At the end of August, we released the 15th annual survey into CEO pay in Australia’s largest listed companies. One of its standout facts is that in the 2015 financial year, 93 per cent of the CEOs in the ASX100 sample received a bonus – at a median 76per cent of the maximum.
That median bonus was worth $1.16 million.
It’s clear that bonuses are the new normal. So many CEOs receiving such a big percentage of their maximum bonus raises serious issues about the appropriateness of bonus hurdles, and begs the question – are bonuses really just fixed pay dressed up as at-risk pay?
Bonuses, by their very nature, should reward exceptional performance. Did nine out of 10 ASX100 CEOs have an exceptional year, or were they just doing their jobs? I’m keen to know just what expectations boards are setting for their CEOs if they’re paying them 76 per cent of their bonus potential in the current economic climate.
We have to go back to 2008 – a year renowned for hitting new heights in CEO pay, bonuses and termination payments – to find such a high level of bonuses paid.
For owners representing the retirement savings of millions of Australians, this is concerning. Independent company directors should be acutely aware that despite the reduced levels of CEO pay, the community believes it is out of step, representing as it does many multiples of ordinary people’s wages. Equally, we believe boards risk an investor backlash if they do not keep a tighter rein on management rewards.
The bonus issue stands out in our latest survey, because many of the long term themes that that have emerged from 15 years of studying CEO Pay are trending downwards.
In 2008, for example, fixed pay seemed to be set on a sky-high trajectory. Between 2001 and 2008, median fixed pay for Australian CEOs rose a staggering 120 per cent, from $780,975 to more than $1.7 million. But in the wake of the GFC, the strong representations that ACSI and other investors had been making about executive pay levels, were listened to and the ‘two strikes’ rule was introduced. Year by year, we’ve since seen fixed pay come down.
To be clear, the shrinking of fixed pay is not due to incumbent CEOs taking pay cuts, though they are receiving minimal pay rises. It’s down to boards taking the opportunity to pay the replacements of departing CEOs less. In 2015, median fixed pay for 2015’s ASX100 CEOs was back to pre-2008 levels, at $1,715,087.
The same cannot be said for CEO pay in the USA and UK, where pay studies indicate that the median CEO pay rate in top companies is still rising – albeit more slowly in the UK which, under Prime Minister Theresa May, faces the prospect of a binding vote on executive pay. The new UK PM has made it clear she wants change in corporate Britain. There will considerable interest in how she implements those changes, and what effect they may have.
In Australia, termination payments had been following a similar downward line as fixed pay, peaking in 2008 with a median of $3.5 million, then dropping swiftly, following investor calls and the Corporations Act amendment which compelled any company wanting to pay its CEO a termination payment greater than 12 months’ salary to first to seek shareholder approval. It’s to be hoped that a rash of $2 million-plus payouts in 2015 proves an anomaly.
As a result of the well documented global corporate excesses in the lead up to the GFC, the CEO pay issue has rarely left the headlines and public debate. This year’s evidence that pay has flattened in the Australian market has surprised many, but we see it as an encouraging sign that investor scrutiny is working. A greater willingness on the part of institutional investors, including our member funds, to vote against poorly structured and overly generous remuneration packages has helped to concentrate the minds in Australian boardrooms.
As this year’s issue around bonuses has shown, there’s always more to do, and investors need to remain engaged or we run the risk of a return to the bad old days.
Louise Davidson is the chief executive officer of ACSI.