Every corporate reporting season, for companies listed on the ASX, there is often one big agenda item that is presented to shareholders, the remuneration of the executives running the company.
Quite often, significant pay rises from already incredible base salaries are raised for voting. Usually, these motions get through the Annual General Meetings, not because the individual investors vote for these pay rises, but because the institutional investors do.
And that’s the difference between being an investor as an individual, and being an investor like, say Macquarie Bank. If you have large institutional investors in a company, then the smaller, individual investors rarely hold the balance of power.
Do they deserve the money?
Many arguments have been made that if companies are to attract the top talent to run them, then massive salaries and incentives are required.
This argument doesn’t really gel when you look at companies that have not fared so well, or in fact performed poorly, and yet the executives still receive incentive payments, massive salaries, share entitlements and regular salary increases.
Vals Kolesnikoff from the Australian Shareholders Association believes that “retail shareholders have long been sceptical of the need for Australian CEOs to be remunerated with such increasing largesse”.
Mr Kolesnikoff also reports that there is “a widespread view that incentive payments are too easily given for performance which is satisfactory only and by no means superior, and that these payments are neither earned nor well aligned with returns generated for shareholders”.
The Australian Shareholders Association also has the position that “there is also increasing concern about high levels of short term incentive payments and the potential for executives to focus on achieving short-term goals to the detriment of the longer-term interests of shareholders.”
So, are executives just gaming the system? There is speculation in both Australia and the US, that this is the case. That often, once someone makes it to an executive level within one company, that they will continue to get opportunities and jobs at that level, regardless of their performance.
If that’s the case, then the climbing of the corporate ladder to the top is the hardest part of the strategy. Many aspire to reach the rare air in the upper echelons of management in our largest companies. Vacancies are filled after extensive searches, and often massive internal campaigns by competing candidates to get the profile required to be the successful candidate.
Executive sports stars
An argument for paying top dollar to our CEO’s was made the CEO of ANZ, Phil Chronican, back in April. Chronican earned $2.2 million last year.
His argument was that when Australian sportspeople or actors make the ‘top paid’ lists we puff out our chests and feel proud. Yet, when our CEO’s earn large salaries we are appalled. It’s a fair point, but perhaps missing a few vital insights.
Sports people and movies stars at a fundamental level are employees, or at a pinch, contractors being paid for services rendered. And while they are paid for the quality of their performance, they are not intimately connected with the setting of their own remuneration. In effect the sponsor or movie studio acts as a neutral intermediary acting for the ultimate benefactors, the shareholder.
There is also a strong argument about having some skin in the game.
An athlete or actor has their livelihood on the line every time they perform, they are “all in”, so to speak. And this seems to apply to business, as research undertaken by the Australian School of Business shows that firms with non-executive directors with substantial shareholding perform 29.7% better than otherwise.
Tellingly executive directors in Australian only average an ownership interest of 2.56%, of shares outstanding, while the typical non-executive director averages a holding of just 0.08%
It is interesting that recent press reports indicate that CEO Gail Kelly owns almost $30 million worth of Westpac shares while Fairfax chair Roger Corbett reportedly holds shares worth just under $60,000.
It is important to note that the success of a movie or basketball star affects their own bottom line, not the everyday Australian’s investments or retirement savings.
Do you get a say?
If you are an individual investor in a company, and executive salaries appear in items for voting at the Annual General Meeting, then yes, you do a get to vote. And, in theory, as all AGM votes count towards the outcome of the motion, your vote counts.
However, when institutional investors hold a vastly larger shareholding than those owned by individuals, then the voices of the few are lost in amongst the voices of the many.
So, why do the institutional investors tend to pass these motions for executive pay rises? Well, there are a few reasons that can be presented. Institutional investors want the companies to succeed; they want their investment to be wise and lucrative.
Management stability is often cited as a reason. As is, keeping the top talent at the company and in Australia. Again, these are logical arguments that are, in many cases, true for keeping large companies functioning.
However, when the average salary of the staff doing much of the daily work in these companies sits between $60,000-$80,000 a year, and with the CEO often earning more than 10 times that amount, there does seem to be a disproportionate gap in earnings.
New laws are giving individual shareholders some avenues to take some control. Under the ‘two strikes’ rule, if shareholders vote against the Remuneration Report and record a 25% share of the votes, a ‘first strike’ is counted.
If this happens two years in a row, shareholders can then force a board spill. If a spill resolution is supported by 50% of shareholder votes, the directors who approved the second Remuneration Report will then have to stand for re-election.
Editor’s note: Over the years it has been my observation that listed corporations and are rarely run with the best interest of shareholders at heart. Sadly this two strikes process offers a less than satisfactory protection for shareholders interests. A more logical reform would make Remuneration Reports binding, which currently they are not.
What can you do?
Invest your money wisely. Invest in companies where the pay inequity seems less extreme. If you have invested in the larger companies, always make a conscience vote against motions that do not sit well with your ideologies and personal beliefs.
You can also consider joining with other shareholders in the advocacy groups such as The Australian Shareholders Association.
The Australian Shareholders Association has already called on shareholders of several companies, including Qantas, Crown Casino and Pacific Brands, to work with them to achieve a two strikes ruling against executive pay motions.
By joining forces with other individual investors, the larger group and its lobbying abilities, has a chance of having an impact and working towards changing executive salaries.
The views in this article are those of the author and not necessarily those of Telstra BigPond.