ACSI releases ASX 100 executive pay study and lobbies for change

The Australian Council of Superannuation Investors represents Australia’s “industry” superannuation funds. Last week it released its annual study of ASX 100 CEO remuneration. And, as with past studies, it calls for change in executive remuneration.

While boards and regulators should be cognisant of ACSI’s views because its members invest hundreds of billions of dollars in ASX listed companies, they are arguably more significant this year than for a decade. This is because its views on executive pay matters are being listened to more closely than usual by the federal government.

This is not just a reflection of tumultuous times and this government’s readiness to expound on the excesses of executive pay. It also reflects the long association “industry” funds have with Australia’s trade unions and, by extension, the Labor party that is now in power.

Some of the views of a key part of this government’s constituency already fit well with the government’s pre election platform (see HERE).

And the government already has reviews under way in regard to regulating banker pay (see HERE and HERE) and listed company disclosures (see HERE) .

In this article we disclose what ACSI wants and the potential implications for listed companies.

ACSI seeks the following minimum reforms to remuneration structures (shown in italics, followed by Guerdon Associates’ commentary):

“That as base salary and other aspects of fixed remuneration are (by definition) not explicitly tied to the company’s performance; companies should disclose clearly the reason or reasons behind a significant increase in base salary.”

This has already been regulated, and is part of the Corporations Act 300A (see HERE). If companies are not complying it is an enforcement matter rather than an additional regulatory matter.

“That as annual bonuses that are usually paid in cash, they should be linked to clear key performance requirements and targets and that where commercial confidentiality applies to performance objectives and targets, shareholders should be informed of the parameters adopted in the financial year for the bonus arrangements.”

This ACSI requirement is a little cryptic, but disclosure of performance requirments is already required as part of the Corporations Act 300A. That is, companies have to disclose performance requirements unless the disclosure would have potential for material harm to the interests of shareholders. If disclosure would result in material harm to shareholders it would be expected that this be explained. As remuneration reports are required to report on arrangements in the prior year, it may be difficult for directors to justify not disclosing these prior year financial performance requirements and actual outcomes. But there may be a case not to disclose qualitative measures of strategy if those strategies are still in place and confidentiality is necessary for competitive advantage. Again, as with ACSI’s prior requirement, if companies are not complying it is an enforcement matter rather than an additional regulatory matter.

“That the performance conditions for long-term incentive schemes should reward executives for contributing to long term, above average corporate performance with forward-looking dual performance hurdles which measure the Corporation’s performance on an absolute and relative basis, to be satisfied before any share options or other long- term incentive instruments vest.”

This is not currently a regulatory requirement. It has not featured on the government’s pre-election platform. It is prescriptive and inappropriate in any number of specific situations. It would fail on several counts to be effective as an incentive. It raises the spectre of potentially poor risk management. Boards would do well to be sceptical of plans with these requirements and let the Minister for Superannuation and Corporate Law, Nick Sherry know what they think. The government would do well to have its bureaucrats explain to ACSI why this would not work. And ACSI would do well to amend their requirement.

“That all grants of all share incentives to key management personnel, irrespective of whether they are newly issued or acquired on market be approved in advance by shareholders.”

ASX listing rule 10.14, which applies to newly issued shares, or rights over such shares, requires shareholder approval. The ASX has reviewed this and decided to maintain the status quo. The intent of the rule was to ensure that shareholders retain rights over any prospective equity dilution. Guerdon Associates supported this original intent when it was under review (see HERE). The Parliamentary Joint Committee on Corporations and Financial Services reviewed and reported on this earlier this year and agreed with us (see HERE). But this issue keeps cropping up, and directors should be wary, noting in their same conversation to Mr. Sherry that the current ASX listing rule serves its purpose.

“That any payments or benefits that accrue to a member of key management personnel on cessation of employment, that are greater than 12 months’ fixed pay (based on average fixed pay over the duration and service in that position) be approved by shareholders after cessation of employment has occurred.”

Currently Corporations Act 300A requires contractual arrangements to be disclosed. Corporations Act regulations on termination pay for directors already exist (see HERE). In practice this ACSI requirement would be difficult to accommodate given that executives would require these and other remuneration provisions to be contractually enforceable before accepting an offer of employment.

“That the Corporations Act require the disclosure of a dollar figure of the maximum amount that could be paid by a company, should a board exercise all its discretion in favour of a member of key management personnel on cessation of employment.”

Again, in practice this ACSI requirement would be difficult to accommodate given that executives would require these and other remuneration provisions to be contractually enforceable before accepting an offer of employment. It would be difficult to anticipate the value of any incentives that may accrue and be payable during the executive’s employment period.

“That we support the compulsory disclosure of remuneration consultants and the other arrangements they have with the company.”

Of all ACSI requirements, this is most likely to be reflected in forthcoming additions to Corporations Act disclosure requirements. This requirement featured as part of the government’s election platform. In addition, recent US congressional investigations have revealed that there appears to be a prima facie case for disclosing potential consultant conflicts of interest (see HERE). Boards should probably consider the implications of this for their company, given that it is reasonably likely that the government will require consultant disclosure.

ACSI’s review can be found HERE.

© Guerdon Associates 2024
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