Executive Remuneration in Australia
Key points
These key points were released with the Executive Remuneration in Australia inquiry report on 4 January 2010.
See also: Media release
- Strong growth in executive remuneration from the 1990s to 2007, and instances of large payments despite poor company performance, have fuelled community concerns that executive remuneration is out of control.
- Pay for CEOs of the top 100 companies appears to have grown most strongly, at 13 per cent real a year, from the mid-90s to 2000, and then increased by around 6 per cent annually in real terms to 2007. Since 2007 average remuneration has fallen by around 16 per cent a year, returning it to 2004-05 levels.
- The rise and decline in executive pay over the 2000s largely reflects increased use of pay structures linked to company performance.
- Executive pay varies greatly across Australia's 2000 public companies
- For the top 20 CEOs, in 2008-09 it averaged $7.2 million (110 x AWE) compared to around $260 000 for CEOs of the smallest listed companies (4 x AWE).
- Generally speaking, Australian executives appear to be paid in line with smaller European countries, but below the UK and USA (the global outlier).
- Liberalisation of the Australian economy and global competition, increased company size, and the shift to incentive pay structures, have been major drivers of executive remuneration - companies compete to hire the best person for the job, and try to structure pay to maximise the executive's contribution to company performance.
- Nonetheless, some past trend and specific pay outcomes appear inconsistent with an efficient executive labour market, and possibly weakened company performance.
- Incentive pay 'imported' from the United States and introduced without appropriate hurdles spurred pay rises in the 1990s partly for 'good luck'. More recently, complex incentive pay may have delivered unanticipated 'upside'.
- Some termination payments look excessive and could indicate compliant boards.
- Instances of 'excessive' payments and perceived inappropriate behaviour could also reduce investor and community trust in the corporate sector more broadly, with adverse ramifications for equity markets
- But the way forward is not to by-pass the central role of boards. Capping pay or introducing a binding shareholder vote on it would be impractical and costly.
- Instead, the corporate governance framework should be strengthened by:
- removing conflicts of interest, through independent remuneration committees and improved processes for use of remuneration consultants;
- promoting board accountability and shareholder engagement, through enhanced pay disclosure and strengthening the consequences for those boards that are unresponsive to shareholders' 'say on pay'.
- These reforms would significantly reduce the likelihood in future of inappropriate remuneration outcomes, or those that shareholders would find objectionable.
| Lisa Gropp (Principal Adviser Research) 03 9653 2392 |
| Alan Johnston (Assistant Commissioner) 03 9653 2147 |