ASX 300 CEO incentive remuneration bounces back from COVID impact
07/02/2022
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It is once again time for GuerdonAssociates’ annual review of pay increases for Chief Executive Officers (CEOs) and Managing Directors (MDs) who led ASX 300 companies in the past 2 reporting periods.

Summary

Our annual review indicates that incentive targets were “right-sized” after the initial pandemic year wiped out many executive incentives.

The sample consists of 171 ASX 300 CEOs who served two full years over the FY2021 reporting period. Remuneration data was sourced from GuerdonData®, and total shareholder return (TSR) was sourced from Bloomberg®.

The median CEO total remuneration (TR) increased by 15.8%. This can be largely attributed to sharp increases in variable remuneration with STI and LTI having median increases of 24.6% and 19.4% respectively.

ASX 300 CEO fixed remuneration increases were less than increases for the general population. The median increase in CEO total fixed remuneration (TFR) was 0.9% over the 2021 financial year, whereas the Australian Bureau of Statistics Wage Price Index rose by 2.2% over the year to September 2021.

In past analyses pay movements lagged TSR outcomes. However, last year saw decreases in TSR and TR and this year both TSR and TR increased, with a median TSR outcome of 32.4% and a median increase in TR of 15.8%. A comparison of company TSR and TFR movements shows most CEOs who had an increase in TFR were from companies which experienced an increase in market capitalisation. The inverse is not true, and there were several CEOs who experienced an increase in TFR even though the company had negative TSR.

Longitudinal trends

Total remuneration (TR) is the sum of total fixed remuneration (TFR), short-term incentives (STI) and long-term incentives (LTI).

While the median increase in ASX 300 CEO total remuneration has been trending downwards over the last four years, this year saw an increase instead, with more than half the CEOs experiencing an increase of more than 15.77%.

Figure 1: Total remuneration median changes since 2013

Both STI and LTI reflect statutory disclosures, which includes the amortised value of deferred compensation and share-based payments expense when incentives are delivered as equity instruments.

The table below shows the median year-on-year change in each remuneration component over the last 3 years (see HERE for 2018-19 an HERE for 2019-20.

Table 1: Median change in ASX 300 CEO remuneration

FY2020-21 saw a median increase in TR of 15.8%, a significant change from 1.0% and -2.3% in the prior 2 years.

The significant increase is largely attributed to variable remuneration with payment of STIs and the increased likelihood of vesting for on-foot LTIs in FY2020-21. This contrasts with the prior year’s cancellation of STIs and reduced likelihood of vesting for on-foot LTIs.

Figure 2 shows the average and quartiles of the dollar value of each CEO remuneration component.

Figure 2: Distribution of ASX 300 CEO remuneration by remuneration component

The average and interquartile ranges of TFR remain largely unchanged with a small increase in the average and 75th percentile. STI and LTI both saw increases across the board for averages and quartiles. The increases in variable pay and TR more than compensate for the decrease in the TR 75th percentile seen last year.

Component changes

Figure 3 shows the proportion of CEOs that saw a year-on-year increase or decrease in each remuneration component by more than 1%, or a change within 1%.

Figure 3: Changes by component of pay

Half of the sample experienced an increase in TFR, while 19% experienced a decrease. This decrease is down from 27% in the prior year.

Overall, more CEOs received an increase in variable remuneration. In the prior year most saw a decrease.

The majority (71%) of CEOs saw an increase in STI, nearly double the 36% in the prior year. Decreases declined from 62% in the prior year to 25%.

Most CEOs (62%) saw an increase in LTI, up from 48% last year.

Three quarters of CEOs saw an increase in their total remuneration with just 19% seeing a decrease this year. This is a significant change from last year which saw 42% experience an increase in total remuneration and 53% experiencing a decrease.

By Company Size

Table 2 shows the median change in remuneration and TSR based on the 30-day market capitalisation quartiles, as of 30th of September 2021.

Table 2: Median % change in remuneration and TSR by market capitalisation quartiles.

CEOs of companies in the second and fourth market cap quartiles saw the largest median increases in TFR of 1.7% and 1.3% respectively.

The top 50% of CEOs of companies by size saw the largest median increase in STI. The top quartile of company size STI increase of 28.8% contrasts with the prior year which saw a median decrease in STI of 36.9%.

CEOs of all companies saw a median increase in LTI of at least 15.8% with CEOs of companies in the lowest quartile by company size experiencing the largest median increase in LTI of 24.0%.

Across all quartiles there was a median increase in TR of at least 13.7% with the smallest company CEOs seeing the largest median increase of 17.9%.

By Sector

Table 3 shows the median change in remuneration and TSR across the different sectors.

Table 3: ASX 300 GICS sector breakdown of median TSR and change in CEO pay

The sector breakdown shows how each industry is recovering in the aftermath of COVID-19.

Most sectors saw an increase in TR.

The Communication Services sector saw the largest increase in TR of 50.5%. The increase was largely driven by an increase in STI. The sector also had the second highest median TSR increase or 46.1%.

The Energy sector saw a decrease in TR of 16.4% largely due to a median decrease in STI of -67.7% further to the median decrease of -27.5% last year. This was not reflected in TSR as the sector had the third highest median TSR increase of 43.2%.

The Consumer Discretionary sector saw the largest median increase in TFR of 5.2% and saw increases of 30.4% in STI and 22.9% in LTI for the third highest TR increase of 22.9%.

Figure 4 shows ASX 300 company TSR relative to the CEO change in fixed pay, by sector.

Figure 4: ASX 300 GICS sector breakdown of TSR and change in CEO TFR

The graph shows that increases in CEO TFR over the year were typically by companies which saw an increase in market capitalisation. However, some CEOs saw an increase in TFR despite a drop in market capitalisation.

Market averages

To reduce the effect of spurious outliers on the average, the data set is truncated at the 5th percentile and 95th percentile for each remuneration component. Table 4 shows the average and quartiles.

Table 4: ASX 300 CEO change in remuneration average and quartiles

There are several methods to indicate an average remuneration movement.

An average across the ASX 300 CEOs weighs each incumbent equally. This approach can be skewed by lower paid CEOs in the sample who have highly volatile percentage changes in pay due to:

  • Greater growth prospects and re-adjustment of pay to reflect growth in company size and scope
  • Significant changes in remuneration outcomes as companies entering the ASX 300 are subject to greater investor scrutiny

Two weighted average remuneration changes were also analysed:

1. A total remuneration weighted average, where changes in pay are weighted by the dollar value of the average total remuneration for each CEO. This method puts a higher weighting on incumbents who receive higher overall remuneration.

2. A remuneration component weighted average, where changes in pay are weighted by the dollar value of each remuneration component (TFR, STI or LTI) for each CEO. This method puts a higher weighting in incumbents who receive a higher dollar value for each remuneration component.

The remuneration component weighted averages provide a more valid depiction of changes in each component as it accounts for the different incentive leverage of CEOs. This reflects the remuneration policies across companies with some companies paying high fixed remuneration and lower STI or LTI opportunity.

Table 5: Different weighted average percentage changes.

The total remuneration weighted averages indicate a more conservative increase in TR.

Methodology

The ASX 300 incumbents were taken after the September 2021 index rebalancing. Remuneration figures for the CEOs were obtained from GuerdonData®, a database of remuneration information sourced from the statutory disclosures present in company annual reports.

Companies that have not disclosed their 2021 annual reports at the time of analysis were excluded from the sample. Companies that floated on the ASX in 2020 or 2021 were excluded, since they have no remuneration disclosures available prior to their listing. Externally managed entities and companies incorporated outside of Australia which do disclose remuneration in accord with Australian accounting standards were also excluded.

CEOs who changed position over the 2020-2021 period or served a part-year term were excluded from the analysis. Termination benefits were excluded from CEOs leaving at the end of the two reporting periods.

Quartiles are calculated on the full sample of CEOs. To reduce the effect of spurious outliers on the average, the data set is truncated at the 5th percentile and 95th percentile for each remuneration component.

Disclaimers: 

The segmenting of results into multiple sectors introduces large variability in the observed values due to small sample sizes.

Some results may be reflective of data-mining effects rather than underlying causal factors, due to the limited sample size of 171.

The selection criteria introduces sampling bias as the ASX 300 at a particular point in time excludes companies which have previously fallen out from the index and replacing them with recent additions. This may cause a positive bias if there is a correlation between share price performance and remuneration or market capitalisation and remuneration.

The following abbreviations have been used:

  • TFR: Total Fixed Remuneration including cash salary, fringe benefits and superannuation
  • STI: Short Term Incentives, which is pay contingent on performance measured within at 12-month period.
  • LTI: Long Term Incentives, which is pay contingent on performance over a period greater than 12 months (typically 3 or more years.)
  • TR: Total Remuneration, which is the sum of TFR, Total STI and LTI
  • TSR: Total Shareholder Return
© Guerdon Associates 2022
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