Two philosophies dominate superannuation remuneration – those who believe top dollar and bonuses attract the best, and those who believe this is the antithesis of the profit-to-members ethos
John Pearce, chief investment officer of UniSuper, was the highest paid employee in industry superannuation in 2014.
In a not-for-profit sector where there is widespread unease at high salaries, it bears listening to the explanation given for the $1.3 million awarded to him.
The message from Chris Cuffe, chair of UniSuper, is that UniSuper’s complexity makes it a much harder fund to run than the norm. John manages accumulation funds as well as defined benefit liabilities – UniSuper has Australia’s largest open DB scheme. As well, the fund operates without an asset consultant, relying on a mixture of experienced independent trustees and the strength and experience of its investment team. And $16 billion of UniSuper’s $45 billion investments are managed internally.
Cuffe says: “People mix up managing the managers and managing the money. Managing money directly comes with a whole lot of additional nuances and skills. There is not a whole lot of people across the industry who are particularly good at it.”
For good measure UniSuper has achieved top quartile returns for its default accumulation fund over 1, 3, 5, 7 and 10 years. Still Pearce is a long way short of what some opposite numbers in the private sector. Richard Woods, chief executive of the Challenger fund management division – another firm also dedicated to achieving optimal results for Australians in retirement, who oversees $47 billion in assets, was paid $3 million in 2014 a figure that includes short and long term incentives. It is worth comparing this to the pay of the widely admired David Neal, chief executive of the Future Fund and until recently its chief investment officer too, who earnt $1.27 million in 2014.
What Pearce’s salary does reveal is the premium paid for managing assets in-house. This explains why Michael Strachan was the fifth highest paid chief investment officer in 2014, despite Equip ranking as around the 28th biggest superannuation fund. Another chief investment officer who makes more than those at bigger funds is Jim Christensen of Telstra Super. He too manages money in-house, for Australian equities, fixed interest, property, infrastructure, private equity, cash, asset allocation overlay, and currency hedging.
And yet maximising their salaries is not always uppermost in the minds of CIOs at superannuation funds. Both Richard Brandweiner of First State Super and Roger McIntosh, former CIO of LUCRF revealed at the Conexus Financial Fiduciary Investors Symposium last November that they had both taken pay cuts to come and work in the not-for-profit sector, largely as they had expectations of greater job satisfaction. According to Kristian Fok, executive manager, investment strategy at Cbus, every one of the senior appointments he has made to his investment team took pay cuts for the job. John Pearce, revealed to Investment Magazine in 2014, part of the willingness of top professionals to work in the not-for-profit sector. “I did not appreciate how liberating working for a profit-for-members business would be. Because we are a closed fund I do not spend much time at all on the marketing and sales front.”
Chris Cuffe concurs. “Whenever we advertise a job in the investment department we are highly sought after. There is a queue of people,” he says. Part of the reason is the absence of a big marketing side to the role in the investment team. “One thing you get in an industry fund environment is that you do not have to sing for your supper every day. The money is coming from members generally.”
Chief executive pay
If the pay of CIOs can be easily explained, the pay of chief executives is less easy to understand. Bruno Cecchini, a partner in the human capital practice at Ernst and Young, says that generally the higher the assets under management, the higher the salary for chief investment officers, but that this applies far less to chief executives.
He notes that in the private sector there is a “pretty strong correlation” between the pay of chief executives and the size and complexity of their business, but not so in superannuation. There appears to be less science in calculating the difficulty factor of CEO roles. Indeed, IM’s remuneration survey shows a bunching of narrow pay ranges; six CEOs at the top 50 superannuation funds earn salaries under $310,000, 21 in a band stretching from $310,000-$460,000, and 16 earn between $461,000 and $1 million (the missing seven CEOs are explained by retail funds in the top 50 without a designated chief executive or a senior manager that discloses their remuneration).
Perhaps the strangest remuneration here is that of Ian Silk, CEO of AustralianSuper. At a total of $698,000, the chief executive of Australia’s largest superannuation fund earnt a lot less than Rosemary Vilgan’s $1 million from QSuper in 2014 and David Elia’s $745,000 at HostPlus.
Karl Morris, chairman of QSuper, explained Vilgan’s salary.
“Unlike most, QSuper operations involve a wholly-owned financial advice business, mortgage broking services and self-underwritten insurance products. QSuper has also developed tailored administration platforms and systems and manages its end-to-end administration.
“Many other funds outsource more complex functions including investment management, life insurance and administration, which QSuper delivers in-house. Funds that do not provide these services in-house have to pay for them externally, where salaries paid can be higher.”
Morris also cites the general size of QSuper looking after 840,000 individual accounts totalling nearly $80 billion, including the direct investment of $51 billion.
He adds that independent advice and industry benchmarking against financial services companies of similar size and scale shows Vilgan’s salary is market competitive.
It is worth noting the pay of chief executives at much smaller funds than AustralianSuper who are not too far behind Ian Silk in their pay owing to the fact that they received bonuses payments in 2014 and he did not.
Peter Carrigy-Ryan earnt $637,000 at Commonwealth Super Corporation, Bruce Watson at Auscoal earnt $616,000, Damian Hill earnt $605,000 at REST and Michael Dundon earnt $575,000 at VicSuper.
Given the way in which Ian Silk’s role makes him the de facto public face of industry superannuation, as well as looking after a team that is much larger in size and scope than others this might look unfair. But the logic of why some chief executives are paid in the not-for-profit sector is not all about financial reward and Australian Catholic Super, CareSuper, Cbus, GESB, LUCRF, Media Super and Vision Super all state that as not-for-profit funds they do not offer performance pay. Australian Catholic Super says that it aims to reward its people “fairly and responsibly” and that it does not pay bonuses believing “these are not in accordance with its ‘profit-to-members’ ethos” – a statement repeated by other funds. Notably, Vision Super goes to great lengths to point out that it pays no short-term cash profit sharing, no long term incentives, share based payments or non-monetary payments.
Cecchini sees this culture as under threat as the level of complexity, competition and size of superannuation grows. As funds negotiate effective retirement strategies and transition their members into optimal retirement incomes, Cecchini sees the need for greater variable pay to be seen to be rewarding success or punishing failure.
He notes that APRA also wants to see greater alignment between pay and performance, in particular favouring long -term incentives, rather than short-term. But very few funds defer incentives. Cecchini says only one of the top 24 chief executives had their incentive deferred and only two CIOs had their’s deferred too.
He sees the growth of independent directors with experience of the private sector as hastening that change, but notes that it should not be too difficult for a fund that already has performance arrangements in place for administrators and fund managers.
Notably, Cbus is wrestling with the idea of introducing bonuses for its investment team as it expands and as it faces a growing need to justify the value of this extra spend to its stakeholders. Kristian Fok, executive manager, investment strategy at Cbus, says that while he is generally against bonuses for the unintended consequences they can bring, he sees them also as a good tool for getting alignment of behaviour and for recruitment, he notes “it is becoming increasingly difficult to get people”.
“That is a challenge for us,” he says. “It is a hard shift to go from smaller fund and fixed salary to trying to attract the right people. You also do not want people who are only there for the money, they are the wrong people.” But he notes: “If they have specialist skills then getting them to think in a total portfolio context with the right behaviours is quite useful.”
While on paper the rationale for performance pay can appear logical, many are deeply sceptical. Bruce Hartnett, chair of VicSuper, cites businesses who have paid out large bonuses when benefiting from favourable economic conditions that their executives had no hand in creating. He cites bonus cultures so ingrained that they are paid when companies have underperformed and of expectations that payouts will always come close to the maximum which leave boards at risk of demoralising them if payouts are considerably less. Lastly, he points out how bonuses can misalign staff behaviour with an organisation’s long term objectives and reputation.
He adds, paying the right bonus will always be an inexact science. The solution for VicSuper is to pay modest bonuses, so Michael Dundon the CEO and Oscar Fabien the CIO can earn up to 20 per cent of their salary as a bonus, which neither of which was paid out in full in 2014.
He is also sympathetic to those funds that pay no bonuses.
“People think that bonuses are what motivate people, but if they do you are employing the wrong people,” he says.
One industry fund chair who wished to remain off the record on this topic said that the reputational issues around not-for-profit funds paying bonuses would always be hard to manage.
“As we know from other sectors there are many conditions required to be met to justify paying performance bonuses,” he says. “And trustees need to be sure members can understand the basis for such payments. That isn’t easy to achieve as we know from the listed corporate sector. And in superannuation where the sector is challenged to justify its fees this adds to complexity.”
Such views highlight a schism in superannuation between funds that do not pay bonuses and those that see them as a hygiene factor in senior executive pay.
Chris Cuffe is quite particular about who UniSuper hires and says he needs a range of tools in its remuneration strategy.
“We are looking for people at the top of the tree in terms of performance and we cannot offer them long term incentives in terms of shares,” he says. “For every single option we offer, except the cash option we are in the top quartile over 1, 3, 5, 7 and 10 years, to be able to do that you need to pay appropriately to get the right people. It’s a necessity in a competitive environment.”
The dilemma for funds in paying more for performance and just paying more generally, is that the example set by listed companies is not inspiring.
Martin Lawrence, a director of governance analyst firm Ownership Matters, says: “The size of package in the listed company bears often very little resemblance to quality, skill and return. That is a problem of capitalism.” He adds: “Exhaustive research has never managed to prove any link between executive pay and shareholder returns.”
He is also sceptical of the link between high pay in return for a higher risk of being sacked than in the not-for-profit sector, pointing out that relatively few executives are fired, or at least not publicly fired, often leaving with generous severance to “spend more time with their family”.
Part of the confusion around what senior executives in superannuation should be paid, according to Russell Mason, superannuation partner at Deloitte, is the absence as far as he is concerned of one single specialist in the area and that consequently there is not enough science in how reward packages are structured. “I struggle to think of anyone who I would view as an expert in advising fund executives and directors on salary increases and packaging,” he says.
For the full list of remuneration for chief executives, chief investment officers and chairs of the top 50 superannuation funds, see February’s edition of Investment Magazine.