Average base pay to the chief executives of Australia’s 100 largest listed companies has stagnated over the past decade, but institutional investors are still agitating for boards to show greater restraint when awarding bonuses.

The latest annual survey of CEO pay by the Australian Council of Superannuation Investors (ACSI), released on Thursday, August 24, 2017, shows that average fixed pay for ASX 100 chiefs in 2016 was unchanged from nine years earlier. The report highlights that not only has average and median pay remained flat for most of the past decade, but on average bonuses have not risen either.

ACSI chief executive Louise Davidson credited the introduction of the “two strikes rule” on remuneration reports and increased shareholder scrutiny for keeping excessive CEO pay in check over recent years.

However, she said ACSI remained concerned that boards were still not exercising enough discretion about awarding the variable elements of executive remuneration. ACSI also wants more transparency from boards about how they make, design and assess executive incentives.

“The prevalence of CEO bonuses at consistently high levels raises serious questions about the way performance hurdles are being designed and applied,” she said. “The fact that only 18 CEOs received bonuses below 50 per cent of their maximum entitlement in the 2016 financial year indicates that they bear little relation to performance in many companies.”

Some key findings of the ACSI pay survey included:

  • In FY16, 86 per cent of ASX 100 CEO’s received a bonus.
  • Where bonuses were paid, the median payout was 69 per cent of the maximum entitlement.
  • Only 18 CEOs in the ASX 100 received less than half of their maximum potential bonus.
  • The median realised pay (remuneration including equity awards and bonus outcomes) for ASX 100 CEOs was $3.78 million in FY16, compared to $3.88 million in FY15 and $3.96 million in FY14.

ACSI represents 37 institutional asset owners, mostly non-profit superannuation funds, as a collective voice on environmental, social and governance (ESG) issues. The organisation’s members have a combined funds under management of $1.6 trillion and control roughly 10 per cent of total shareholdings in the ASX 100.

Call for transparency

One of ACSI’s most vocal members is AustralianSuper, the country’s largest industry super fund. AustralianSuper head of ESG Andrew Gray told Investment Magazine that he is also alarmed by the seemingly low hurdle for CEOs to earn bonuses.

“We would be expecting much more variability in the awarding of bonus payments to reflect actual outstanding achievements,” he said. “The persistence of bonus payouts is a definite concern and boards need to give much greater thought to what they are trying to achieve and set genuine stretch targets accordingly.”

Gray said that a key focus for AustralianSuper in its engagement with boards and remuneration committees this reporting season was looking to see that pay policies are structured in a way that is aligned with the business strategy.

He noted a trend for a growing number of companies to simplify their bonus structures by collapsing short- and long-term incentives into a single measure, but warned that this was not always an appropriate strategy.

“While it is often good to see companies simplifying their incentive structures, I would warn boards against doing something because it is fashionable,” he said. “What we really want to see is companies and boards designing pay structures that are specific to their business, aligned with long-term shareholder interests, transparent and well annunciated.”

One of the factors that AustralianSuper considers when assessing the appropriateness of CEO pay – alongside more traditional factors such as market capitalisation, shareholder return on equity and industry benchmarking – is how it is expressed as a ratio of average worker pay in the company.

Reporting season scrutiny

ACSI executive manager for governance, engagement and policy Ed John said it had been encouraging to see some boards scale back or cancel CEO bonuses this reporting season.

Commonwealth Bank of Australia chair Catherine Livingstone made headlines earlier this month when she announced that the bank would cut executive bonuses following a money laundering scandal.

“Institutional investors aren’t obsessed with the levels of CEO pay,” John said. “They’re more concerned with ensuring there’s alignment around the sorts of incentives that are created for management. Transparency is also key as shareholders want to understand why bonuses have been paid.”

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