ACSI research finds statutory disclosures of CEO remuneration are good proxies for realised pay

Australian Council of Superannuation Investors released the 2012 issue of the annual “CEO Pay in the Top 100 Companies” report on 18 September 2012.  Except it is not about CEO pay in the top 100 companies.  Instead, it is CEO pay in the top 200 companies.  This year ACSI has extended the focus of its research to the S&P/ASX 200 to capture a broader group of CEOs. S&P/ASX200 companies are divided into two segments as S&P/ASX100 (“Top 100”) and companies ranked 101-200 in the S&P/ASX200 (“ASX 101-200”). If this keeps up, ACSI may have to consider changing its title for next year.


The study is based on 2011 financial year disclosures. After excluding the part-year CEOs and externally managed companies, the sample consists of 75 CEOs in each segment.


As for last year, ACSI has gone to some trouble to compare realised pay with the required statutory disclosures. Statutory disclosures are the accounting values of pay. This poses some problems, as it is a mish mash of some of the actual pay received and present value estimates of future pay.  The estimate of future pay is made more complex because it is the sum of promises of past pay not yet vested, plus present pay that has not yet vested, converted into an annual value by dividing by the employee’s service period. And that is not all.  Some of the estimate of future pay never changes, irrespective of whether it does actually vest, because it has the probability that it will vest built into the estimate of fair value at the time the promise is made to the executive.  But other estimates of future pay are adjusted every year in accord with a re-estimate of the likely value to vest. While this keeps accountants occupied, it is a problem in trying to make remuneration reports transparent.


In response, ACSI defines realised pay as the sum of fixed pay, cash bonus, and value of vested equity incentives that also includes gains from the exercise of options that may have vested in prior years.  But this is not a perfect solution to making pay transparent either.  Some of the executive pay that comes from exercised options that have vested in past years is the outcome of a pay policy that applied years earlier, and may relate to a performance requirement and strategy applicable then, but not now.  The independent CAMAC report to improve reporting tried to address this with recommendations to report past pay that has vested in the current year, present pay (paid for the current year) and future pay (yet to vest) (see HERE).


Strictly speaking, the realised pay and statutory pay figures are not comparable under the ACSI method.  The statutory pay refers to current and the estimated value of future pay, while the realised pay refers to current pay received, and current value of past pay that has vested.  Despite the apples to oranges comparisons, it is interesting that ACSI did not find significant differences, on an overall basis, between the two figures.  This is also consistent with the results from last year (see HERE)


Main findings of the research are that prior statutory disclosures of S&P/ASX100 CEO remuneration, on average, are close to their realized pay for the 2011 financial year and that fixed pay for held steady, but bonuses fell materially in the same period relative to the previous year.


The study compares the statutory disclosures of ten highest and lowest paid CEOs in each segment with their realised pay and finds that statutory disclosures are good proxies for realised pay. Of the 40 CEOs studied, 13 had higher realised than reported pay, 20 had lower realised pay and 7 had realised pay consisted with reported pay. 3 of the 4 groups of ten CEOs had the average realised pay consistent with the average statutory reporting of pay outcomes; only the lowest paid ten CEOs in ASX101-200 had a big discrepancy between the statutory accounts and realised pay. This discrepancy arises mostly from a single CEO in the sample with a realised gain of more than $160m from sale of previously vested options.


In a related Financial Review opinion piece, Ann Byrne, CEO of ACSI, argues for improved disclosures on assumptions behind discounts used to calculate the option values, citing the difficulty in determining the value being transferred to the executives without proper supporting evidence or disclosure.


Other findings of the study and the main comparisons with the findings from the 2010 report are tabulated below:

·         Results from 2011 show that fixed pay for S&P/ASX100 held steady, but bonuses fell materially in the same period. ACSI attributes part of this fall to improved conversation on executive pay that is taking place between boards and investors with the advent of the “two strikes” rule on executive pay.

·         In 2011 the average and median fixed pay for Top 100 CEOs both rose; with the median fixed pay increasing by 5% and average fixed pay increasing only slightly from 2010 by 0.9%. 

·         Bonuses for Top 100 CEOs fell in 2011. The average bonus in 2011 fell by 21.8% while the median also declined 2.1%. The overwhelming majority of sample CEOs – close to 90 percent – still received a bonus in 2011. 

·         The average termination payment to a departed CEO in the Top 100 sample in 2011 was $2.918 million.

·         There is a substantial gap between the highest paid CEOs of the Top 100 companies and the highest paid CEOs of the ASX101-200. This indicates that company size has a substantial influence on pay outcomes despite the fact that the role maybe more difficult in smaller companies that cannot afford the substantial management infrastructure enjoyed by major listed companies.

·         18 Exploration companies in the ASX101-200 receive lower fixed pay and bonuses (and hence cash pay) than the remaining 57 “established companies”.


The ACSI report, “CEO Pay in the Top 100 Companies: 2011” can be found HERE, and Ann Byrne’s Financial Review article, “Boards must be more transparent on executive pay”, can be found HERE.   

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