Remuneration report votes are not so much about executive pay. It is more about performance.
15/09/2013
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Australia is entering into the 3rd AGM season with the ‘two-strikes’ rule on the remuneration report. Under this law, if 25% or more of votes cast at the meeting are against the remuneration report, the company may be required to hold another general meeting for a vote to ‘spill’ all non-executive director positions.

In the last 2 seasons, and indeed since the advisory vote on the remuneration report was introduced for ASX listed companies, there has been a discomforting fickleness with the outcome of many votes. Why is it that some companies and their boards get away with questionable pay practices, while others with seemingly few executive pay issues get slammed with a strike? Several of us with who monitor executive remuneration, company performance and governance have long suspected that vote outcomes have just as much, if not more, to do with company performance as with egregious pay practices. The problem has been that the sample size in Australia has been too small to come to any definitive conclusion.

Well, look no further.

A US study by the Conference Board conducted two experiments simulating say-on-pay votes. This study strongly supported what most executive compensation professionals have recognized since the inception of shareholder say on pay voting: Shareholders only care about CEO pay when shareholder return performance is below average.

As long as company performance was above average, shareholders supported CEO pay regardless of whether it was high or low.

However, when the company underperformed relative to the market, then shareholders were much more likely to vote “no” on resolutions for CEO pay. The findings suggest that when the probability of a “no” vote is high (when the recommended CEO pay is high and the company is underperforming), the board should either reconsider the pay or take steps to mitigate a no vote by engaging with shareholders on the rationale behind the CEO’s pay.

An examination of failed remuneration votes found that these companies underperformed their peers in total shareholder returns (TSR). Results uncovered some additional important findings. Company size was a relevant factor – companies that failed to receive support were smaller (in terms of assets) than both those that received a simple majority and those that received a large majority. This may also be reflective of the level of stakeholder engagement for smaller vs larger companies.

Turning to ROA and ROE, significant differences exist between companies that received a large majority and those that did not, but there are no significant differences between companies that failed the vote and those that received a simple majority. This suggests that performance does factor into the outcomes of remuneration votes.

But remuneration report voting does not necessarily support symmetry. That is where there is high performance there is high pay and low performance low pay. Shareholders do not seem to care if there is high performance and low pay.

A follow on simulation study instructed participants to behave as shareholders and vote on remuneration. First, “shareholders” overall were no more likely to reject high CEO pay than low CEO pay. This was unexpected, as recent public ire over high CEO pay led experimenters to believe that a substantial increase in CEO compensation would meet strong resistance. Accounting for company performance provided illumination. The participants in the study were significantly more likely to reject high CEO pay relative to low CEO pay only if company performance was poor. CEO pay exhibited absolutely no effect when company performance was strong.

The conclusion is akin to Bill Clinton’s comment regarding his election prospects that it is the economy (stupid!) that will determine the outcome. Likewise, with company directors and the Australian two-strikes rule, it is total shareholder return that is the main influence on whether there will be a board spill, an election and a continuing board seat.

See more about the research HERE.

© Guerdon Associates 2021
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