ACSI’s annual review of CEO pay
04/10/2019
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The Australian Council of Superannuation Investors has released its most recent CEO remuneration report.

Fixed Remuneration

ASX 100 CEO median fixed remuneration increased 1% year on year, continuing a trend of modest pay uplifts. The average decreased 1.3% year on year. ASX 101-200 CEO median fixed remuneration decreased 1.9% year on year. The average decreased 1.5%.

This compares with the Australian Bureau of Statistics annual increase in average full time earnings of 3.0% (see HERE) .This is consistent with the long term trend whereby ASX 100 CEO fixed pay has increased less than average full time earnings each year since 2009.

Realised pay

ACSI’s definition of “realised pay” includes the market value of options when options are exercised (i.e. the difference between market price and exercise price) plus the market value of shares on the day that share rights (zero exercise price options – ZEPOs) vest. This is different from most definitions of realised pay, which includes the value realised on all options when they are exercised, including ZEPOs, given ZEPOs may not be exercised at vest date. “Realisable pay”, on the other hand, is the value of equity if it were to be realised for cash on the day it vested.

Unfortunately, the use of realisable or realised pay (take your pick) as a measure for increases or decreases in CEO pay is also not that informative, comprised as it is of payments vesting from equity grants made in different years.

Average realised pay (using the ACSI definition) for ASX 100 CEOs fell in FY18 to $5.66m from $6.23m. Median realised pay did, however, increase from $4.36m to $4.50m (3.2%).

The average realised pay remains significantly above the median realised pay for all years the study has been conducted. This is to be expected as realised pay is intended to reward CEO and company performance – there will be winners and losers, such that some CEOs who perform and whose company’s share price increases will have substantially larger realised pay amounts than others. If the grant was above benchmark to begin with, the sizable nature of the reward is compounded by performance.

The median realised pay for ASX 101 -200 companies fell 1.1% to $1.74 million, while the average rose to $2.56m from $2.26m. The average was driven by an increase in CEOs realising over $10 million from significant increases in company share price.

Reported pay

Both median and average reported pay reduced for ASX 100 CEOs. Median fell from $4.73m to $4.57m and average fell from $5.54m to $5.12m. There is little that can be deduced from this aggregate figure. Since fixed remuneration has increased, the decrease could indicate:

  • Lower short-term incentive awards
  • Lower LTI grants
  • More difficult market performance hurdles
  • Higher level of CEO turnover

Median reported pay for ASX 101-200 CEOs increased from $1.88m to $2.03m and the average also increased from $2.17m to $2.32 million.

Interestingly, the median reported pay for ASX 101–200 CEOs was above the realised pay (though the average reported pay is below the average realised pay). This could indicate that ASX 101-200 CEOs are receiving higher prospective grants that are yet to be realised or that the actual number of securities vesting is lower than expected.

The report also looked into the CEOs with the most understated pay in terms of reported pay versus realised pay. In the highest case of understatement, the difference was 10 times – not unexpected given the nature of the pay. Realised pay is looking backwards and includes share price appreciation, reported pay is looking forward, is amortised over service and involves a discount for the probability of instruments vesting. Numbers can even be negative – a severe understatement of pay. Of course, reported pay can also overstate as realised pay can be zero.

The ACSI report noted that the lumpy grant structure more prevalent in the ASX 101 – 200 companies (periodic large grants rather than smaller annual grants) led to some executives going through a cycle of having their pay under or overstated.

The whole analysis is a lesson on the perils of relying on statutory values for benchmarking LTI (see HERE). Realised pay would not be much better.

Short term Incentives

The report has again focused this year on the low number of CEOs who were eligible for an annual incentive (labelled by ACSI as “annual incentive”) and did not receive it. Of the 158 CEOs in the sample, 147 were eligible for a short term incentive and 140 received one. In the ASX 100, only one CEO who was eligible for a short term incentive did not receive one. This implies it is more likely for ASX 101-200 CEOs to receive no annual incentive.

As we have noted previously, high annual incentive payments year after year are a red flag for proxy advisors that boards should note in the coming proxy season and take some effort to explain. However, note that some proxy advisers and investors do not consider rewards for sustaining returns and reducing return volatility as particularly valid.

Half the sample received more than 70% of maximum for both the ASX 100 and ASX 101-200. While this sounds like a lot, since the target annual incentive payment is generally around 70% of maximum and this normally is paid if the business meets budget, this is really saying that half of the ASX 100 companies met budget or their expected performance. If the company did not meet budget then certainly a below-target payment would be expected, with the drop below the 70% level reflecting the extent to which the company undershot budget.

Only five CEOs received 100% of their maximum.

The “no budget” mindset clique would have executives paid zero if they did not meet their targets, however, this is cliff vesting and is risky practice that can encourage executives to try kamikaze do or die operations to get their pay over the line or give up part way through the year.

The median ASX 100 cash annual incentive reduced from $1.1m to $0.93m. The average also decreased from $1.28m to $1.08m. The median awarded annual incentive (which includes equity) declined from $1.76m to $1.61m and the average declined from $2.30m to $2.00m.

ASX 101-200 annual incentives were much more modest and, ACSI notes, more variable. The median cash annual incentive increased from $0.36m to $0.38m and the average reduced from $0.57m to $0.48m. The median awarded annual incentive reduced from $0.52m to $0.42m and the average reduced from $0.64m to $0.58m.

All of these numbers recorded declined, which ACSI attributes mainly to lower STI opportunities for new entrants, however, given that same incumbent STI awarded also reduced at the median (see next section) the reductions also reflect lower award amounts for tenured executives.

Same incumbent pay

One thing to note about the ACSI report is that it reports a full population of CEOs, as long as the company they are leading was in the ASX 100 or ASX 101-200 in the current and the prior year (81 CEOs for the ASX 100 and 77 for ASX 101-200 companies). That is, the data includes freshly minted CEO incumbents along with those who have been in the role for a long time.

This captures the state of the market, and the percentage change of the state of the market year on year. However, it is not an indication of how much the remuneration of an individual CEO who has remained in their position has increased.

Guerdon Associates conducted a similar analysis in February that also includes a same incumbent movement analysis (see HERE) . 

The ASCI report can be found HERE

© Guerdon Associates 2021
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