Remuneration for externally appointed executives from offshore
10/09/2018
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A benchmarking study by the University of Melbourne indicates that on a global basis Australian executives are paid under the market rate. The one exception is small mining companies.

The study analysed the remuneration for each of the top 200 companies by market capitalisation for the 2017 financial year and that of five global peers. It found 76% of ASX listed companies paid their CEOs below the levels of their global peers.

The five peers were selected based on their market capitalisation, sector and industry classification.

The relative pay of Australian CEOs to global peers’ average ranged from a low in the healthcare industry of 34% to 96% of the average at engineering and accounting management (comprising mainly construction and mining services companies).

Metals and mining CEOs received pay at 85% of global peers. In the light of the Hayne Royal Commission and damning reports from ASIC, APRA and proxy advisers that put the finger on bank pay practices, Depository Credit Institutions and Depository institutions (i.e. banks) received 66% and 62% of global CEO average pay respectively.

Oil and Gas’ CEO pay as a proportion of global peer average was 52%, while Insurers (under review this week at the Hayne Royal Commission) were at 49%.

Methodologically, there are issues with using market capitalisation as the only sizing variable, and the statutory reported pay is arguably not a particularly valid measure. Five peers is also a relatively small group for benchmarking purposes.

Nevertheless, it does raise issues and questions. Some of these are asked by the study. For example, are Australian CEOs good value, in terms of returns generated? (Guerdon Associates observations are yes, probably, given the ASX 200 returns on a risk adjusted basis over 30 years exceed that of most companies on overseas comparable indices.)

The study did not attempt to answer this question, as it would require an examination of value provided by the CEO. It explicitly states that its findings do not mean Australian CEOs are underpaid. It could well be that global CEOs are overpaid.

There may be some truth to this if one reviews the asymmetry of some governance systems. For example, Australia is the only country with the two strikes law (although South Africa is doing something similar). Its majority independent boards with independent chairmen tend to not suffer long tenures of underperforming CEOs compared to other countries. Sweden, another country with relatively conservative CEO pay, has external investor and worker representatives on board remuneration committees. But the highest paying country, the USA, does not require majority shareholder votes for a director appointment to be confirmed, chairmen CEOs who effectively control the appointment of fellow directors , have longer serving CEOs, and has relatively limited shareholder rights.

The study’s explanation for the global – Australian CEO pay discrepancy is that many Australian companies do not compete in the global market for talent and therefore can depart from global benchmarks. (Which the authors state is consistent with earlier research findings.)

However, this insularity raises issues. ASX 200 operate as oligopolies. A large company seeking an external executive appointment has a choice of three or four local candidates, with the only other alternative being an offshore appointment. Yet, proxy advisers and local investors protest at the levels of pay required to attract an external appointment. Incredibly, they also object to relocation allowances to keep an overseas executive whole in terms of post tax income or support a family still in the home country. Anecdotally, we have observed many instances where offshore candidates are rejected purely on remuneration grounds, even though such an expense is not material to a company’s operations. It is instances like these where a directors’ duty of care may conflict with reputational risk and loss of tenure due to the exaggerated power of the two strikes law.

See the University of Melbourne report HERE

© Guerdon Associates 2020
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