CEO pay has finally exceeded levels last recorded in 2007 – the last financial year before the GFC.
This return to growth after ten years of stagnation has mostly been the result of higher incentive pay: the median realised pay for an ASX100 CEO rose 12.4% to $4.36m. Since CEO pay tends to vary with earnings growth, which in 2017 was 12.6%, and TSR, which in 2017 was an average of 11.79%, a 12.4% increase appears about right for advocates who insist pay vary with performance.
While realised pay increased significantly, fixed pay did not. Median fixed pay fell 1.1% to $1.77m, while the average rose just under 1% to $1.91m.
The data is courtesy of the Australian Council of Superannuation Investors (ACSI), which released its annual survey of CEO pay on 17 July 2018. Although it is based on 2017 remuneration reports just as the 2018 disclosures are being released, the survey provides a good historical perspective on CEO remuneration trends over the last decade
The ACSI data shows that reported CEO pay increased at a compound annual growth rate of 1.3% over the 2007 to 2017 period. This compares to the compound annual growth rate in average weekly full time adult earnings (using Australian Bureau of Statistics figures) over the same period of 3.7%. Hence, average ASX100 CEO fixed pay has reduced from almost 32 times average adult earnings in FY08, to just under 23 times in FY17.
So why don’t we see CEOs joining the throngs of those protesting against stagnating wages? It could be that unlike most adults earning full-time wages in 2007, all ASX100 CEOs in 2007 have since lost their CEO jobs. Or it could be that their ASX100 successors are happy enough on a median reported pay of $4,728,890.
ACSI attributes most of the rise to “persistent and increasing” incentive payments. It pointed out that these CEOs are more likely to lose their job than their incentive. This is as would be expected, given that a performing CEO keeps his/her job, and as a consequence, earns an incentive, whereas one who is not performing, and therefore unlikely to earn an incentive, loses his/her job. Persistency would also be a function of those able to keep their job. With an annual turnover rate of 20% that is a tough ask.
The ACSI analysis also indicated that 2017 CEO incentives were near the top end of their maximum potential. While the distribution is more mixed than that, overall this is again what would be expected, given overall ASX100 and ASX200 performance during the year was the best since the GFC.
This outcome was in contrast with the ACSI survey published in the prior year, which indicated that the median ASX100 cash incentive fell 12.2% (see HERE).
ACSI bases its analysis on “reported pay” and “realised pay”. The latter excludes share-based payments expense – but includes the value of any equity that vested during the year, using disclosures from annual reports and ‘Change of director-interest’ notices. Despite some methodological issues in regard to mixing up and adding the market values of share rights settled in shares at time of vesting and the values of options and rights exercised years after vesting, the report and underlying data are a valuable addition to understanding the state of CEO pay, and builds on other reports and analyses, such as Guerdon Associates’ annual review published in February (see HERE).
The following sections discuss the elements of 2017 CEO pay in more detail.
Fixed pay increases
Median and average ASX100 CEO fixed pay continues to show little growth. Median fixed pay fell 1.1% to $1.77m, while the average rose just under 1% to $1.91m. The flatness in fixed pay appears to be primarily due to newly-appointed CEOs starting on lower pay than their predecessors. This has a drag effect on all CEO pay. (If companies benchmark to the median for similarly sized companies, and the median goes down, incumbent CEOs do not see any increases, while newly minted CEOs receive less than predecessors.)
Fixed pay for CEOs is increasing faster in smaller companies than in larger entities. ASX101-200 CEOs enjoyed stronger increases, with median fixed pay rising 10.6% to $955,688, and the average rising 0.6% to $1.04m.
Short-term incentives (STIs)
Close to one in three ASX100 CEOs received 80% (or more) of their maximum bonus during the period. This is, as noted above, probably a fair reflection of performance.
The median cash incentive awarded for an ASX100 CEO was up nearly 20% to $1.76m, the highest ACSI has ever recorded, while the median cash incentive also rose by 8.7% to $1.11m.
The median ASX101-200 CEO incentive as a proportion of the maximum was awarded at 69%, which was down on the prior year.
Long term incentives (LTIs)
The ACSI report is light on any LTI analysis. However, it does highlight the highest paid CEOs, whereby the most significant component was equity.
ACSI’s primary concern – “high and persistent” STIs in the face of failing to meet community expectations
ACSI expresses concern that the increase in pay levels for CEOs occurs at a time when public trust in business is at a low ebb, and wages growth in the broader economy is relatively low. Against this background, decisions to significantly increase incentive payments has ACSI concerned that boards have lost sight of the link between “community and investor expectations”, and the “company’s social licence to operate”.
We would argue the “investor expectations” point. The rate of remuneration strikes in 2017 was low relative to prior years. CEO pay increases, inclusive of incentives, for the most part, were aligned with shareholder returns and earnings growth.
As regards community expectations, ACSI is right to highlight the need to be sensitive in light of the Hayne Royal Commission, APRA investigations and other reports . We have already observed comments from all sides of politics that executive pay is “too high”, rather than the more politicly and economically challenging concept that regular worker pay is too low.
ACSI made the point that increasing income disparity in the current environment may have the consequence of further damaging community perceptions of business. It sees a real prospect of regulatory intervention if the “current trend” continues. This is an interesting comment in light of ACSI’s own data that there is evidence of less income disparity (see pay ratio changes cited above), a recent Australian Bureau of Statistics report that inequality has not increased (see HERE) and an earlier Reserve Bank report that indicated income inequality had reduced (see HERE).
Some may also take issue with what is meant by “current trends”. On the executive pay front, the trends are all positive. Fixed pay is subdued, in fact increasing less than that of CEOs’ employees, as it has done for over a decade. Incentive pay is aligned with performance, with alignment appearing to have continuously increased in strength over the past decade (refer to our annual reviews of CEO pay on our web site). To an extent, this improved alignment between pay and performance could be attributed to ACSI and other proxy advisers ensuring boards’ feet are held to the fire in justifying incentive payments.
But, as Australia approaches an election year with more bad press expected from the Hayne Royal Commission, it would be folly to discount ACSI concerns lest a lack of sensitivity leads to well-intentioned but poorly thought out and counterproductive prescriptive remuneration restrictions.
On ACSI’s part, this AGM season it will be looking closely at incentive outcomes. If the rationales for bonuses are not transparent, and the magnitude of incenitves does not reflect performance, ACSI will be recommending its members vote against remuneration reports at those companies.
ACSI’s focus is a legitimate concern for most boards, and all should check that their remuneration disclosures are transparent on performance standards set and rewarded. Beyond this, boards should remain sensitive to electoral ambitions, and the threat of misconstrued regulation.
This does not necessarily mean paying less for performance. An alternative that boards may like to consider is delivering more incentives as deferred equity. This will keep take home cash modest, and align pay with the interests of superannuants, most of whom are voters.
See the ACSI survey report HERE.
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