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Category Archives: executive pay

By Malcolm Farr
The Daily Telegraph
April 25, 2009 12:01am

Robin Hood … Treasurer Wayne Swan is expected to slug high earners in the upcoming

THE nation’s big earners, on $150,000 a year or more, will be hit to pay for pension reform.

Earners taking in more than twice the average wage could lose so-called middle-class welfare as the Federal Government prunes “programs that may not be essential”.

Prime Minister Kevin Rudd said a pledge for long-term pension reform would begin this Budget, with an increase in the single aged payment. He said this would require “additional support from those who are better off”.

The Daily Telegraph has reported that senior ministers are looking at possible cuts in private health insurance subsidies for the well off and elimination of some of their superannuation concessions.

Mr Rudd defended the Government’s growing debt as it funds measures to blunt the impact of recession while also seeing its own revenue shrink.

“Either you completely slash and burn everything government does and throw tens of thousands of extra people on to the unemployment queues and cut funding for hospitals and schools, or you engage in temporary borrowing,” he said.

Mr Rudd again said the increase in the first home owners scheme would end as scheduled on May 30, with subsidies reverting to their original levels.

Finance Minister Lindsay Tanner said the issue was still under consideration in final preparations of the May 12 Budget.

“That issue, along with a number of others, is something we’re still actively considering,” he said.

The Daily Telegraph reported yesterday that the Budget would renew the improved scheme, which doubled the usual payment for buyers of their first home from existing stock to $14,000, and tripled it to $21,000 for first home buyers of new houses.

Around 36,000 people nationally have taken up the higher grants since they began four months ago.

A renewed scheme could emphasise new home construction, an area Mr Rudd said was important.

“This boost has helped keep our housing construction figures up when the rest of the world has been falling,” he said.,27574,25383598-5012587,00.html?referrer=email&source=eDM_newspulse

Jamie Freed
April 21, 2009

NEARLY one in five Rio Tinto investors has voted against the company’s remuneration report in a revolt by Australian shareholders at the mining giant’s annual meeting in Sydney.

In the latest example of investor angst after a tumultuous year, high-profile director and Melbourne business luminary Sir Rod Eddington was returned to the Rio board despite 63 per cent of Australian shareholders voting against him. His position was assured by support from investors in Britain and China.

But new chairman Jan du Plessis promised to reach out to shareholders as a vote approaches on a proposed $US19.5 billion ($A27.5 billion) investment in the world’s third-largest mining company by Chinalco. Mr du Plessis, who will meet a group of shareholders in London next month, said he was committed to the deal.

“I will go out of my way to find out what people really think and what people really feel,” he said, after he was elected chairman, succeeding Paul Skinner.

The 400 or so mostly retail investors at the meeting could barely contain their anger over the miner’s debt-fuelled purchase of Alcan, its refusal to engage with merger proposals from BHP Billiton and its decision to turn to Chinalco to help it out of its financial quandry.

The tone of the meeting was in stark contrast to Rio’s annual meeting in Brisbane last year, when a generally satisfied bunch of shareholders had plenty of praise for their board and not one suggested the board engage with BHP.

Since then, metal prices have plunged and the Alcan purchase has weighed on the company like an albatross.

But despite shareholder outrage over the Chinalco deal, Rio did not make clear how any of the objections would lead to a change of the terms or the board’s recommendation.

From the investor reaction to date, it seems there is a chance of the proposal being voted down. Such a vote would cause serious problems for Rio, which has already signed a binding deal with Chinalco.

“For the moment, the deal is as it stands,” Mr du Plessis said. “We are waiting for the (Foreign Investment Review Board) process to complete itself. We are listening to shareholders and at the end of that we will put a package of proposals to shareholders to consider at that time.”

As shareholders vented their anger yesterday, the outgoing chairman, Paul Skinner, appeared to tacitly admit for the first time that the 3.4-shares-for-1 bid from BHP — once deemed by chief executive Tom Albanese to be “ballparks” away from fair value — would not significantly undervalue Rio in today’s market.

“Against the background of commodity and financial markets as they stood during the currency of that offer, the view of this board was that the value of our interest in any potential combination was not adequately recognised,” Mr Skinner said. “We now live in a different world, in a different state. The relative values all look different for a whole set of reasons.”

Mr Skinner also noted that, in a shareholder vote at the time, 97 per cent had supported the Alcan purchase.

The negative comments about the Chinalco deal and the board’s previous decisions — along with 19 per cent of the register voting against the remuneration report — show Rio shareholders are no longer as trusting. One shareholder asked Mr Skinner if the Chinalco deal could in time look as foolish as the decision to buy Alcan at the top of the market.

“There are no guarantees in this world,” Mr Skinner quipped. “Life would be a lot simpler if there were.”


Scott Rochfort
April 20, 2009

A BATTLE is brewing between Australia Post’s top brass and its army of 35,000 postal workers amid union accusations the government-owned enterprise is preparing to force staff to take unpaid leave.

The Communications, Electrical and Plumbing Union (CEPU) has warned it is considering industrial action amid signs the postal carrier is seeking sacrifices from its workforce to help tackle the impact of the economic slowdown.

“It’s getting to crunch time,” said the union’s NSW secretary, Jim Metcher, who said the $1 million cash bonus paid to Australia Post’s managing director Graeme John last year was particularly galling for his members. Mr John’s overall package for the year was $2.9 million, up 9 per cent on the previous 12 months.

The top seven executives at Australia Post received $2.6 million in cash bonuses last financial year.

Mr Metcher said the union had received calls from workers in Sydney who had been asked to take unpaid leave.

“People were strong-armed to take leave without pay in two-week blocks,” Mr Metcher said.

Australia Post has denied this. But an Australia Post spokesman did confirm the company had held meetings with staff, highlighting the impact of the financial crisis on its profits.

“There’s been informal chats around the business that there will be tough times for everyone,” he said.

However, the spokesman denied the union’s claims that staff had already been asked to take leave. He argued there was actually a shortage of postal workers in some areas.

One area where Australia Post could be feeling the pinch from the economic slowdown is in its express freight and parcel joint ventures with Qantas.

The spokesman, however, dismissed rumours the mail carrier had already warned staff it would post a $300 million loss this financial year. It reported a $432 million net profit last financial year.

But it is clear relations between Australia Post and the union have hit rock bottom.

The union has already raised concerns — which Australia Post has denied — that hundreds of postal workers have had compensation claims unfairly rejected by the company.

The CEPU, which is in enterprise bargaining talks with Australia Post, has also raised objections over the company’s shift towards hiring part-time or casual staff.

“I’m actually advocating that we take unprotected industrial action to reach agreement over these two issues (worker’s compensation claims and full-time staff),” Mr Metcher said.

Lauren Wilson | April 08, 2009
Article from: The Australian

THE Productivity Commission inquiry into executive pay will not be a “witch-hunt” to name and shame high-earning chief executives, but an investigation of whether current arrangements drive corporate performance or encourage too much risk-taking.

Speaking at the release of an issues paper in Melbourne yesterday, former Australian Competition and Consumer Commission chairman Allan Fels, who has been appointed an associate commissioner for the inquiry, said: “I don’t see this as a witch-hunt on individuals, but as an attempt to look at the issues more generally.”

The Australian Council of Superannuation Investors recently found executive pay had increased by 96per cent from 2001 to 2007, while average adult weekly earnings increased by only 32per cent, and the consumer price index by just 18per cent.

“There is a very high degree of community concern about executive pay,” Professor Fels said. “The issue will be very much on the public agenda for the duration of the inquiry.”

The Productivity Commission inquiry, headed by its chairman Gary Banks, was requested last month by Assistant Treasurer Chris Bowen as part of a government crackdown on corporate exorbitance that also targeted massive golden handshakes for departing executives.

Mr Banks said it had become important to determine a model of executive pay that could withstand a downturn in the economy, given businesses were less diligent at assessing the merits of large remuneration packages when the share market was roaring.

Commissioner Robert Fitzgerald said the inquiry offered “extraordinary opportunity to lift the lid on the way remuneration packages operate”.

He said it would explore whether executive pay arrangements drove corporate performance, whether they best served the interests of shareholders and the community, and whether high pay packages encouraged inappropriate risk-taking.

Mr Fitzgerald said he hoped some of the myths surrounding executive pay could be debunked, including whether it was necessary to pay Australian executives obscenely high wages to keep them from working overseas.

The issues paper says the inquiry will investigate whether shareholders should have a greater influence to determine remuneration practices, and how best this could be done.

It will also canvass how transparency might be increased so corporations cannot camouflage their remuneration practices.

In line with discussions at the Group of 20 meeting in London last week, the inquiry will explore whether banks and financial organisations should come under a different set of conditions from other corporations.

Initial submissions are due by May 29, public hearings will begin on June 16 and a draft report is scheduled to be released in September. The final report will be handed down on December 19.

Malcolm Maiden
March 21, 2009
The Government is moving to rein in what an angry public see as excessive executive payouts. Here, four key players debate the issues, and look for answers, with BusinessDay’s MALCOLM MAIDEN.

MALCOLM MAIDEN The question that people outside the business world are asking is – in this environment, is executive remuneration too high?

MARTIN LAWRENCE There are certain cases where pay is just too high.

CEO pay – Sir Rod Eddington
Sir Rod Eddington, Chairman JP Morgan Australia and NZ and a director of News Corp and Rio Tinto explains what boards must do to regain community confidence.

We don’t see it happen very often in Australia. There was a case with Adelaide Bank two years ago where the termination payout to their managing director was so large that they had to issue a profit warning. Everyone, I think, would quite happily say that that is too high.

The better question is: is executive pay linked to performance? Is it actually a fair reward for what’s been achieved?
We’re finding that out right now because we’re starting to see the first disclosures made after things have really started to turn down.

In some cases it’s looked pretty disproportionate.

SIR ROD EDDINGTON Historically, it’s a debate you only have when markets are turning down. It’s not usually a big issue when markets are ramping up, shareholder values increasing, businesses are doing well.

The key question is: is executive compensation linked to the right things? And does it deliver the right behaviours? Linking compensation to medium and longer-term shareholder return is a good thing. You get some strange outcomes – because there’s a lead and a lag effect, you’ll perhaps have rather bigger incentive payments at a time when the market is going down.

You need to make sure that the incentives for senior executives are aligned to the objectives of the company – that the relative salary packages of senior people in a company are appropriate.

In Japan, senior executives get a much smaller premium over the packages of what I would call front-line staff. In America, that difference is substantial. Australia is sort of in the middle.

MAIDEN Are the Government’s moves to cap golden handshakes, and inquire into executive remuneration, the right ones?

JOHN COLVIN With the benefit of hindsight, it would seem there have been mistakes made by some companies. But we believe that education is better than legislation in fixing whatever problems exist. On the termination payments changes – we’re disappointed that legislative action is being taken without prior consultation and ahead of the expected Government discussion paper.

LAWRENCE The changes will allow shareholders to protect the company against huge payments to departing executives and should help boards in their bargaining with executives. If boards respond by simply increasing salaries – again – it will be clear whose interests they are protecting.

MICHAEL O’SULLIVAN The inquiry’s timetable will mean that the Government will not be taking any further steps to intervene in the remuneration issue for at least 12 months.

MAIDEN Well, should shareholders get the power to determine executive pay packages?

O’SULLIVAN I think it’s a foolish proposition to ask shareholders to make detailed judgements when they don’t have – they simply can never have – the information. You need the degree of disclosure you would have in a takeover situation, where you’re in a locked room, in order to make those kind of judgements in any sensible way.

We think that the Opposition policy of a compulsory shareholder vote is foolish. We do think that shareholders should vote on issues of shares, including shares bought on-market for executives. But other than that, we don’t want a compulsory vote.

We’ve done a longitudinal study looking at the movements in chief executive officer payments. From ’01 to ’07, the consumer price index has increased by 17.7 per cent; average weekly earnings have done quite well, 32 per cent; but CEO fixed remuneration – not bonuses, not rights issues, not options – 97 per cent.

It just seems to me that what used to be the work value of any job hasn’t increased in that kind of proportion.

Now that the tide’s gone out and a lot of “boats” are left a long way from the water, people are in some cases going for short-term cash bonuses (that are) not in any way transparent – described to us privately as “if we don’t retain this fellow, he’ll walk”. We really don’t think that is credible: where’s he going to walk to?

COLVIN In the US, in ’84, Congress brought in a law saying that you can’t get a tax deduction for more than three times pay for a termination payment. Everybody (then) rose to that level because that was a norm which the Government had set, as opposed to leaving people to say “well, is that right?”.

I think it was Bill Clinton who brought in a law, in ’93, that said you can’t have a tax deduction for anything more than $1million. Short and long-term incentives just shot off.

So you’ve got regulation distorting the market, making it much worse. We have some of those distortions in Australia. Squeeze the balloon at one end and it goes somewhere else.

O’SULLIVAN It’s hard to say that those regulations caused the egregious behaviour.

COLVIN It doesn’t drive it, but it does distort it. Boards must take control of executive remuneration, particularly the CEO’s. You’ve got to get that absolutely spot on.

Ironically, you probably should be paying more money because they’re actually working harder (now) that the numbers are going the wrong way. When everyone’s rising with the tide, you probably shouldn’t be paying as much.

MAIDEN When remuneration reports are rejected, the same shareholders at the same meeting overwhelmingly support the re-election of the directors who presented the report – seems illogical, doesn’t it?

COLVIN Does it? It is such an emotive issue. I think it is used as a grab bag for voting dissatisfaction against lots of other things. There’s often other angst about the share price: “This is my retirement saving, I’m angry … I’m not quite sure how to deal with it, but I’ll vote against the remuneration report.”

O’SULLIVAN: Institutions don’t vote against remuneration proposals unless we’ve analysed them and are dissatisfied. The best thing is to engage with the company about the bad things in their remuneration policy, or anything else. Our beneficiaries depend substantially, in their retirement, on the success of these companies. We don’t want to be bagging them in the public. It’s much better to approach them privately, see if we can persuade them to adopt a better course, or at least satisfy us that the course that they’ve taken is actually correct.

MAIDEN And when that doesn’t happen?

O’SULLIVAN That’s why there is the beginning of voting against particular directors. There are failures for which I think you can legitimately say that independent directors didn’t play the role that we would have expected of unconflicted representatives.

MAIDEN Do remuneration committees work? When the board votes on those reports, would there be directors thinking: “I can just tick this – the work’s been done?”

EDDINGTON It’s not uncommon for a non-executive director who’s not on the remuneration committee to ask for clarification because they know it’s going to be very much in the public domain, as it should be, and they’re going to have to defend it collectively.

If you want every member of the board involved in the minutiae of compensation or remuneration, or the risk and governance, directors will need to meet once a week and they’ll need to be full-time.

COLVIN Most boards don’t appoint a CEO more than once. Some don’t do it at all, because they become a board member when it’s been done previously. If the board’s doing it correctly, they will also have the remuneration consultants, the lawyers, the governance people, reporting directly to the subcommittee first, and then secondly to the whole board.

O’SULLIVAN The damage is frequently done with the original contract, and can’t be undone. That’s what gives rise to golden parachutes and all these kinds of “welcome-aboard” payments.

LAWRENCE Part of the problem is that when a board is recruiting a new CEO, it’s like drawing up a pre-nup agreement when you’re trying to convince somebody to marry you.

And we’ve seen it go wrong spectacularly fast.

COLVIN When I was drafting them, the best boards started the contract well in advance of looking for anybody. They had a big discussion about how far they’d go, the hot spots. The board was basically ready to say: “Whoever’s doing the negotiation … has authority to those levels. Come back and chat to us if we get him.”

EDDINGTON I didn’t get a golden goodbye. I would never have accepted one. I wouldn’t expect it to be in the contract. And my view is it’s nonsense, really. You don’t need to put it in there. Good chief executives will front up as long as you offer them a good competitive salary. They don’t want payment for failure either.

But look at (US insurer American International Group) and their bonus payments. Not all boards are smart.

MAIDEN Are the remuneration and search consultants part of the answer or part of the problem?

O’SULLIVAN A bit of both.

COLVIN The lawyers, if they’re doing their job well, will set out the contract and the structure. They won’t advise – because they’re not qualified – on remuneration levels. A lawyer will be asked: is this permissible under law. Their job is to say it is or it isn’t.

Then the next question of the remuneration consultant is: is this fair and reasonable? Yes or no? Remuneration consultants are good up to a point, and then it’s got to come back to commonsense.

LAWRENCE: Unfortunately we see, too many times, boards hiding behind their advice. We’ll say, “Why did you decide to pay your CEO an amount which, if I compare him to the obvious peers, his base for turning up is much higher?” And they say, “Oh, we got an appropriate peergroup from an independent consultant.”

Remuneration is one of the very few insights you get into the relationship between the executives and the board. An executive team that is able to get the remuneration outcomes it wants most of the time is also more likely to be able to come to a board with a merger proposal that perhaps shouldn’t have been done, and get it through. It’s an insight for how that relationship works.

O’SULLIVAN One of the issues in a merger was options that people had. They got a remuneration company to reconstruct what would have happened at an assumed share price.

They paid people for forgone options packages that would have been underwater by 10,000 fathoms if they’d been allowed to run.

When we confronted the chairman, he was sort of laughing with us, saying, “Well, I don’t blame you for not being able to understand it; I could never understand it either.”

That’s just not an independent chairman’s role – to give something a tick when he plainly had no idea how it was calculated.

MAIDEN What is the difference between short and long-term incentives?

O’SULLIVAN One is to encourage making decisions that pay off in the long term. And we’ve always said we don’t mind if people don’t get the rewards for that after they’ve left the company.

Short-term incentives are frequently based not only on financial, but non-financial considerations which (companies say) are sometimes difficult to disclose – but we are very sceptical about the non-disclosure.

LAWRENCE The Corporations Act doesn’t actually acknowledge short and long-term incentives’ existence. It just says any remuneration that is tied to a performance condition, you must disclose a detailed summary of the condition. In 2008, in the top 100 companies, 94 per cent of CEOs got more than 50 per cent of their target bonus, and 45 per cent got more than 100 per cent.

MAIDEN It does seem that it’s base pay in drag.

COLVIN Why not go back to where you get a base pay and a discretionary bonus? Many commentators say we’re not going to have any part of a (system) which allows the board to use their discretion – but that’s probably a trust issue.

Let’s say a chairman went to the shareholders and said: “We’re going to have a base pay. Then the CEO can have a bonus at the discretion of the board up to a set amount.” The chairman may say, “I’m going to do that because I don’t know yet whether the CEO’s going to work out. I also don’t know whether we need to pay a little bit more to keep somebody around in really tough times, or really good times.”

However, this will give the board the flexibility to adjust up and down to meet the existing circumstances without relying on any complicated formulas.

O’SULLIVAN Very largely, the behaviour over the last 10 years has caused a loss of trust. I think you can never have a situation where you don’t disclose the basis for your discretionary judgement.

COLVIN But if the chairman got up and said, “Look, I have awarded 50per cent, because we have been on the edge of going out (of business)”, are you giving really confidential information to your competitors?

Are you spooking the market by being really honest?

LAWRENCE Just say that the board exercises discretion this year to reduce these payments.

EDDINGTON Boards will never do that, nor should they. If a chairman’s going to have a performance discussion with the chief executive he doesn’t want to read about it in the annual report – or the newspapers the next day.

LAWRENCEThe problem is we do (read) about the non-performance payments.

EDDINGTON You don’t read about the conversation where the chairman says to the chief executive, “I think you’ve earned 70 per cent of your bonus this year.”

That’s the sort of conversation a good chairman has with his chief executive, although clearly the size of the bonus should be in the public domain.

MAIDEN Do we have agreement that simplification of remuneration policies is desirable?

EDDINGTON Simple has always got to be better. If you’ve got a formula everyone can understand quite quickly – staff and shareholders – then you’re probably in the right place.

If you need a PhD in mathematics to work it out, self-evidently it’s wrong. People don’t trust what they don’t understand.

MAIDEN Finally, what do you think is going to be the biggest change to remuneration policy that comes out of this?

COLVIN I think one will be something which we haven’t got on to: a focus on what does remuneration do in terms of the culture of the organisation, not only in terms of who we are and what we do, but the ethics and the whole structure that goes behind that.

EDDINGTON I hope that all this focus on remuneration which we’re seeing now will result in clear and hopefully simpler compensation packages for executives that are tied to the things that matter in the business.

O’SULLIVAN What ought to happen is that boards should understand that in relation to some of these bad remuneration policies, responsibility is with them.

If the same people repeat the same errors, then the ultimate recourse is to say to these people, “We really need to get somebody else in there.”

LAWRENCE What I hope will happen is that boards think about whattheir stance on executive pay says about their position with theirshareholders and with the community.

Trust is a precious commodity. It’s hard to get, very easy to lose.


SIR ROD EDDINGTON Chairman-designate of ANZ Bank. He is also a director of News Corporation and Rio Tinto and a former chief executive of British Airways. Chairs Prime Minister Kevin Rudd’s Business Advisory Council.

MICHAEL O’SULLIVAN President of the Australian Council of Superannuation Investors, which advises super funds on corporate governance and other investment risks. Deputy chairman of CARE Super.

MARTIN LAWRENCE Co-head of Asia-Pacific governance research for RiskMetrics, responsible for Australia and NZ proxy research. Former manager corporate governance at BT Financial Group’s Governance Advisory Service.

JOHN COLVIN Chief executive of the Australian Institute of Company Directors. A lawyer by training, he was formerly a partner at legal firm Freehills, specialising in employment law and corporate governance, advising companies on executive appointments.

The Institute of Company Directors has accused the Federal Government of moving too quickly to tackle excessive ‘golden handshake’ executive payouts.

Treasurer Wayne Swan says the Corporations Act will be amended to give shareholders a greater say in either approving or rejecting payouts, by lowering the threshold at which termination payments require shareholder approval.

The threshold willl be changed from seven years’ base salary to one year’s.

But the institute’s chief executive, John Colvin, says the Government should focus on educating boards, rather than instituting legislation.

“We also acknowledge there have been some termination payments which even the director community would be concerned about, so I understand why perhaps the Government has acted hastily on this,” he said.

“However, sometimes we act in haste and we don’t get the best results.”

Mr Colvin says the crackdown will make things trickier for businesses.

“Let’s say there was somebody who was just sensational who one of the banks really wanted to get out from another country,” he said.

“It may be part of that bargaining system that the board’s engaged in to have a longer termination payment or maybe a smaller payment somewhere else, and that would be harder I think to do now.”

There has been community anger over the size of so-called golden handshakes when executives leave a company.

In the latest high-profile case, US insurance giant AIG paid out more than $250 million in bonuses despite relying on government bailout money to stay in business.

The Federal Government has asked the Productivity Commission to look into how much executives are paid.

Corporate Governance Minister Senator Nick Sherry has told the Senate that at the moment, shareholders only get a say if it is a payout worth more than seven times the total pay package.

“We’re reducing that down to one times; we’re also reducing the base pay from the salary package to the basic pay – there will be two major changes to the way in which these payments are calculated,” he said.

The Shareholders Association’s chief executive, Stuart Wilson, has welcomed the crackdown on golden handshakes but warns executives may find ways of getting around it.

“It seems to be pretty broad, so it’s likely to capture most things, however one should never underestimate the ingenuity of senior executives, particularly when it comes to getting the most for themselves,” he said.

Ian McIlwraith
March 19, 2009

CAPPING the extraordinary “golden goodbyes” accepted by senior executives at some of Australia’s largest companies is a laudable idea – but the Government may have shot itself in the foot.

In the US, when efforts were tried to curb executive excess by limiting tax deductions beyond a certain level, the response from big business seemed to be: “OK, the Government’s set the limit – let’s move everyone’s salary up to that line.”

In this case, without vigilance, the danger is that companies will be pressured by the executives they hire, or are renegotiating contracts with, to lift their base pay to counter the new limits and avoid needing shareholder approval. Already the shareholders’ association predicts armies of lawyers will be searching for loopholes.

Hopefully the independent directors in Australia’s boardrooms, who are responsible for acting in the best interests of shareholders when setting salaries, will not make the mistakes of their US and British counterparts in ignoring the prevailing winds.

Companies argue that they have to pay globally competitive salaries, but many are further inflated by “reverse engineering” – removing tax. It is a deal most of us never cut. When were you last asked by your employer, “How much do you want to take home?”, and were then paid a larger amount so the Tax Office gets its share and you pocket what you desired?

Another element of the system, one companies do not want to talk about, is that some termination payouts are the equivalent of “hush money” for failed executives. So a parting pay-off is negotiated on the understanding there will be no unfair dismissal claims. The Government has yet to touch “golden hellos”.

Sensibly, the new proposals stop short of shareholders getting the power to vote down executives’ salary packages. No shareholder, large or small, is really equipped to make that decision unless they are in the boardroom.

The Productivity Commission’s inquiry into remuneration just has to keep in mind that it can’t be too prescriptive because a “one size fits all” approach cannot work given the diversity of areas in which companies operate – the hurdles for executives running a gold mine are not the same as those running department stores.

Experts on both sides of the fence agree that one of the problems has been a lack of structure in setting executive remuneration. If it produces a framework which directors, probably gratefully, can subscribe to – it may be a better outcome for all.

Jacob Saulwick and Phillip Coorey
March 19, 2009

THE existing contracts of executives will be unaffected by the clampdown on “golden handshakes” announced by the Government yesterday as part of its campaign against greed.

After months of railing against excessive executive salaries, the Federal Government flagged laws giving shareholders more power to control the size of exit payments granted to executives.

The Treasurer, Wayne Swan, also charged the Productivity Commission with a nine-month, sweeping review of executive pay, meaning further limitations could be imposed next year, before the federal election.

Mr Swan said the community was “rightly offended” by excessive bonuses paid to some executives. He framed the measures as necessary to rebuilding confidence in the economy.

“If there isn’t a level of trust between executives and workers and the wider community we cannot build a stronger economy for the future,” Mr Swan said.

Under the changes, the Government will lower the maximum payment a company can grant a departing executive without asking shareholders.

As it stands, companies can lavish exit payments on executives of up to seven times their annual remuneration without seeking shareholder approval.

The changes to the Corporations Act will make termination payments limited to one year’s base salary – excluding share options and other instruments used to drive up pay – before requiring shareholder assent.

The Government also widened the range of executives whose termination payments need to be put to shareholders. But the laws will not be retrospective, so they will have little effect on the current crop of executives.

The announcement will bolster the case the Prime Minister, Kevin Rudd, makes at the Group of 20 summit in London on April 2, where he will urge other nations to curb executive largesse. He will also be armed with as-yet-unreleased recommendations from the Australian Prudential Regulation Authority on reducing greed-induced risk-taking in financial institutions.

Mr Rudd has been coming under pressure from his own back bench to do more than talk about executive salaries.

Several MPs have raised the matter at successive caucus meetings over the past fortnight, citing anger in their electorates.

Last year Malcolm Turnbull said shareholders should decide the entire remuneration of executives and board members, not just their severance packages.

Yesterday the Opposition Leader said a review was not needed and his proposal was “the simplest and fairest solution”.

The Minister for Corporate Law, Nick Sherry, said the “retirement gold watch” had been “replaced by a truckload of gold bullion”. He cited as examples Owen Hegarty at OZ Minerals, who received a bonus of $8.35 million, and John Alexander’s $15 million bonus from Consolidated Media – as payments that would be difficult to make under the new legislation.

The director of the corporate governance advisers Riskmetrics, Dean Paatsch, praised the initiative. “I think they’ve got the balance right. They are acting to constrain the worst excesses of compensation structures.”

Allan Fels has been appointed an associate to the Productivity Commission and will help inquire into executive pay. The Government said all options are on the table for the inquiry, which will report early next year.

The chief executive of the Australian Institute of Company Directors, John Colvin, lamented not being consulted. “Acting in haste or going too far with legislative solutions could be counter-productive,” he said.

The Business Council of Australia said excessive corporate salaries “that have occurred overseas have not been such an issue here in Australia”.

Sandy Easterbrook, director of the advisory firm CGI Glass Lewis, said boards had responded to complaints about excessive exit payments and would no longer be likely to grant them. “It is shutting the door when you don’t need to,” he said.