AMP Capital, one of Australia’s largest institutional investors, has a long history of measuring environmental, sustainability and governance (ESG) factors and relating these to investment performance. Its latest corporate governance report identifies key ESG themes that, it believes, impact value.
Executive pay, as usual, has a place in its ESG review. This time, the size and frequency of bonuses for CEOs remains an issue, as well as the performance hurdles.
The AMP Capital report cites the annual study on executive pay in Australia, commissioned by the Australian Council of Superannuation Investors (ACSI). That research found the median fixed pay for CEOs of ASX200 companies had declined to pre-2008 levels at $1.7m in 2015.
The ACSI research also found that, in 2015, 93% of CEOs in the ASX100 received a bonus equivalent to 76% of their maximum entitlement. This implied that the majority of CEOs met and exceeded their bonus hurdles. This was the highest proportion of CEOs to receive a bonus since 2008.
This is consistent with AMP Capital’s research on remuneration trends in global listed real estate, which it commissioned in December 2016. Of 19 Australian externally managed real estate investment trusts (REITs) proxy adviser, Ownership Matters, found that only five of 79 executives received less than 50% of their maximum bonus potential. Four of these five executives were at one REIT.
That study determined that all except one REIT paid their executive teams more than 65%, on average, in 2016.
Based on Guerdon Associates research, the target payments of most REITs were at or higher than 65%. A 50% payment would be considerably under target, which would be unusual in a year that was good for REITs and their investors.
AMP Capital describes these as “remarkably persistent” bonus outcomes. We think AMP Capital means “remarkably consistent”, given that the study it cited did not consider incentive outcomes over multiple years.
Both the ACSI and AMP Capital studies did not consider longitudinal performance and incentive payments. This would have been useful to further test their hypothesis of “sticky” incentive payments, as the 2016 year was, in general, a good year for REIT investors. That is, on the face of it, it appears REIT investors and executive incentive payments were more or less aligned.
In contrast to its unstinting support for relative TSR performance measures, AMP Capital also support the use of incentives based on non-financial measures relating to corporate culture, safety, customer satisfaction etc. Relative TSR is an externally verifiable hard-edge objective measure, while the others are internal, less transparent, and not financial.
The AMP Capital perspective contrasts with the views of some other investors, as well as proxy adviser ISS and the Australian Shareholders’ Association (ASA).
AMP Capital is concerned that incentives linked solely to financial metrics risk fuelling negative culture and conduct. AMP Capital suggests that the clearer the link to long-term value creation, and the more clearly targets can be measured and articulated, the more likely it is that shareholders will support the pay structure. Companies would therefore, do well to carefully consider which non-financial performance measures to introduce, how they can be adequately measured and monitored, and how these measures can be transparently explained to shareholders.
The report also has some interesting perspectives on ethical investments, and social and environmental impacts on value.
See the AMP ESG report HERE.© Guerdon Associates 2021 Back to all articles