Institutional Investor Dissatisfaction with STI payments – ACSI CEO Survey Results

The Australian Council of Superannuation Investors (ACSI) released its annual survey of CEO pay on 24 August. Although it is based on 2016 remuneration reports just as the 2017 disclosures are being released, the survey provides a good historical perspective on CEO remuneration trends for over a decade.

In addition, the survey reveals ACSI’s perspective on executive pay. This carries significant heft, as the Council represents environmental, social and governance (ESG) issues on behalf of 37 Australian and international asset owners and institutional investors. Collectively, these organisations manage over $1.6 trillion in assets and own on average 10% of every ASX200 company.

This article focuses on fixed pay and STI outcomes. The ACSI analyses on realised pay are founded on a methodology that may be problematic for some, so we have chosen not to report on these. However, readers can peruse these outcomes by clicking the link to ACSI’s report at the end of this article.

We also have some observations regarding ACSI’s concerns with STI pay.

Fixed pay increases

For the first time since 2011, FY16 average and median fixed pay increased for ASX100 CEOs, although the rises were relatively modest. Median fixed pay for ASX100 CEOs rose 4.4% to $1.79m (Table 13 in the ACSI report).

This year’s data might be bucking the trend by showing an increase in fixed remuneration, yet excluding FY15, this is still the lowest level of median fixed pay  recorded since 2008.

It’s important to note that boards should interpret this growth rate with caution. ACSI is not recording “same incumbent” fixed pay adjustments but rather  comparing medians in two different samples of CEO (i.e. a 2015 sample to a 2016 sample). The sample would be made up of different companies as well as different incumbents from one year to the next. Despite some overlap, it is an apple to orange comparison and will suffer from “noise”.

ASX100 CEO fixed pay has fallen in absolute terms since FY11, and relative to wages, inflation and fixed pay for CEOs in the ASX101–200. Average weekly earnings have risen 16.2% over this period compared to a 2.8% decline in ASX100 CEO average fixed pay and an 11.3% increase for ASX101-200 CEO average fixed pay.

In FY16, average fixed pay for ASX101-200 CEOs declined for the second consecutive year, falling to $1.04m (its lowest level since FY12) from $1.08m in FY15 (FY14: $1.20m). The median also declined 2.2% to its lowest level since FY11. Again, we suggest caution in interpreting these statistics, due to differing samples.

In fact, ACSI admits that changes in CEOs drove much of this decline, with the 42 incumbent CEOs (those in both the FY15 and FY16 ASX101- 200 sample) receiving fixed pay increases. ASX101-200 median incumbent fixed pay increased 5% to $870,481, and the average rose 7.2% to $1.10m.

Short-term incentives (STIs)

The ACSI report uses the word “bonus” to describe a short-term incentive (STI). To specialists in this field a bonus is a discretionary payment not derived from the achievement of a defined performance requirement. Therefore, as most CEOs’ STIs were based on specified performance requirements, Guerdon Associates has used “STI” in lieu of ACSI’s “bonus”.

In FY16, the proportion of ASX100 CEOs who did not receive an STI rose to its highest level since FY12, with 12 of 83 CEOs (14.5%) receiving no cash STI. This occurred in a year where STIs generally fell. For those CEOs who did receive an STI, the median cash STI fell 12.2% to $1.02m, although the average rose slightly to $1.31m. The median STI, as a proportion of maximum, for an ASX100 CEO fell from 75.8% to 68.6% in FY16, although over half of all ASX100 CEOs still received more than half their maximum STI in FY16.

Among ASX101-200 CEOs, STIs also appeared harder to get, as well as being much lower. At 19%, the proportion of CEOs who received no STI was the lowest it has been in the six years ACSI has collected data on ASX101-200 CEOs. In FY16, 10 ASX101-200 CEOs (13%) received no STI for performance reasons, while another five CEOs were not eligible for an STI. Of the 66 CEOs for whom data was available on their STIs as a proportion of maximum, 23 (35%) received less than half of maximum, compared to 25% of the ASX100.

STI deferral was again less common among ASX101-200 CEOs than for ASX100 CEOs. In FY16, 27% of ASX101-200 CEOs had a proportion of their STI deferred, (FY15: 28%) compared to 61% of ASX100 CEOs in both FY16 and FY15. (Guerdon Associates’ data indicates that this may be understating the extent of companies with STI deferral. However, the bases of ACSI methodology in this regard is probably based on incumbent actual pay, rather than policy disclosures, which can be obfuscated with the nature of statutory reporting).

ACSI contends that receiving no STI for performance reasons remained a reasonable indicator of CEO turnover. This appears to be based on small sample observations rather than statistics.

The average STI accrued and paid rose in FY16, in part due to an increased number of very large STIs.

Cash pay

A decline in the proportion of ASX100 CEOs who received an STI saw cash pay decrease in FY16. Average cash pay fell slightly, while median cash pay declined almost 11% to $2.60m, after spiking sharply upwards in FY15. This was driven by declines for incumbent CEOs (in office in both FY15 and FY16), whose median cash pay fell from $2.96m to $2.64m.

The 10-year trend for both average and median cash pay indicates negative or minimal growth, with average cash pay over the past 10 years falling by 1.3% per annum.

Cash pay received by ASX101-200 CEOs increased, with the median rising 6.4% and the average rising slightly.

Extreme pay outcomes and ownership

ACSI indicated that the historical data from their CEO pay survey suggests that sizeable equity holdings for a CEO are likely to be associated with extreme pay outcomes. The highest and lowest fixed pay in the ASX100 sample for the past three years has occurred at companies where the CEO has a sizeable equity interest. This appears anecdotal, and no statistics were provided.

ACSI’s primary concern – sticky STIs

ACSI’s 16th CEO Pay survey produced two key results, of which ACSI characterises as one positive, and the other less so:

  • Fixed pay for ASX 100 CEOs, although slightly higher in 2016, has remained broadly unchanged over the last decade with the average $125,000 (6%) below its 2009 peak, and
  • STIs still appear far easier to get than they are to miss out on.

A good deal in ACSI’s report focuses on the lack of STI variability, and the fact that there is more likely to be an STI payment than no STI payment.

ACSI says, “After all, a bonus is commonly understood as something paid for exceptional performance. Yet some 86% of ASX100 CEOs received one, begging the question – are these amounts truly at risk?”

The words “common understanding” is the nub of the issue. And unfortunately issuers are at least part of the problem. Disclosures frequently describe performance requirements as “stretch”.

The reality is that they are not. They are usually budget. Budget is an estimate used for planning expenditures assuming all goes to plan. There is, of course, a reasonable risk that things will not go to plan, so contrary to ACSI’s conclusion, the incentives are truly “at risk”. But it is not stretch. A board does not approve a budget’s expenditures for extreme outcomes.

The other aspect to this requires ACSI and investors to face up to the realities of human behaviour, underpinned by decades of research. Human beings are not motivated to achieve the impossible. They can, however, be motivated to focus on the possible, especially if there is a dollar in it. The more they focus on making sure they achieve what is required, the higher the probability is that they will exceed it, and the lower the probability that they will disappoint. This is what shareholders should require. Higher probabilities of meeting or exceeding expectations, and lower volatility, means a higher capacity for dividends or future growth. This, in the main, reflects what superannuation funds are investing in.

This is not to say that investors should suffer budget achievement if this is less than prior. This is something that ACSI and boards should both focus on. But the absence of volatility is not something to be worried about. It is to be welcomed.

See the ACSI survey report HERE.

© Guerdon Associates 2020
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