In June, the federal government introduced a Bill seeking to limit executive termination payments to one year’s fixed salary (before shareholder approval is required). Currently, companies can pay departing executives seven times total remuneration before shareholders are consulted. Not only is the proposed legislation astonishingly sensible, but the current policy regarding executive termination payments is abhorrent, so much so that former Babcock & Brown CEO Phil Green would have been entitled to a termination payment of $119 million had he been sacked in 2008 (shortly before Babcock & Brown collapsed). That the Liberal Party is publicly opposing the legislation shows how out-of-touch the supposedly small government, free-market political party has become.

Crucially, the proposed legislation still gives shareholders the ability to approve termination payments above the one-year threshold. That means that superstar executives would still be entitled to a substantial termination payment if shareholders thought their performance warrants it. (Perversely though, most well-performed CEOs such as Woolworths’ Roger Corbett, Macquarie Bank’s Allan Moss or BHP’s Chip Goodyear tend to not be paid termination payments at all — they are usually reserved for executives who destroy shareholder value, such as Telstra boss Sol Trujillo, disgraced former Oxiana CEO Owen Hegarty or one-time PBL chief John Alexander, the man who allegedly “killed Channel Nine”).

In 2008, a RiskMetrics study revealed that the average termination payment provided to executives was $5.71 million — almost double the average payment made over the three preceding years. As RiskMetrics’ Australian boss Dean Paatsch noted: “Some of these are payments for outright failure … they should not be called golden handshakes but golden condoms, because they protect the executive while they’re screwing the shareholder.”

However, not everyone agrees that limiting executive pay termination is a good idea. Chris Pearce, the Liberal Party spokesperson for financial services wrote in The Australian last week that the proposed legislation “will likely have the perverse effect of raising executive and director payments on a permanent basis, in particular those payments not at risk or incentive-based. This is because the amendment will cause base pay to rise.” Pearce did not explain exactly how or why this would happen —  other than drawing the conclusion that simply because termination payments would be based only on one-year’s fixed salary, boards will immediately increase the fixed salary of CEOs to increase the amount they could be paid if they are eventually sacked. (Pearce quoted the Business Council of Australia to support his stance, a strange choice, given that BCA is the paid lobby group of CEOs).

It is possible that Pearce’s predictions of higher base salaries may come to fruition — however, that would still be an improvement on the status quo. For at least if CEOs contracts are “front-ended” shareholders are able to have some sort of say on the matter by voting against the company’s (non-binding) remuneration report. Shareholders could also vent their anger indirectly by voting against directors (especially those on the company’s remuneration committee) or voting against options granted to executive directors at the company’s annual general meeting. (Currently, shareholders have no say on termination payments at all).

Chris Pearce and the Liberals came up with their own ingenious solution — rather than limit golden goodbyes to one year’s fixed pay, Pearce suggested that termination payments be restricted to one year’s total salary before shareholder approval is required. Pearce’s reasoning was that “performance and pay should be linked as should executive and shareholder interests”.

Pearce appears to have made the assumption that there is in fact a link between short-term cash bonuses and shareholders returns. Perhaps before Pearce proposed his alternative he should have reviewed some of the performance bonuses paid over the past few years. That is because most short-term bonuses are paid using a set of secretive metrics and are effectively at the whim of company boards and bear little, if any, resemblance to shareholder returns.

For example, under the Liberal proposals, Michael King, the disgraced former CEO of MFS, would have been entitled to a termination payment of more than $3 million had he been sacked in 2007 — this was because King received a $1.6 million cash bonus the year before MFS collapsed. Similarly, had Phil Green been terminated by Babcock before  its disintegration, he would have been eligible for a payout of $22 million under Pearce’s scheme to “link executive and shareholder interests”. Similarly, Telstra’s Sol Trujillo would have been entitled to a $13 million termination payment under the Liberal scheme, compared with only $3 million under the proposed legislation. Admittedly, ham-fisted policy ideas are the natural result of the Liberal Party outsourcing executive remuneration policy creation to the BCA, Australian Institute of Company Directors and remuneration consultants.

The Liberals’ stance against termination payments is commercially, morally and politically indefensible. There are times when government policy simply makes good sense, and an Opposition should swallow its pride and support it for the good of the nation. This is one such occasion. Sadly, with friends such as Chris Pearce, shareholders hardly need enemies.