Treasurer Wayne Swan and Prime Minister Kevin Rudd certainly know how to make the right noises about excessive executive pay. Speaking at the G20 Summit over the weekend, Swan supported moves to curb executive largesse and noted that “we need to have action in this area, the public are sick and tired of some of these obscene packages”.
However, when it comes to actually doing something about executive pay, the federal government prefers talk and reviews over action. Witness the useless draft APRA report released recently, which does nothing to address the ever-increasing quantum of remuneration. Similarly, the Productivity Commission report, penned by Alan Fels, is expected to be released in draft form this week is also likely to talk tough, but provide little real means for an actual curb of executive pay.
If there were ever going to be a slowdown in monies paid to corporate bosses, it would presumably occur in a year where share prices slumped — much like last year. Despite a recent recovery, the Australian market is still 30% below its 2007 peak. However, perversely, a recent survey by Mercer has indicated that short-term bonus payments for executives of ASX-listed companies actually rose by 14% during 2008 — executives also witnessed their base-pay jump by 5.7%. Wealthy executives must chuckle at the claims of alignment between shareholders returns and remuneration — such alignment appears to involve paying a lot more to executives during the good times and paying a little more to executives during the bad times.
The non-binding remuneration report, while slightly embarrassing to directors, appears to be having little or no effect of their behaviour. In 2008, Wesfarmers’ shareholders roundly rejected the company’s remuneration policies — this year, the board responded by giving struggling CEO Richard Goyder a base pay rise to $2.97 million and a short-term cash bonus of $1.1 million (up from zero the previous year). Goyder’s total remuneration increased by more than 60% to $8.1 million. Not only did Wesfarmers appear to completely ignore its shareholders’ views, the company also adopted little commercial sense. In the past two years, Wesfarmers return on equity (a key indicia of management performance) has dropped from 25.1% to 7.4% last year — largely due to Goyder’s terribly timed acquisition of Coles Group.
Despite the contradiction, Wesfarmers chairman (and also chair of the company’s remuneration committee) Bob Every told the Australian Financial Review that there was no need for more regulation of executive pay and that “boards react to that and are adjusting. Australia has not seen the excesses of other parts of the world and so I personally think the system works quite well.” Others may disagree with Every’s views — especially Wesfarmers shareholders who have witnessed the value of their holdings sliced in half largely due to Wesfarmers’ well-remunerated management.
Wesfarmers is far from alone in disregarding the views of its shareholders. Last year, Qantas received a 40% rebuke from shareholders regarding pay practices, but clearly failed to take the advice on board. This year, despite only working for five months, former CEO Geoff Dixon collected $10.7 million — including a termination payment, despite his departure being voluntary.
Similarly, last year, Asciano was only able to avoid a complete shareholder revolt after CEO Mark Rowsthorn voluntarily agreed to take a $750,000 bonus drop in 2009. Despite Asciano reporting a $244 million loss, and being forced to undertake a massively dilatory share offer at $1.10 per share (after rejecting a $4.40 per share offer months earlier), Rowsthorn saw his cash bonus ostensibly increase this year. Asciano shareholders must shudder at the thought of how much Rowsthorn would be paid should his performance be anything other than poor.
Given the vote on Remuneration Reports appears to be having little or no effect on remuneration, it is hard to envisage fuzzy proposals such as those purported by APRA will do anything other than let politicians temporarily off the hook.
There is a simple was to curb much of the executive pay problems — that is, by actively reducing the agency costs that cause the problem. The main reason executives are paid so much is because the people who determine executive pay (company directors, specifically the chairman and members of the Remuneration Committee) have no personal interest in minimising executive pay. It is shareholders who pay the bills, not the directors. (If anything, the opposite is true — cutting a CEO’s pay would make five-course boardroom lunches just unbearable).
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To fix the problem, the legislature needs to ensure that directors are personally accountable — to achieve this, should shareholders reject a company’s remuneration report, the chairman and members of the Remuneration Committee should forgo all directors’ fees for the previous year (or be forced to repay any fees already made), Plus, they should all be required to stand for re-election to the board the following year to allow shareholders to vote them out of office. This will ensure that directors are held personally accountable for their actions, rather than suffer some minor embarrassment when a remuneration report is rejected.
When a director has their own livelihood at stake (and directors’ fees are often upwards of $200,000 annually), one suspects they will suddenly have a greater empathy for long-suffering shareholders.