How much is enough?

The debate about the increasing size of executive remuneration has raged in the wake of the Hayne royal Commission. At the most recent annual meeting season shareholders showed their anger about the multimillion dollar pay packets handed to big bank chief executives by registering big protest votes.

While top brass employed in the not-for-profit superannuation sector are not remunerated to the levels that those in the private sector are – the average ASX100 CEO gets around $4.36 million per year – the 2019 Investment Magazine Super Fund Salary Survey reveals there is still no magic formula when it comes to working out super executive salaries.

The survey data shows wide variety between pay packages making comparison across the sector difficult, however funds that Investment Magazine spoke had robust rationales behind their remuneration decisions.

Michael Swinsburg, a managing partner at global executive search firm Alexander Hughes Asia, says one reason for this is that running a super fund is getting increasingly challenging.

“The big funds are developing more complex client service offerings, internalising investment teams, building their own financial advisory units, and increasing offerings so they are looking more like a large wealth management business,” he says.

“The remuneration will need to reflect the complexity and risks associated with this and the need to attract and retain the right senior talented executives who can run today’s business and tomorrow’s in this hyper competitive environment.”

With this in mind, he warns that scrutiny around how much CIOs, CEOs and chairs are paid will only intensify.

“As the sector grows we can expect ever more scrutiny from the Productivity Commission and future reviews. It is only going to get hotter in the kitchens of super funds.”

Now in its fifth year, the survey includes remuneration for non-profit licensed super funds for the financial year ended June 30, 2018. It also encompasses the country’s largest pension funds and the Future Fund, but does not include bank-owned or other for-profit super funds.

Short term incentives popular

The survey reveals that variable pay and performance-linked pay is now a feature of the remuneration structures for many funds.

Long term incentives (please see methodology for further explanation) were paid by only four funds – CBA Group Super, Equip Super, Mine Super and First State Super – while short-term incentives were far more popular, with 22 chief executives and 22 CIOs receiving these as part of their total remuneration package.

In the case of CBA Group Super, chief executive Doug Carmichael has a $75,505 “share-based payment” listed according to its annual report, which is referred to as “deferred rights (at risk)”.

“The structure of remuneration arrangements for senior managers consists of the following components: (i) fixed remuneration, and (ii) short-term variable remuneration (STVR) at risk,” said CBA Group Super in its 2018 Remuneration of Executive Officers document.

“The ‘at risk’ component is based on performance against key financial and non-financial measures across performance categories of customer, people, financial, and business and strategic initiatives”.

For FY18 Carmichael’s LTI includes “the accounting expense of the previous years’ STVR deferred awards. For FY18, this includes the expense of the FY15, FY16 and FY17 deferred STVR awards as applicable to each senior manager”.

Cbus CIO Kristian Fok, who has a base salary of $560,193 with an STI of $81,797, says the fund last year introduced a “cautious and conservative variable pay program” for the $48 billion fund’s executive team and some of its senior investment staff.

“The change was introduced to better align performance with outcomes for key staff. Additionally, as Cbus has begun its internal management of several investment strategies, the change allows us to better align with the employment for investment talent,” he says.

On bonuses, Fok says the board reserves the right to withhold payment of these “at their discretion”.

This includes “unpaid amounts from previous years that have been deferred for future payment. Examples of these types of situations where the board may exercise this right would include material breaches of risk controls, and misconduct”.

The bulkiest pay packets

Last year, Fok announced that the fund for construction and building industry was set to bring up to 40 per cent of its asset management in-house, with Cbus now rewarding investment staff for exhibiting behaviours which align with member-first thinking, longer term investing and whole-of-portfolio outcomes.

The complexity related to in-housing of investment functions is very much reflected in the salaries received by CIOs in this year’s survey. Swinsburg says “a more diverse skill set is required for a CIO to run their own fund’s money and lead a team of internal asset managers”.

UniSuper CIO John Pearce, AustralianSuper CIO Mark Delaney and Commonwealth Superannuation Corporation CIO Alison Tarditi are the most highly paid members in the $2.8 trillion super sector according to the survey, which uses publically available annual reports as its source material.

Pearce is again the most highly paid executive, taking home almost $1.6 million for the year to June 30, a slight increase on the previous year’s $1.4 million. In 2018, his package included a base salary of $589,744 with short-term incentives of nearly $882,924, and super of a little over $100,000. Delaney received a base salary of $711,350 with an STI of $736,350, while Tarditi had a base salary of $627,001 and STI of $614,295.

Julie Watkins, UniSuper’s executive manager for people, told Investment Magazine that Pearce’s pay reflects the “significant and direct influence on fund performance and results” he has.

“UniSuper’s investment team performs a number of in-house functions not performed by, or to the same extent as, many other super funds which tend to outsource more. The nature of the investment function is complex relative to other funds with in-house management strategies,” she says.

“Not only does the CIO have overall responsibility for investment of UniSuper’s assets of around $70+ billion, he has direct management responsibility of funds managed internally, which is expected to hit $50 billion this year.”

UniSuper’s in-house investment function comprises defined benefit and defined contribution options, fundamental and quantitative strategies, as well as global and Australian portfolios across a range of asset classes.

“The CIO’s remuneration reflects this extra responsibility. In addition, there are no payments to any outsourced providers to manage the in-house funds and fee savings for members are in the tens of millions per annum. The CIO’s bonus is heavily dependent on the achievement of quantitative goals over a period of several years,” Watkins says.

With the average salary for a CIO at a not-for-profit fund sitting at almost $480,000, some experts question what the right level of pay is for executives concerned solely with member outcomes. However, there is also an acknowledgement that funds need to be able to employ the best talent to achieve the best results for their members.

Top 10 earners

The highest-paid CHAIRS

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The highest-paid CHIEF EXECUTIVES

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The highest-paid CHIEF INVESTMENT OFFICERS

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Passing the BBQ test

In an op-ed written for Investment Magazine, and included in full in this issue, former fund CIO David Bell questions whether the current rate of executive remuneration in super would “pass the BBQ test”. With the average wage in Australia currently sitting at $83,486, this seems a fair thing to ask given super execs earn many multiples of that, even at lower levels.

Bell, whose base remuneration was $343,335 in the year to June 30, 2018, writes that he was “permitted to cap” his take-home remuneration to a level he felt was appropriate by returning his “bonus entitlements”.

According to Mine Super’s Remuneration Disclosure document, Bell was also eligible for a deferred LTI component of $147,331 for the year commencing 1 July 2017 (this has been included in our survey’s total remuneration column, along with STI and paid LTIs), but that this wasn’t due to vest until June 30, 2020.

“Continued employment is also a prerequisite for payment,” said the document. Bell resigned from the fund in December 2018 to continue his PhD studies.

“I find executive remuneration in superannuation a fascinating topic, both personally and academically. Was I part of a problem? I felt that ‘yes,’ I was,” he writes.

“But what is an appropriate maximum remuneration for an executive? I considered how hard I worked and the stress of the role, the hours I worked, my education and experience, and the scope to add value through my actions.”

First State Super general manager of human resources, Steve Hill, says that a movement towards funds managing more of their assets in-house does not necessarily mean exponentially higher salaries for CIOs.

Overhauling incentive schemes

Damian Graham, First State Super’s CIO since December 2016, was the fifth highest paid CIO in the country, receiving a $700,951 base, plus a $232,525 STI and a $212,525 LTI (according to this survey’s methodology).

The LTI portion (as reflected in our survey), which First State Super’s Director and Officer Remuneration document lists as a “deferred incentive” emanated from a bonus scheme called the Investment Team Bonus Scheme which he was invited to participate in from July 1, 2017.

“The Investment Team Bonus Scheme Policy operates under the same principal conditions as the Senior Management Bonus Scheme with a bonus paid based on the achievement of fund performance (investment) goals and for the achievement of individual goals relevant to the chief investment officer,” said the document.

“The STI is paid in cash and the deferred Incentive is payable in cash after two years pursuant to the Senior Management Bonus Scheme Policy”.

Hill commented that “what is critical is that as the depth and breadth of the CIO role increases then we must provide remuneration that is commensurate with the skills, experience and expertise that is required to lead a broader and more diverse in-house investment function.

“Our approach to remuneration supports our objective to attract and retain the right talent to serve our members. Our approach is to remain competitive, but not be motivated to be the highest payer in any particular job category.”

This is certainly reflected by this year’s salary survey. First State Super chair Neil Cochrane received total remuneration of $215,393 for the year to June 30, 2018. Topping the list of chairs was $5.4 billion TWU Super’s David Galbally, who took home $277,200 – a figure which is exactly the same as last year. AustralianSuper’s Heather Ridout, who took home $237,560 for her role at the country’s largest fund, came in third.

First State Super’s now-retired CEO Michael Dwyer was the sixth most highly paid in this year’s survey, with total remuneration of $928,666 (which includes a base of $774,800 and an STI of $110,000).

“First State Super has a very clear remuneration policy that outlines the approach for remuneration for all its staff, including the CIO and CEO, Hill says.

He added that external global remuneration consultants are also engaged, with regular reviews.

“The remuneration structure of the chairman also follows a rigorous process set by the constitution of the fund. The chairman’s remuneration is reviewed every two years by an external consultant and auditor,” he says.

The country’s most highly paid CEO is again the Future Fund’s David Neal, who took home total remuneration of just over $1.27 million. QSuper’s Michael Pennisi was in the number two position, receiving a little over $1 million in the year to June 30, 2018, and AustralianSuper’s Ian Silk was third, receiving nearly $994,822.

A spokesperson from QSuper told Investment Magazine that the fund’s leaders are “remunerated according to a range of measures across a balanced scorecard”.

“In the case of Michael Pennisi, this includes the performance of three separate and large entities; QSuper, financial advice arm QInvest and QInsure…this makes it difficult to compare his remuneration with that of other super funds’’ CEOs,” said the spokesperson.

“Variable payments are explicitly linked to performance and the group’s risk management framework. Underperformance directly impacts the amount of variable pay received by executives.”

Despite this, Guy McKanna from Super Recruiters says there remains a “range of pay structures” across the super sector.

“The key is to ensure that remuneration is linked to performance – be that fund performance, whole organisation performance and employee satisfaction – or better still a combination of all these,” he says.

“Boards currently determine this, sometimes without adequate comparison. Surveys such as this provide some transparency and comparison, but more needs to be done to make this clearer across the industry.”

Average C-SUITE EXECUTIVE PAY

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Chief investment officer pay at the 50 biggest super funds

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Chief executive officer pay at the 50 biggest super funds

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Chair pay at the 50 biggest super funds

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Alice Uribe is the editor of Investment Magazine’s print and digital platforms. Uribe has been working as a journalist, editor and digital producer for more than 10 years.