CPA Australia review lays bare board pay decisions
09/10/2017
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The independent review of CPA Australia’s remuneration by Ian McPhee AO PSM, Su McCluskey, Maryjane Crabtree and Professor Bob Baxt AO found that the board continued to increase former CEO Alex Malley’s salary despite advice that his remuneration was well above the 75th percentile of comparators.

The analysis by the independent panel in its preliminary report is a case study for company boards on the role of benchmarking in the remuneration process. Some of the key lessons for directors include:

  • Ensure the comparator group is appropriate in the context of the role(s) being benchmarked. While this may seem a statement of the obvious, it is critical for setting the remuneration.
  • Understand the basis on which the benchmarking is carried out.
  • Remember it is the position that is being benchmarked, not the person.
  • If the benchmarking advice is not to be followed, be very clear why that is the case.
  • Recognise that such advice may become public in any number of circumstances. In fact, assume that at some stage there may be full transparency on all board and executive remuneration matters.

Report findings

The CPA board had considered the appointment of CEO Alex Malley as a successful one, according to the review panel, because of the increased brand recognition he had brought to the organisation. Indeed, the review acknowledged that:

“…CPA Australia has grown in size, global footprint and revenue. It has acted as an advocate for the accounting profession nationally and internationally. Also, it continues to provide a valuable range of professional development and networking opportunities for members. In particular, CPA Australia has been attractive to many younger and prospective members due to strategies that were adopted. It has built profile and recognition as a strong brand, despite the fallout from recent events.“

Yet the independent panel found that Mr Malley’s pay was high in comparison to member-based and private organisations. An external review conducted in 2013 by Hay Group had advised that the CEO’s pay was 35% above the 75th percentile of comparators.

The CEO’s remuneration continued to rise. The panel’s report contains a figure comparing base salary to revenues, membership numbers and the Australian average wage. Over the period of 2013 to 2016, the growth of the CEO’s base salary accelerated, reaching 20% in 2016. The growth in the other metrics remained below 5% per annum, except for revenue, which recorded an increase between 5% and 10% in 2015.

The independent panel noted that the external remuneration review had advised it would be reasonable for the CEO to be paid above market level if the board had a high opinion of his individual contributions. The advice stated a salary increase of 3% could be offered in 2014 to maintain a competitive position.

There was no information provided in the external review as to which organisations had been used as comparators (301 executives were included from 79 organisations). The panel recommended the appropriateness of these benchmarks be reviewed and that CPA ensure the benchmarking of employee remuneration include member-based organisations and/or organisations “relevant to CPA Australia’s context”.

CPA’s executives were found to be paid more than their counterparts in comparable organisations when remuneration from CPA Advice was taken into account. The panel did, however, state that the pay might not be considered unreasonable when considered as a percentage of total revenue as compared with other member-based organisations.

The CEO’s $4.9m termination payment, equivalent to three times base salary, was singled out for special attention, with the review noting it was “well above” what would be considered standard. The review recommended the organisation confine itself to more conservative arrangements, pointing to the 2009 changes to the Corporations Act (Section 200B(1)) that limit the termination payments of the CEOs of public organisations to 12 months base pay unless shareholder approval is sought.

In terms of the board’s remuneration, the independent panel stated that it was above the expectations of many members and also above those of a sample of member-based organisations with similar operations, revenues and or member numbers.

It found that the Directors received higher remuneration than the member based organisations, with pay comparable to a listed company. The review panel noted that a listed company is expected to face greater shareholder scrutiny, compliance obligations and risks arising from its operations.

Considering aggregate remuneration, it found that the CPA Australia’s remuneration alone was on par with that of Australian Super that has more than $100b of assets under management.

The panel found that the board had defaulted to minimum disclosure where possible. While this is not unusual for organisations of its kind, the board had been wrong-footed by changing community expectations.

“Best practice governance is for an organisation to be transparent and communicate clearly to stakeholders,” the panel stated. “This is especially true for member-based organisations, where the organisation exists for members’ benefit.”

Many similar organisations to CPA Australia have now disclosed their CEO’s remuneration.

The report can be found in full HERE.

© Guerdon Associates 2020
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