It is difficult to ascertain the extent that turnover is the result of executive pay limitations, given boards are loathe to admit this. Recruiting difficulties are also not transparent.  But a recent example suggests if regulation is taken too far it can encourage executives to move industries.

The example emerged from Ireland. The Bank of Ireland has lost its CFO to an opportunity outside the Irish Banking sector.  The Bank of Ireland attributed the move directly to the competitive disadvantage posed by remuneration restrictions applying to the banking industry following bailouts in that market.  Ireland restricts bank executive pay to €500,000.

A key element of the feedback surrounding the yet to be launched CPS511 and FAR regulations is the lack of level playing field posed in particular by deferral requirements. That is, the regulation makes it difficult to attract and retain skills and experience that are transferable across industries. It also puts listed entities at a disadvantage to unlisted competitors, in that unlisted competitors can overcome regulatory barriers by simply eliminating variable remuneration, or paying more, whereas listed companies are constrained by proxy adviser and investor requirements from doing the same.

You can read our previous articles on the topic HERE and HERE.

As mentioned in our earlier newsletters, deferral requirements can be circumvented by doing away with variable reward altogether and is a door that has been left open by the legislation drafting. This would be a logical and rational response by boards of entities subject to the regulations, constrained only by investor requirements that pay be variable with performance for executives in listed companies.

In the UK we observed effective increases in fixed pay in response to European regulation limiting variable pay to 2 times fixed pay.  We expect that over time we may observe a similar response in Australia. Given that other aspects of regulation aim to reduce excessive volatility such a “utility” type of trend in pay would not be inappropriate.

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