Guerdon Associates’ input into Productivity Commission’s executive pay inquiry

The initial closing date for submissions to the Australian Productivity Commission’s inquiry into executive remuneration was 29 May 2009.  However, given the issue’s complexity and breadth, many organisations (including Guerdon Associates in its joint submission with CGI Glass Lewis) requested and received approval to submit a week later. 

Guerdon Associates’ and CGI Glass Lewis’ combined submission can be viewed HERE.

We set out below a condensed version of our conclusions and recommendations.


Key management personnel (KMP) levels of pay

• Are correlated with market capitalisation;
• For Australian companies, from an international perspective, are positioned at the lower quartile for OECD countries
• Are less than management in equivalent private companies;
• Are equal to the management of foreign subsidiaries of equivalent size but less accountability, liability and complexity; and
• Are not dissimilar to the levels of pay for top entertainers and sports people.

Rates of pay increase

• Have been significantly higher than average weekly earnings increases during periods of high economic growth;
• Are related to the growth in market value of companies managed; but
• Are vulnerable to a ratchet effect through the injudicious acceptance of disclosure comparisons with only those who are more highly paid; and
• Should, if boards hold the line and do not change the rules, decline and become negative as market value and earnings decrease due to the significant proportion of pay that is now performance based.  The extent of decline should also be exacerbated by high levels of company share ownership among CEOs.

Constraints on excessive or inappropriate pay

• The key constraint is market efficiency;
• A diligent and independent board with the right mix of skills and experience for the company’s businesses assisted by a competent remuneration committee (where those exist), relevant disclosure and the non binding vote, assist efficiency, allowing cost benefit comparisons to be made and communicated;
• Constraints are facilitated by proxy adviser and governance group advice to institutional and other investors;
• Constraints will be more effective if boards receive unconflicted advice; and
• Constraints will be more effective with better institutional investor voting and engagement.


• Do not cover the full extent of the executive market by exempting foreign companies;
• Have improved since CLERP 9, and are continuing to improve;
• Do not mandate disclosure of remuneration in the form that is widely understood and used for comparative and management purposes;
• Do not mandate disclosure of the realised value of all remuneration benefits received in the financial year;
• Do not comply with current disclosure requirements under section 300A of the Corporations Act 2001 (Cth) (Corporations Act), especially in regard to performance requirements for short term incentives (STIs); and
• Are subject to regulation that is not enforced by the Australian Securities and Investments Commission (ASIC).


• Has, in its current form, been instrumental in the rapid improvement of remuneration management and the greater engagement of boards with their investors; BUT
• Has, in its current form, weaknesses that can and should be improved (see Recommendations);
• Cannot eliminate instances of poor judgement evidenced in all manner of agency/stewardship decisions (e.g. mergers and acquisitions, CEO recruitment, debt financing, capital expenditure etc., as well as executive remuneration);
• Comprises “hard” law compliance, “soft” law comply or explain (“if not, why not?”) and guidelines applied by proxy adviser, governance and other stakeholder groups;
• Hard law compliance (mainly disclosure requirements) is not enforced;
• Soft law comply or explain is flexible, more easily changed to reflect evolving best practice, but again is not enforced for the instances of non compliance, especially in small listed companies; and
• Guidelines from different agencies may conflict and suffer from low levels of stakeholder resourcing.


• Based on US experience, has had unintended and, on the whole, negative consequences if used as a method to limit forms of remuneration; and
• The proposed limit on termination payments and method of share plan taxation will have similar consequences.

Alignment and performance

• Performance contingent pay is an essential ingredient to ensure pay symmetry, i.e. pay increases as performance increases, while pay decreases if performance decreases;
• Performance measurement is a required board function in order to assess the executive; but
• Can be better applied for determining pay outcomes by using a mix of market based and cash based measures of performance, taking into account capital requirements and risk as appropriate; and
• Alignment of executive interests with those of shareholders can be better achieved with a mix of equity vehicles to encourage an appropriate level of risk taking that will vary with each company’s circumstances.

Overall conclusion

Ultimately, effective management of executive remuneration requires and is a consequence of diligent and independent boards with the right mix of skills and experience for the company’s businesses, assisted by a competent remuneration committee to do the necessary nitty gritty on complex remuneration issues.

It is not possible to prescribe (create) such boards by regulation; ultimately, that is the role and responsibility of the owners (shareholders), and especially institutional shareholders, as the key activity in their monitoring of their agents (board and management) through voting and engagement.

From a comparative international perspective, Australia has a well balanced governance infrastructure, which, in the field of executive pay, allows the board to make operational decisions on pay matters to best meet their fiduciary duties while still remaining directly accountable to shareholders.  In particular, there are good tools for shareholders to exercise constraint through non binding votes on annual remuneration reports and director elections or removal.

But the system can and should be improved (see below).



• Should be confined to KMP who have a material impact on shareholder value;
• There is no utility in the disclosure of the top 5 remunerated persons as a separate requirement (that may include non-KMPs) and this should be removed;
• Require the disclosure of pay in the terms of fixed remuneration, STI, long term incentive (LTI) and total remuneration terms used to manage and compare pay, but in a strictly prescribed format and according to consistent definitions for ease of comparison;
• Require disclosure of the realised value of all remuneration benefits received in the financial year;
• Maintain the current requirement for disclosure of KMP pay;
• Require boards to explicitly address the issue of risk in the formulation of pay policy;
• Require boards to disclose all sources of advice to the board on remuneration matters, with an opinion on the adviser’s conflicts of interest and independence;
• Enforce disclosure requirements; and
• Reduce and simplify aspects of disclosure that are not required to judge the effectiveness of board governance of remuneration matters.

We will draft a suggested amendment of section 300A to address/implement some of the above.


• As per the above, require disclosure of board advisers and an opinion on their independence; and
• Require boards to receive independent advice via soft law.


• Amend soft law to encourage long term executive equity holdings, including holdings beyond their departure time to promote sound legacies;
• Change tax regulation to promote these outcomes; and
• Do not impose tax or regulatory impediments to boards applying equity vehicles and/or incentive payments to achieve optimal shareholder alignment.


• Align taxation to be levied when a benefit is received.

The Commission has already undertaken initial consultations and research via various means, which has taken it beyond the initial Issues Paper (HERE). 

On 16 June 2009 Guerdon Associates appeared before the Commission with CGI Glass Lewis.  The line of questioning reflected quite different strands of view being considered by the Commission, including:

• Australia’s executive pay relative to international standards
• If reasonableness can be ascertained in terms of community well being and fairness, as well as from a market relativity perspective, and
• What constraints can be applied given that executive pay is considered a small cost relative to overall company costs

The Commission is due to release an interim report during September, while its final report will be released in December.

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