Ever since the global financial crisis, the waters around Australia’s remuneration committees have grown choppy - public scrutiny abounds, not to mention lurking Royal Commissions.
In this series: It’s early days in terms of what we’re learning from the Hayne commission, but we know that ASIC and APRA have said they intend to keep looking into remuneration and risk - a potential red flag for already-embattled remuneration committees. As the waters change, this series of articles will help keep you fully appraised of what might hide just out of sight, and the decisions you can make to ensure you remain on course throughout the upcoming remuneration calendar.
In today’s article, we discuss the perception gap between media hype regarding executive remuneration, and what Australian shareholders actually believe.
Media hype vs. reality in the world of executive remuneration
“Australian executive pay too high” is a common media headline around the world right now, including here in Australia. These articles are effective at creating public hype and sparking fierce debate on executive remuneration, but may not represent how actual shareholders feel.
BDO reviewed AGM voting patterns for 142 companies listed in the S&P/ASX 200 Index from the second half of 2019. Just over 80% of those companies received shareholder votes of 90% or more on their remuneration reports. In total, only 11 companies received a strike (i.e. 25% or more of shareholders voted against the remuneration report).
Our analysis showed no thematic issues underpinned these strikes or ‘near strikes’. In fact, some companies that received strikes significantly outperformed the S&P/ASX 200 index and their industry sectors over the past three years. Instead shareholders used their votes to signal displeasure about a range of issues, including:
- Governance concerns such as that raised for Harvey Norman
- Lack of disclosure around performance targets for Wesfarmers
- Concerns around underlying vs statutory financial measures for Ramsay Healthcare
- Use of heavily weighted non-financial measures by carsales.com.
The takeaway? Voting patterns suggest that executive remuneration may not be the catalyst for investor displeasure in the same way it is a catalyst for media displeasure. This is good news for corporate Australia and a potential opportunity for board members (which we’ll come back to later in this article).
Does a 90% vote mean that the executive remuneration structure is delivering on its objectives?
One interesting question that data such as this brings up: Shareholders have voted emphatically on remuneration reports, but does that mean that companies have their executive remuneration settings correct?
Remuneration voting is influenced by shareholder advisory groups and these parties tend to have broad views on what constitutes a ‘good’ executive remuneration structure. When companies broadly comply with these ‘good’ structures, it is not surprising they receive shareholder support.
The shifting waters in the business ecosystem are compelling companies to develop new business strategies. It follows then that the remuneration strategies that align executives to these business strategies need to be fit for purpose.
Adding to that the increased scrutiny from ASIC and APRA, means Boards must ensure new remuneration strategies strike a fine balance between delivering to shareholders, motivating executives and addressing risk and culture concerns.
A new way to look at executive remuneration plans
The crisis now is one of trust in companies. Media hype doesn’t come out of nowhere - since the financial crisis the public has become acutely aware of misbehaviour in corporate Australia and journalists are constantly on the hunt for it. One bad headline, can easily damage an organisation’s reputation.
This is an opportunity for boards to innovate, and build structures that balance the expectations of the shareholder with a new lens on corporate responsibility - for companies to show the public that they are doing right by their consumers. Remuneration plans are a chance for investors to motivate executives to do the right thing. It’s a way to say, have we got our settings right? Are we using the right measures and setting appropriate targets?
Of course, there has to be a balance between financial outcomes and building a future, otherwise companies will always risk creating the negative kind of culture that has been scrutinised in the Hayne commission. But if a company does the right thing, it can do well as a business.
The media frenzy around executive remuneration can be exhausting, not to mention damaging. We all know that rewarding executives properly for their job is important, given how challenging the role can be, but these rewards must be tempered by thoughtful consideration to a company’s future. Can executive remuneration be tied to measures that promote a positive culture and better future?
Companies have a choice: Pat yourself on the back and say remuneration is in line with expectations and therefore acceptable, or recognise that the waters are always shifting and what is acceptable now may quickly change. Now, therefore, is the time to do something about it so you don’t lose your competitive advantage.
For further advice on remuneration and other needs, contact the BDO Australia People Advisory team today.