political resonance during the aftermath of the GFC. It took many submissions and presentations from Guerdon Associates and others to steer various government sponsored enquires and the ASX Corporate Governance Council to understand the pragmatic and legal issues associated with the differences between clawback and forfeiture to arrive at a sensible requirements for disclosure (for example, see HERE).

The ACSI report purports to show “realised” executive pay. It does not. “Realised” pay is when the executive has received cash from the employer directly, or has exchanged securities received as part of remuneration for cash. Instead, ACSI shows “realisable” pay. That is, it is pay that has vested and at some point may be exchanged for cash. Realisable pay does not take into account whether:

• Any vested equity is subject to a holding lock, preventing the executive from realising value
• Equity that cannot be sold because the executive has to meet a requirement to hold a certain multiple of fixed pay as shares
• Shares remain unsold, or options unexercised, because \executives are in possession of inside information
• Options or rights are subject to an exercise restriction and so cannot be exercised for shares and exchanged for cash
• The executive voluntarily chooses to retain vested securities and not exchange these for cash

Being aware of the distinction allows far more value to be mined from remuneration data. For example, there is long standing research capitalised on by active investors indicating that the extent of remuneration realised from vested securities is a good predictor of future share price performance. Other research also indicates that the extent of a CEO’s or management team’s personal wealth (with the value of securities held as a multiple of fixed pay serving as a proxy) tied up in company shares is a predictor of future growth and volatility. In fact, too much wealth tied up in company shares has been found to be inversely proportional to shareholder returns, as management becomes more risk averse.

Alas, the ACSI study limits itself, at least for this year, to totalling the levels of realisable (not realised) CEO pay.

Key findings from this year’s study include:

• The median “realisable” pay (using the correct distinction described above) for ASX 100 CEOs was $3.958 million, while the average was $5.626 million. The lowest and highest payments for this group were $657,073 and $30.796 million respectively.
• For ASX 101-200 CEOs, “realisable pay” ranged from $357,009 to $18.028 million. Median pay for this group was $1.738 million.
• Median fixed pay for a Top 100 CEO was $1.81 million, which is a 1.1% decrease from last year.
• For ASX 101-200 CEOs, median fixed pay increased by 3% to $930,000, but the median cash STI decreased by 4% to $335,000.
• Median cash STIs for ASX 100 CEOs increased by 12% to 1.07 million. Within this group, and indicative that pay is variable for performance, a small number of CEOs received an STI increase of over 90%. The average STI was $2.89 million.
• STIs for ASX 101-200 CEOs increased by 40% on average to $609,010, while the median STI decreased by 4.4% to $334,500.
• In the ASX 200, there were eight termination payments paid to CEOs that amount to over $1 million. Of those eight, the two largest payments were $13.59 million and $8.13 million.

To read ACSI’s CEO pay report, see HERE.

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