For chief executives of Australia’s largest public companies, size matters more than performance when it comes to pay increases. The major exception is for financial services sector chief executives, where remuneration is more highly correlated to earnings per share growth than market capitalisation.
These are outcomes from a study by Guerdon Associates of ASX 300 companies reporting results for the financial year ending June 30 2005. Data was sourced from GuerdonData™, an on-line database of executive and director pay.
There were two main findings from the study. On of these was a surprise. What was not such a surprise was that the size of pay is related to the size of companies managed. What was a surprise was that the rate of increase in pay is more related to size than performance. According to this analysis chief executives may be encouraged to make their companies bigger, rather than grow their profits. These results are supported by anecdotal evidence that the primary beneficiary of mergers and acquisitions seems to be management rather than the investor.
Industrial companies had the strongest tendency to reward size over performance, judging from Guerdon Associates’ analysis. Increases in industrial sector chief executives’ total remuneration had a very high correlation with market capitalisation, and virtually no correlation to earnings per share (EPS) performance. Over 83% of the increase in industrial sector chief executive pay can be explained by company size. In contrast, financial services sector chief executives had rates of increase in total remuneration that could be explained mostly by growth in earnings per share. Sixty-two percent of their total remuneration increase could be explained by EPS growth. The materials sector was more of a mixed bag, with increases in pay being explained partly by company size and partly by growth in EPS.
The study was based on 107 ASX 300 companies that reported results for June 30 2005 and that also had the same chief executive for the 2004 and 2005 financial years. Median total remuneration for these chief executives was $1,255,719. Total remuneration is comprised of fixed pay and “at risk” incentive pay, including share options and performance shares. The overall annual increase in total remuneration for these ASX 300 company chief executives was 33%. The incentive component increased by 41%, while the fixed pay component increased by 29%. Median market capitalisation was $867 million. Median earnings per share growth was 9.9%.