In July the Australian Council of Superannuation Investors (ACSI) published its latest survey of CEO remuneration based on FY21 disclosures including companies with 31 December financial year ends. The ACSI review is a useful complement to Guerdon Associates’ FY21 CEO remuneration review published in February (see HERE).

The main points arising from an analysis of the ACSI report and our earlier analyses from February shows that CEO pay suffers from a malaise not dissimilar to that of lower paid occupations. In fact, while the level of CEO pay is much higher than the average wage, CEO salaries have declined for 10 years. Including incentives, median and average ASX100 CEO reported pay (total pay according to Australian regulations) has been flat over the 10 years to FY21, suggesting that after inflation, total pay has also declined.

CEO pay is also volatile, and far less reliable than the pay of most other occupations. The median ASX100 CEO annual incentive paid was 76.7% of maximum, the highest in the seven years the ACSI study has been collecting data. The median annual incentive for the ASX101-200 CEOs was even higher at 86.3% of the maximum and again the highest in the seven years of the study. But these incentive payments followed from the pandemic FY20 year of lowest payouts ever recorded.

While the median ASX100 CEO annual incentive paid increased to $1.76 million, the higher incidence of annual incentive deferral in the asx100 has kept the median CEO cash annual incentive below $1.2m since 2009. Annual incentive deferral is lower and less frequent in the ASX101-200 with the median cash annual incentive outcome closely tracking the ASX101-200 CEO annual incentive median of $885,177.

Against this backdrop ACSI noted that boards are considering retention payments for senior executives often in situations where existing incentives have failed to vest and have telegraphed added scrutiny on behalf of investors where that is the case. This has been the story with every downturn from 2005 since the say on pay was introduced. We would expect the incidence to continue to decline because of ACSI’s and other proxy advisors’ disdain for the practice.

The retention of CEOs as advisers in a non KMP capacity after stepping down from the CEO role has been again highlighted by ACSI who by inference would prefer it to be disclosed as remuneration.

A summary of ACSI’s findings follows.

Realised pay

Realised pay is where many focus and is an indicator of the pre-tax cash that could be realised by a CEO including vested equity-based incentives. ACSI values share rights as at the vesting date, but options when they have been exercised. As we have noted in the past, this is an inconsistency between the treatments that could be addressed either using an intrinsic value at vesting or fair value at vesting.

While the report tabulated 1 year and 5 year TSR for each CEO, ACSI provides no statistical analyses to indicate the strength or otherwise of the relationship between realised pay and TSR.

Reported pay

Reported pay is the data provided in the statutory table (accounting standards) format and is a like-for-like comparison of the pay elements.

Reported pay includes cash annual incentives which rebounded in FY21 and the accrued value of equity incentives which were reversed at many companies in FY20. As expected given the rebound in incentives reported pay recovered to pre-pandemic levels where the:

• ASX100 was around $4.6m at the median and $5.0m average broadly in line with the FY19 outcomes and flat over the ten years to FY21, and
• ASX101-200 was around $2.2m at the median and $2.45m average (3.9% p.a. growth over the 10 years).

Fixed remuneration

Increases in fixed pay from FY20 were largely due to the unwinding of temporary Covid related pay cuts and increased leave accruals as we all remained confined as a result of border closures and lockdowns.

The overall assessment was that long-term ASX100 CEO median fixed pay has fallen by 0.6% p.a. and average fixed pay by 0.8% p.a. over the 10 years FY11 to FY21.

Over the same 10 year period CEO fixed pay for the ASX101-200 has increased in line with inflation. The median by 1.7% p.a. and average by 0.9% p.a.

ACSI attributes the difference due to the greater scrutiny of the household name companies in the ASX100 with no ASX100 CEO now receiving fixed pay above $3 million, Wesfarmers and the big four banks previously being ‘comfortably’ above that level. ACSI at the same time draws the conclusion that CEO pay is ‘often driven up by benchmarking to peers’ noting that the fixed pay of the four major banks are around the same at $2.5m (including leave accruals). A counter view could be taken that benchmarking has actually served to constrain fixed pay for the major bank CEOs given the recalibration below $3m.

The data analysis is laid out in the report though as a summary, CEO fixed pay in FY21 for:

• ASX100 was around $1.8m (median and average); and
• ASX101-200 $1m (median and average).

Short term incentives

It is no surprise that the median STI (as a proportion of the available maximum) rebounded in FY21 to 76.7% from record ‘Covid’ low of 31%. The rebound delivered the highest outcome in the 7 years that the data has been collected.

The other highlights are:

• Annual incentive outcomes of zero fell to 7% from the FY20 high of 31%, Alan Joyce being the only ASX100 CEO receiving zero in both years.
• Six ASX100 CEOs received a maximum annual incentive in FY21 (FY20:3).
• Sixteen ASX101-200 received a maximum annual incentive in FY21 (FY20:4)
• Three CEOs received maximum STI outcomes for three consecutive years.

The rebound in dollar terms delivered:

• ASX100 CEOs median of $1,758,000 and average $2,313,599
• ASX101-200 CEOs median of $700,000 and average of $885,177

Termination payments

Key observations were:

• The number of terminations increased to 17 in FY21 (FY20:16) with 12 being above $1m (FY20:10)
• The total cost of shareholders is comparable at around $32.05m in FY21 compared to $33.17m in FY20.

ACSI calls on boards to be more disciplined in how they remunerate departing executives, particularly those under a cloud.

To view ACSI’s full report, see HERE.

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