As late night TV ads say: “Wait. There is more!” Further scope for political action on executive pay
27/07/2012
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Risk management requires board remuneration committees to be aware of what could await them around the legislative corner. Disclosure of executive remuneration invites politicians seeking to improve their poll numbers to focus on more compliance hoops for boards to jump through, in order to prove they are being tough on egregious pay practices. 

As a guide to the sorts of executive remuneration ‘reforms’ Australian directors may face, Guerdon Associates provides updates on developments in other countries that could be adopted by Australian governments.

One interesting development goes beyond public company executive pay governance, potentially disrupting the usually calm executive remuneration waters of private companies.  After a phase-in period, the US government now requires all contractors for public sector projects exceeding $25,000 to provide details of their executive pay.

Given the highly partisan nature of US politics, it is interesting that the legislation passed both houses of the US Congress with support from both sides.  Australia saw something similar with the 2 strikes law, while it is likely that the UK binding vote on executive pay (See HERE) will receive support from both sides there too.

The imposition of pay disclosure requirements on private companies contracting for government work is an interesting twist that many would say does nothing but add red tape.  The contracting companies have given numerous reasons why providing the required pay information is not a good idea, among them:

·        The information is outside the scope of the taxpayers’ interest and will have no practical use.

·        Publishing executive compensation information will create discord, envy, and turnover.

·        It could impact critical working relationships.

·        Most commercial companies lack the required systems to calculate and track the required information for prime contractors and their first-tier subcontractors.

·        The requirements will be burdensome on small businesses.

·        This type of information is not currently disclosed to the public, even pursuant to Freedom of Information Act requests.

·        The disclosure may translate into safety issues for the executives, their families, and potentially, U.S. government personnel outside the United States. Executives or their families could be subject to extortion, blackmail, or kidnapping as a result of these disclosures.

·        Disclosing compensation information will create risk that a company may lose its key personnel to “raiding” by competitors.

·        The information could discourage some contractors and subcontractors from working for the government. By implication, it then could deprive the government of access to cutting edge technologies and ideas and reduce competition.

·        It could jeopardize a contractor’s competitive position.

·        No process exists to ensure accuracy in reporting executive compensation, either to verify or monitor the accuracy of the information.

·        All contractors, whether large or small, are required to provide the requested compensation data on the Central Contractor Registration.

·        Total executive compensation is already being reported to the government annually through an incurred cost submission.

·        It is “pure politics.” 

In response to feedback on the new regulation, the public sector regulators charged with its implementation more or less said “it is out of our hands as it is the law passed by our politicians”.  See HERE. 

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