Productivity Commission Report Should End Many Executive Pay Misconceptions

The Productivity Commission’s latest report should end many of the misconceptions about executive remuneration, says BCA President Graham Bradley.

Mr Bradley said the commission’s final report on executive remuneration set out many important facts about how executives are paid. And he welcomed the report’s overall finding that there is no widespread failure in executive remuneration governance across Australian companies.

‘The commission’s independent report should make an important contribution to public understanding’, he said.

Mr Bradley added that the report’s specific recommendation on a so-called ‘two strikes’ rule had been improved in the final report. But he said this proposal and a new proposal for a ‘no vacancy’ rule would need further consideration and refinement before they were made law, to avoid unintended consequences.

Mr Bradley highlighted the report’s recognition of the central role of boards in determining executive remuneration.

‘It’s important that companies keep working to ensure remuneration for their executives reflects performance. And boards should be accountable for that.

‘This is a continuing challenge for boards, and one they continue to work at.’

Mr Bradley said the report made a number of points not well recognised in the public debate:

  • Since 2006–07, CEO pay has been falling.
  • Executive pay has generally tracked the share market. When executives have been rewarded, it has mostly been because they delivered for shareholders, including superannuation funds held by millions of Australians.
  • Most of the reported increases over recent years have resulted from increases in incentive pay in the largest companies – at a time when those companies have performed very well.
  • Australian executive remuneration is below that of the US, the UK and larger European countries like France and Germany (for companies of similar size).
  • There is a competitive global marketplace for executive talent. Australian listed companies need flexibility to attract and retain skilled and experienced executives in that competitive global market.

‘This report is released just as Australian companies have delivered their strongest share market performance since 1993,’ Mr Bradley said. ‘And Australian companies have done better than anyone expected over the past year at keeping people in jobs and employing new workers.’

Mr Bradley said the change to the 'two strikes' proposal in the commission's final report was a step in the right direction. Requiring a resolution for election of directors following the second 'strike' would limit concerns that a small minority of shareholders could wield undue influence at the expense of the majority, he said.

However, the BCA remains concerned that the 'two strikes' proposal elevates executive remuneration matters beyond other strategic commercial issues facing boards.

Mr Bradley also said that the new mechanism proposed in the commission's report for improving a 'no vacancy' rule presents difficulties in practice. ‘It amounts to an annual shareholder approval of board size, which seems an unnecessary obstacle to board management.’

In its discussion of a ‘no vacancy’ rule, the report acknowledges good reasons for keeping some board positions vacant – such as increasing board flexibility. But the report nevertheless suggests shareholders vote each year on whether companies be required to fill all available positions.

This would require in many circumstances that companies nominate directors in advance to fill extra positions – even though these positions would probably not finally need to be filled. One likely result, Mr Bradley said, was that some boards would move to reduce their maximum number of directors, even at the cost of reducing their flexibility.

‘The report acknowledges that board flexibility has been central to good corporate governance,’ Mr Bradley said. ‘Yet one of the report’s own recommendations could actually reduce that flexibility.’