The Australian Council of Superannuation Investors (ACSI) released its annual survey of CEO remuneration in ASX200 companies on 31 August 2016. The most significant finding in this survey was that CEO remuneration had declined, with median “reported pay” down 3.1% and “realised pay” down 2%.

The survey was undertaken by proxy adviser Ownership Matters, as research commissioned by ACSI.

The survey’s version of “realised pay” includes detail on the actual value received by CEOs from their equity incentives vesting, as opposed to the accounting values required to be disclosed under the Corporations Act in their measure of “reported pay”.

There are issues with both of these methods, and they should not be used to determine whether a company’s remuneration policy is fair and equitable, or if an annual increase is justified. This is discussed further below.

Nevertheless, the findings from the ACSI survey are interesting

• Overall pay levels are down: both realised and reported ASX100 CEO’s pay were down on FY14 levels, with median reported pay declining 3.1%, and median realised pay declining 2%.
• Realised and reported pay levels have declined substantially in the ASX101-200. The median realised pay for ASX101-200 CEOs fell 18.7% to $1.41m, while median reported pay was down 14% to $1.47m.

However, caution is warranted with the ACSI headline proclaiming CEO pay is down. This basis of the headline is not on a “same incumbent” basis. That is, the increases are across two different samples – ASX 200 CEOs in 2015, and ASX 200 CEOs in 2014. These are often not the same people. Fortunately, buried in the body of the report, there is some analysis of ‘same incumbent’ differences. This analysis is likely to be more valid and relevant for boards considering CEO pay adjustments- but you will have to go looking for it.

In addition to looking at various “median” pay levels, the survey also makes use of “average pay”. Readers should be cautious of “average pay” data as it is often distorted by a few companies. In this case, ACSI acknowledges that the drop in average remuneration was the absence in 2015 of the high pay outcomes in recent IPOs that distorted prior year figures.

The study’s analyses of short-term incentives (STIs) are probably the most interesting and informative in the report, and make it a worthwhile read. In doing this, readers should not skip past the foreword that criticises the high level of STI payouts in the ASX 100 companies. This is useful for the forthcoming proxy season to understand one of ACSI’s (and Ownership Matters’) primary areas of focus. Do not ignore this message.

For the first time, the study includes data on the proportion of maximum STI awarded. The median proportion of maximum bonus awarded across the ASX100 sample is 75.8%, and across the ASX101-200 sample is 56.4%.

The study does emphasise various STI outcomes, indicating that 93% of all sample CEOs received an STI – the equal highest number in the history of the ACSI survey.

The median STI paid rose 9.2% to $1.16m, while the median STI accrued rose 5.8% to $1.6m. STIs in smaller companies seem harder to achieve. In the ASX101-200 sample, median STI paid fell 1.6% to $329,000, while one-third of the CEOs in the ASX101-200 sample received no STI, up from 21% in FY14.

As ACSI define it, “reported pay” is the remuneration reported in statutory tables. ACSI readily acknowledges this data is next to useless for understanding pay practice because it reports the amortised accounting expense of remuneration granted over multiple years.

ACSI’s “realised pay” is the market value of remuneration that vests in the financial year. This may be cash salary, the market value of share rights from STI deferred in prior years, and the market value of LTI grants from prior years, plus other sundry items.

As we have said in prior years, ACSI’s definition of “realised pay” would be more accurately labelled as “realisable pay”, given that there is no consideration of whether vested equity was sold on the day it vested for cash. “Realisable pay”, on the other hand, is the value of equity if it were to be realised for cash on the day it vested. The distinction is important, given that many CEOs are in possession of insider information which prevents them realising the value of vested equity at the time it vests.

Unfortunately, the use of realisable pay as a measure for increases or decreases in CEO pay is also not that informative, comprised as it is of payments vesting from different years.

The more valid method to compare data is to analyse ”granted remuneration”. Granted remuneration is a measure of actual remuneration granted in the year, comprising fixed remuneration, STI opportunity (including the economic value of STI deferred until another year), and the economic value of LTI granted in that year.

The analysis of ‘granted remuneration’ provides a more valid assessment of annual remuneration changes.

Readers interested in this assessment of remuneration changes for the same period, but covering ASX300 CEOs rather than ASX200 CEOs, and with more analysis on incentives, should refer to Guerdon Associates review published earlier this year (see HERE).

The ACSI survey can be found HERE.

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