It’s reporting season and the interest in executive pay is heating up again. Alan Joyce is the latest CEO to forgo a bonus, joining a growing number of high profile business leaders including Rio Tinto’s Tom Albanese, BHP’s Marius Kloppers and BlueScope Steel’s Paul O'Malley.
Joyce has said it is “appropriate” that when company returns go down, that executive pay should also. O'Malley’s move pre-empted a $1 billion annual loss announced yesterday.
This is the second reporting year of the two-strikes legislation on executive pay. The law gives teeth to shareholder dissatisfaction about remuneration matters by providing that where there is a 25% or greater “no” vote on the remuneration report at any two consecutive annual general meetings, a resolution must be put to shareholders to spill the board.
Last year saw a number of corporate boards – including BlueScope – received their first “strike”, which if repeated could result in a costly and destabilising spill and subsequent re-election of a new board.
The trend for CEOs to decline their bonus this year is an effective response to a first strike or more generally, to forestall concerns about remuneration. The adverse media attention given to CEOs facing shareholder unrest about pay can have significant negative reputation effects for both the company and the executive. Pay issues can also dominate the AGM, at the expense of other important business.
Voluntarily declining the cash bonus effectively defuses the pay issue in the AGM without the adverse implications of a board imposed cut in bonus because of poor corporate performance.
It also sends a powerful message about the commitment of the CEO in these austere times – as Paul O'Malley said, it was “the right thing to do". And it seems that some Australian CEOs agree.
It seems too that the two-strikes rule is achieving greater accountability from company boards about executive pay. Australia has had a non-binding shareholder vote on remuneration since 2005.
Research indicates that the average “no” vote from 2005-2009 trended steadily upwards, with some companies receiving “no” votes well in excess of the 25% needed to invoke the two-strikes legislation. However, there is no evidence of similar “voluntary” pa cuts over the study period.
There is also the question of the sustainability of this strategy. Is it just a one-off to take the heat away from remuneration when corporate performance is poor and shareholders have previously dissented on the remuneration report?
Certainly in the longer term it won’t divert from a poorly designed incentive plan or poor governance more generally. Better disclosure around remuneration processes is more likely to reduce shareholder concern and minimise the probability of a no vote.
In the meantime, it will be interesting to see how many Australian executives decide that knocking back their bonus is “the right thing to do” this year. And how those corporate boards will deal with the longer term issues of fairness and disclosure of executive pay in the years to come.
Andy Payne
HR Manager
The fact that these incentive schemes are generating bonuses to be waived in the context of such dire corporate performance suggests poor design and lack of board discretion with the benefit of hindsight review. Many CEOs in the past have dismissed concerns about excessive pay by saying its not their fault as pay is set by the Board. Surely in these cases the boards would get more support from shareholders if it were them saying poor performance = no bonus, rather than relying on a gesture by a small number of CEOs who are still rewarded generously by normal community standards whether they get a bonus or not.
Andrew Hunt
IT Manager
You are right about the poor structure of the bonus. And since high CEO packages are justified on the basis of attracting the best talent and motivating them, does this now mean that Joyce, Albanese, Kloppers et al will be working half as hard? And will the next CEOs be poorer talent? I don't think so.
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David Arthur
n/a
At present, companies get tax deductions from company tax for all renumeration, regardless of how ludicrous those renumeration packages may seem in the light of company performance.
A remedy may be to limit tax deductibility of employee pay to the amounts due under wage awards; all over-award payments, including any and all "performance" bonuses, should be drawn from profit share with company owners (eg share holders), AFTER company tax has been calculated, and paid.
Among other things, this will make it a lot harder for executives to drive down worker pay while lining their own nests.
Comment removed by moderator.
Dianna Arthur
Dianna Arthur is a Friend of The Conversation.
Environmentalist
This is a fair start.
The amount of annual salary should be considered in conjunction with the rate of pay of the lowest level employees. Often 'coal-face' work is just as draining and stressful - yet remuneration rarely reflects the reality of low ranking employees. As for annual bonus - that is something that applies only to high level execs in recent decades - rank and file employees are lucky if the company pays for the cost of the annual Christmas knees-up.
http://crooksandliars.com/susie-madrak/new-study-companies-lavish-ceo-pay-av
I do not know enough about the Australian Tax system to comment, however in the US of A (according to above mentioned link) - paying higher salaries to CEOs results in less tax.