Putting the brakes on bosses’ bonus blow-outs

Public sector wage growth is also at a record low, at 2.4 per cent. Photo: Simon BoschThey were words to send chills up spines in boardrooms Australia-wide.
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The Commonwealth Bank’s annual report landed on Monday, bringing with it news that chief executive Ian Narev’s salary package had topped $12.3 million in a year when the bank was hit with a scandal in its life insurance division, CommInsure.

The news was met with hostility from both sides of politics. “We are returning to the 1980s adage that greed is good,” Labor Senator Sam Dastyari told Fairfax Media this week, suggesting Narev share his earnings with victims of the bank’s scandals. Just days earlier, Opposition leader Bill Shorten had spoken about a “fat cat bonus system”, as he continued to push for a royal commission into the banks, while Liberal MP Warren Entsch railed against “banking bastardy” as he called for a new tribunal.

With most of Australia’s big listed companies to shortly release their annual reports – and with them, the details of their executives’ pay packets – the outcry over Narev’s salary would have dashed any remaining hopes that executive pay would be a relatively low-profile issue in Australia this year.

Such outrage is a regular news-cycle staple; but this year, things are different. The constant threat of a royal commission hangs like a sword of Damocles over the financial services sector, with each new scandal and run of bad press adding to the case for such an inquiry.

The new parliament, set to return at the end of the month, is stocked with diverse and populist cross-benchers, several of which have already thrown cold water on the Turnbull government’s planned corporate tax cuts – already a tough sell at a time of wilting tax revenues. And a rising tide of anger over executive pay overseas – notably in the UK and US – is being closely watched here, as other governments move to crack down on executive excess with new regulations.

In a report on executive pay released in the UK this week, titled “Time to Listen”, consultants PricewaterhouseCoopers warned the corporate world that it needed to “find a way to respond to public concern about executive pay, or matters will be taken out of our hands”. (PwC’s business includes advising boards on the structure of remuneration packages and how much to pay executives and staff.)

In a note for Australian clients, it pointed to “political turmoil around the world”, which had “highlighted the concern among many that globalisation and free trade have left them behind”.

“There’s now an urgent need for “big business” to learn from this and start to rebuild public trust,” it warned.

But as far as some experts are concerned, at least one sector of “big business” in Australia has missed its chance. Former consumer watchdog Allan Fels, the architect of the “two strikes” rule that gives Australian shareholders a say on executive pay, told Fairfax Media this week that the scheme had failed to restrain executive pay at the banks, suggesting additional, special rules on remuneration may be needed for the financial services sector.

“The time has arrived for this to be considered,” he said.

Senator Dastyari says the generous pay packets showed that the influence of shareholders over executive pay was nowhere near as strong as it needed to be.

“Greed may be good for some but the rest are paying the price,” he says.

“When a small group of executives are becoming incredibly rich, and that gap between them and everyone is growing, long-term social problems will follow.

“We need to be looking at how we empower consumer and shareholders to have a greater say and make sure their voices are heard. We should be looking at international comparisons for how that’s done.” Home and away 

Overseas, anger at ever-swelling executive pay packets has been on the rise since the global financial crisis, especially in countries where taxpayers were forced to bail out companies.

Bernie Sanders, the self-described socialist who ran opposite Hillary Clinton for the Democratic nomination, railed against inequality and excess in Wall Street and corporate America, with income tax hikes for the rich a prominent policy. Both Presidential nominees, Donald Trump and Clinton, have promised to keep Wall Street in check.

In the UK, new Prime Minister Theresa May has tackled the issue directly, with a proposed crackdown on executive pay, including giving shareholders a binding vote. She has also proposed putting consumer and employee representatives on corporate boards, and making companies reveal the ratio between the salary of their chief executive and that of their average worker.

In Europe in 2014, as part of a wave of post-GFC reforms, the EU placed a cap on bonuses at financial institutions – limiting them to 100 per cent of fixed pay, or 200 per cent with the approval of shareholders.

Executive pay has been “extremely topical” overseas, says Emma Grogan, a partner at PwC, particularly in countries where banks were bailed out by governments. “It became a real political issue”.

In Australia, the situation is more nuanced. Allan Fels, architect of the ‘two strikes’ rule.

Already, at annual general meetings held earlier in the year, companies like Woodside Petroleum and Spark Infrastructure have been slapped with shareholder “strikes” over their remuneration reports. Tech company Reckon received an incredible 70 per cent shareholder vote against it.

Each company’s annual reports includes a remuneration report, a section detailing the structure and quantum of the company’s executive and director pay packets. The two strikes rule allows shareholders to vote against the remuneration report at the company’s annual general meeting; if 25 per cent of shareholders vote against two consecutive reports, a resolution is put forward to dump the board.

Annual reports are hitting the Australian Securities Exchange now, giving investors and the general public a clearer picture of where Australia stands on the global stage when it comes to executive salaries, as well an idea of how well executives have fared in the almost 10 years since the global financial crisis.

Last year saw a jump in strikes against listed companies, from 95 to 113 – the highest number in three years. The number of those that involved a second strike more than doubled, from 10 to 22. Seven of the companies who received strikes were in the ASX200.

The bulk of company annual meetings will take place in a couple of months, peaking in October.

Grogan says executives are receiving modest pay increases, if any, with new chief executives often placed on a lower pay scale than their predecessors. “We are still in a period of pay restraint in Australia,” she says.

It’s not just the fear of a shareholder strike that is driving this, Grogan says, “although that is there”. There were also discussions about “what is a fair outcome here, based on the year that we have had”.

The Australian Council of Superannuation Investors, which represents Australia’s powerful super funds, expects chief executive pay packets this year to continue on a downwards trend from 2008, when it reached dizzying pre-GFC highs.

But data collected by ACSI last year shows that while fixed pay fell by 1.1 per cent for ASX100 chief executives, bonuses rose 12 per cent. Bonuses also became more common, with the proportion of top-100 chiefs receiving a bonus reaching the highest level since 2008.

ACSI has pointed to bonuses – and whether they are truly “at risk” – as a key issue for investors. Chief executive Louise Davidson says more needs to be done to ensure executive bonuses reflect more than just “short-term profit numbers”.

“It’s about having a social licence to operate and [addressing] the lack of trust and scepticism that has built up in the community – particularly toward the banks – by seeing culture failure after culture failure,” she says.

Lawrence says it is now more likely for a chief executive to be fired in Australia than to not receive a bonus.

“Executives in Australia seem to be compensated for a risk that is not real,” he says.

“What is the worst thing that can happen to you as an executive of a large publicly listed company? You get fired with more money than most people earn in a lifetime.

“You might get bad stories written about you in the newspaper, but people look at that and think that’s not risk.”

PwC has advised boards’ remuneration committees to make “tough decisions” and only pay bonuses that are close to the maximum “for unambiguously outstanding performance”.

“Furthermore, on target annual bonuses should not be easily earned,” it says. “The percentage of ASX100 CEOs receiving less than 75 per cent of their target incentive has not exceeded 30 per cent over the past three years.

“These payments need to be seen by the public as truly variable, and to be varying in relation to transparent performance outcomes.” Bank on it 

Australia’s big banks were hit with another round of bad press this week, which in turn kept pressure on the Turnbull government and its opposition to a banking royal commission.

After details of Narev’s salary emerged on Monday, news broke later in the week that the big banks and Macquarie were being sued by US hedge funds over allegations of bank bill swap rate rigging.

Labor is considering ways of pushing for a royal commission through the parliament; while a motion in favour would easily clear the senate, two or more Coalition MPs would have to cross the floor in the lower house for it to pass.

Facing mounting pressure from the backbench and anger over Narev’s pay, Turnbull announced he would require the bosses of the big four banks to front the House of Representatives’ economics committee at least once a year. Treasurer Scott Morrison has also suggested he is open to some kind of bank tribunal, as urged by Warren Entsch. “What I find helpful about these suggestions, whether that particular outcome is supported or not, is they’re dealing with very specific problems,” he told Sky News.But whether this will examine the broader issue of how much the heads of Australia’s biggest banks – and companies – get paid remains unclear.

Fels, whose brainchild, the two strikes rule, came into effect five years ago, believes the scheme has helped reign in excessive pay, “though less so for banks”.

He says any royal commission into the banks should scrutinise bank pay arrangements “to ensure that they have incentives to act responsibly and to avoid excess”. He believes additional measures addressing excessive bank pay may be needed.

“Banks are privileged. They get a licence that entitles them to prudential protection. With that licence, should come a degree of obligation to act responsibly,” he says.

“This in turn should be reflected in pay incentives.”

The corporate sector, and its advisers like PwC, warn that increased regulation on salaries can have unforeseen and negative consequences. The UK government, for example, has argued that the EU’s bonus cap has merely led to a substantial increase in base salaries.

But these arguments are hard to make in the face of job losses, stagnant wage growth and public outrage. Worldwide, big business is on notice – respond to concerns about pay packages, or brace for the consequences. “In all developed countries there’s concern about executive pay,” Grogan says. “There’s an opportunity right now for organisations to take a position on that and address some of those concerns… or there is the risk of further regulation, which could fuel perverse outcomes”.

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