Top bosses fear striking out; Increasing shareholder scrutiny is leading to a drop in top executives’ fixed pay

Top bosses fear striking out

October 27, 2013

John Collett

Increasing shareholder scrutiny is leading to a drop in top executives’ fixed pay.

Just the threat of facing a second strike makes directors more accountable. Photo: Jessica Shapiro

Rule changes to give shareholders more say over the pay arrangements of top executives are reining in excessive pay packets, according to researchers at Griffith University. The ”two-strikes” rule was legislated in 2011, and there is evidence that executive compensation is being curbed and boards of directors are paying more attention to shareholder views, says Associate Professor Reza Monem from the Griffith Business School.Under the two-strikes rule, if 25 per cent or more of shareholders votes against a company’s remuneration report, which outlines the salaries and bonuses of senior executives and directors, a first strike is recorded.

A second strike occurs when a company’s subsequent remuneration report also receives a ”no” vote of 25 per cent or more.

When a second strike occurs, the shareholders will vote at the same annual meeting to determine if all the directors will need to stand for re-election.

If this ”spill’ resolution passes with 50 per cent or more of eligible votes cast, a spill meeting has to take place within 90 days. Before the two-strikes rule, shareholder votes on companies’ remuneration reports were non-binding on directors.

”Overall, the results provide early evidence that the two-strikes rule is improving executive compensation practice in Australia,” Monem says.

The research by Monem and colleague Professor Chew Ng indicated clear evidence of some level of restraint on the amount and structure of chief executive pay in the companies that received a first strike in 2011 but avoided a second strike in 2012. It shows that just the threat of facing a second strike makes directors more accountable to shareholders, Monem says.

The research concludes that smaller companies are more likely to face a strike. Monem says companies with larger market capitalisations generally have better corporate governance. ”They have more resources and can afford to have larger boards and bring in more independent non-executive directors,” he says.

Separate research released last month by the Australian Council of Superannuation Investors and advisory company Ownership Matters concluded the average fixed salary among the chief executives of the largest 100 listed companies fell 2.6 per cent to $1.9 million for the year ending June 30, 2012. When bonuses are included, Australia’s top executives took home an average of $4.7 million, virtually unchanged from the previous year. But even with the recent fall in fixed pay it has increased almost three times as fast as inflation during the 10 years to 2012, and nearly 70 per cent faster than average wages growth. The chief executives of the largest 100 companies earned 67 times the national average wage in the year to June 30, 2012.

Ann Byrne, the chief executive of the Australian Council of Super Investors, said at the time the research was released that increased investor engagement, combined with the introduction of the two-strikes rule, had ”no doubt” played their part in the decline in fixed pay.

She said the decline showed that boards had taken a more active stance on executive remuneration in response to increasing shareholder scrutiny in the years following the global financial crisis.

But shareholders still have concerns there are cosy pay arrangements between boards and executives.

Monem says about 90 per cent of the 111 companies that received a first strike in 2011 had the chief executive sitting on the remuneration committee.