Release of Executive Pay Best Practice Principles

Best practice principles to provide companies and their boards guidance on developing and structuring executive pay packages have been released today.

Development of the Executive Remuneration: Best Practice Principles and Guide by Deloitte Touche Tohmatsu for the Business Council of Australia recognised executive remuneration remained a significant issue for boards, investors and the broader community.

“The guide brings together for the first time, concise guidance on best practice proposals, practices and recommendations on executive pay,” BCA President, Mr Hugh Morgan said.

“It is aimed at supplementing existing industry guidance while providing investors with a greater depth of information and understanding on best practice executive pay policies and strategies.

“The fact is many of Australia’s best companies already undertake a range of measures to ensure executive remuneration is appropriate, strategic and transparent.

“Companies that have not yet should consider using this guide to establish and disclose remuneration policies and practices that are in line with best practice.”

Mr Morgan said that while the guide was a welcome contribution to the debate, there needed also to be a recognition this debate was focussed on the excesses of a small minority of Australia’s approximately 1,500 publicly listed companies.

“The reality is that the marketplace for executive remuneration is not limited to publicly listed companies,” he said.

“It also includes a very large number of Australian companies that are privately owned, as well as senior executives in Australia representing companies headquartered overseas. This reflects the fact that the market place is becoming increasingly complex and competitive due to the increasing internationalisation of demand for skilled managers.”

“The BCA and the broader business community recognise that from time to time there will be excesses.

“It also recognises that there have been and will continue to be instances where shareholders’ adverse response is justified. However, these instances should not be taken as a sole point of reference in this debate.”

Mr Morgan said the reality was that Australia has among the most competitive and productive corporate sectors anywhere, as evidenced by OECD recognition that Australia’s economy is one of the best-performing in the developed world. Neither were CEO remuneration levels above average by international comparisons.

“Experience shows that the vast majority of boards seek arms-length advice on remuneration issues in the interests not of only their shareholders, but also in the interests of equitable outcomes for staff and to discharge their own responsibilities to shareholders,” he said.

“It is important for shareholders to recognise that the board is their agent and they have the option of voting any or all directors off the board if they believe it has not fulfilled its obligations. The second, though less satisfactory option is to sell their shares in the company.

“These choices are real and should not be lost sight of.”

At the same time, the BCA has sought to raise awareness of the potential unintended consequences of new proposals to further regulate publicly listed companies on executive pay.

“At the time when legislation mandating disclosure of the remuneration of a publicly-listed company’s top five executives was introduced, business publicly expressed concerns this would provide a stimulus for increases in salaries. That advice was disregarded, but that publication has undoubtedly been a factor underlying the generation of higher remuneration.

“The expansion of this disclosure regime, as proposed in CLERP 9, is likely to do more of the same.”

Mr Morgan said reliance on local regulatory change in what was a global market for skills and expertise was ultimately a poor fix.

“The difficulties in attempting to impose uniformity on this market is highlighted by the fact that local fund managers – many arguing for ‘regulatory constraints’ on pay in Australia – are prepared to invest an increasing proportion of funds under management in markets overseas where executive salaries are higher and excesses have been greater.

Mr Morgan said the intensity and nature of the debate – focused on a perceived lack of integrity among boards and companies in determining pay, performance assessed increasingly on short-term benchmarks, and the microscopic scrutiny of individuals’ base salaries, options and other remuneration structures –  ran the risk of undermining confidence not just in corporate Australia, but distracting CEOs, senior staff and workforces generally from their core function of value and wealth creation.

“There is a real risk that executive pay becomes the overriding indicator as to how a company is perceived and how it positions itself, to shareholders, the public, its staff and current and future managers.

He said business recognised that if both the public and governments were determined to make changes to executive pay regulation, that would ultimately happen.

Mr Morgan said he welcomed full transparency of CEO remuneration details, but if the community was determined to make the changes proposed then it must also be prepared to acknowledge not only the complexity of the debate, but accept the flow-on effects that may be counter to its intentions.

Executive Remuneration: Best Practice Principles and Guide