Around the World in Remuneration and Governance

Aon Hewitt’s 2014 Global Salary Increase Survey stated that salary increases will be strong around the world in 2015 due to better GDP projections and lower unemployment rates.

2013 Average Increases 2014 Average Increases 2015 Average Increases (Projected)
Africa 7.2% 7.4% 8.0%
Asia Pacific 5.8% 5.2% 5.8%
Europe 3.7% 3.6% 3.7%
Latin America 5.9% 5.5% 5.9%
Middle East (Gulf Countries) 5.3% 4.9% 5.1%
North America 2.9% 2.9% 3.0%

Not all nations were expected to enjoy such high salary increases, with some due to report higher rises and others more likely to experience stagnant wages. The Australian Bureau of Statistics’ seasonally adjusted Wage Price Index increased only 2.6% year-on-year to September 2014, while Average Weekly earnings rose 2.4% to May 2014. The CPI Increase to September 2014 stood at 2.3%.

Wage Equality – Ratios and Caps

The gap between executive and worker pay is receiving more attention across the globe.

The proposed SEC rule forcing US organisations to disclose the ratio between the pay of their CEO and that of their median worker has still not been finalised and is experiencing resistance from business and Republican lawmakers. The SEC has now postponed its finalisation until October 2015.

The EU may also see the introduction of a pay ratio. Its Parliament is reportedly keen to table legislation by the European summer for an updated Shareholder Rights Directive that would oblige companies to:

  • disclose clear, comparable, and comprehensive information on their remuneration policies and how they play out in practice;
  • put their remuneration policy to a binding shareholder vote;
  • Include a maximum executive remuneration amount in the policy, explain how this maximum contributes to the company’s long-term interests and sustainability; and
  • set out how the pay and employment conditions of employees of the company were taken into account when setting the policy, including a clarification of the ratio between average employees and executive pay.

Some organisations such as the UK’s High Pay Centre believe that the concept of a maximum pay ratio between the workers and the CEO of a company should be introduced to ensure equality does not slide. It notes that such maximum ratios could be sector specific.

As mentioned in a previous round-up, Swiss citizens voted down a proposal that CEO pay in the country be limited to 12 times what the lowest paid worker in the company earns.

In July this year Canada introduced a Bill that proposes limits for executive remuneration for organisations in the “broader public sector”. It will apply to every hospital, every school board, every university and every college. Under the Bill, the government would have the authority to establish remuneration frameworks which may include hard caps.

On the other side of the world, executives of China’s state owned enterprises will have their pay cut down in 2015 to a ratio of around eight times that earned by the average workers at those enterprises.

Is there a perfect ratio?

A recent study by Chulalongkorn University and Harvard Business School academics Sorapop Kiatpongsan and Michael Norton surveyed people from 40 companies on what they thought the ratio between CEO and average unskilled worker pay was and what the ratio should be.

Australians were tolerant of income inequality: Australians’ ideal ratio sat at 8.3 times, almost twice the average across the 40 countries of 4.6.

There was a large gap in between what survey respondents thought the CEO to worker pay ratio was and what it actually was. Australians estimated the ratio of CEO pay to unskilled worker pay as being about 40 times. The study placed the actual ratio at just over 90 times, more than twice as high as the estimates. To put the error into context, the mean estimate of the ratio across the 40 countries was 10, the actual ratio across the 16 countries where data existed was 101.

In comparison to Australia’s ratio of 90, the UK’s actual ratio was 84, the USA’s was 354 and Germany’s was 147. The ideal ratio uncovered by the survey for those countries was 6.7, 5.3 and 6.3.

Bonus Cap

UK Chancellor George Osborne has dropped the legal action looking to overturn the EU’s bonus cap that limits bankers’ variable pay to twice fixed remuneration in an attempt to reduce risky behaviour. Osborne’s argument had been that the cap provided perverse incentives to increase fixed remuneration. However, with an advisor noting there was little chance of winning, he decided not to waste taxpayer money on continuing the suit.

European banks’ preferred loophole for getting around the bonus cap has now also been closed by the European Banking Authority. Banks had been paying employees adjustable role-based allowances (often on a month-by-month basis) and classifying them as fixed.

The Banking Authority investigated the matter and found that if role-based allowances were discretionary, not predetermined, not transparent, not permanent, or are revocable, they should not be considered as fixed remuneration but should be classified as variable. It noted that institutions making use of such allowances should change their remuneration policies and reclassify the ratio between the fixed and the variable component to comply with the bonus cap.

Corporate Governance Principles

KPMG and the Association of Chartered Certified Accountants have released a report ranking 25 markets for their corporate governance practices. The organisations produced the rankings based on the clarity and completeness of corporate governance requirements.

The ranking is as follows:

1 UK 9 Brazil 17 Indonesia
2 US 10 Taiwan 18 Canada
3 Singapore 11 South Africa 19 China
4 Australia 11 Thailand 20 Cambodia
4 India 13 Korea 21 Japan
4 Malaysia 14 UAE 22 Vietnam
7 Hong Kong 15 New Zealand 23 Myanmar
7 Russia 16 Phillippines 24 Brunei
24 Laos

Australia’s strengths were considered to be its requirements on Board diversity, the remuneration committee and the role of the Board, while the weaknesses were considered to be risk governance, Directors’ time and resources, and assurance.

Information on recent corporate governance developments in other countries is found below:

New Zealand

New Zealand’s Financial Markets Authority has released a new set of corporate governance principles, set to replace principles put in place a decade earlier.

The principles have been updated in the following areas:

  • Ethical standards: Additional points added including recognition that Boards must hold management accountable for delivering high standards of ethical behaviour and a recommendation that Boards describe the actions management and the Board are expected to undertake in responding to and supporting whistleblowing.

  • Board Composition and Performance: Added a recommendation that the Board consider using a board skills and capability matrix to identify the current and future skills, capability and diversity needs of the entity. It should also annually report the assessment of its composition and the impact it expects that composition to have on its future success and sustainability.

    The principles also encourage Boards to undertake external performance reviews on a periodic basis, for example every third year.

    Director independence has been further defined, including a clause regarding the effects of long Director tenure on independence. The principles note that regular reviews of tenure will help strike the right balance between institutional knowledge and fresh thinking.

  • Board Committees: A note added that committees are not appropriate for all entities. The importance of the audit committee was highlighted and further commentary was provided on other committees.

  • Reporting: Principles updated to reflect changes in audit and accounting standards and terminology. The continuous disclosure commentary has also been updated.

  • Remuneration: Focus increased on transparency.

  • Risk management: Principles updated to ensure that Boards have risk frameworks in place, that Directors oversee these frameworks appropriately and that they report to investors on risk.

  • Audit: Updates made to reflect changes to practices and legislation.

New Zealand’s strengths in the KPMG report were its audit committee and financial integrity rules, as well as its shareholder rights and Director independence provisions. Its weaknesses were risk governance, shareholder engagement and communication and Board diversity.


From 2016, Germany’s top publicly traded companies have to fill 30% of new supervisory Board roles with female Directors. Those who do not meet this quota must leave some Board vacancies unoccupied.  In addition, from 2015, companies must set their own binding goals for increasing the number of women on supervisory Boards, management Boards and the executive team.


The UK’s Financial Reporting Council (FRC) published a revised version of the UK Corporate Governance code, which applies for companies with reporting years beginning on or after 1 October 2014. The new version follows proposals aired by the Council in 2013. Key changes include:

  • Companies are required to put into place clawback provisions for unvested and previously paid variable remuneration or explain why they have not done so. Companies must decide themselves when they would claw back remuneration, although a restatement of results or misconduct are considered minimum triggers.
  • Wording changes were made to the effect that remuneration policies should be designed with the long term success of the company in mind (instead of to attract, retain and motivate)
  • Where there are significant votes against a resolution, organisations are expected to note in the AGM results how they intend to engage with stakeholders on the issue
  • Directors should provide a “viability” statement in the annual report evaluating the company’s likely overall viability during the course of a specified period (significantly longer than 12 months) based on a wide ranging and thorough assessment of the company’s market and financial position.

The FRC has also flagged that it plans to release a discussion paper on Board and executive succession planning after concerns that companies are not dealing with appointments in the way they should be. The council is considering whether it needs to be made clear in the UK’s Corporate Governance guidelines that succession planning is a constant process.

The UK’s corporate governance strengths in the KPMG report were Audit committee and financial integrity, remuneration structures and risk governance. Its weaknesses were Directors’ time and resources, Stakeholder engagement and communication and shareholder rights.


Italy has reportedly updated its corporate governance principles with effect from 1 January 2015 such that:

  • Boards should have at least two independent Directors, with Directors to be reviewed at least annually to check for relationships or other matters that could affect impartiality
  • Every compensation scheme should have a claw back provision
  • Press releases announcing the firing of executives should explain the process leading to termination, note whether the executive’s replacement is governed by the company’s succession plan, and include further details including intended severance payments, benefits, non-competition clauses and ongoing rights to incentive plans.
  • Boards should explain to investors each individual case of non-compliance with Italian law or the corporate governance code


Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, has been increasing its allocation of domestic stocks and is expected to take on more of an activist role, which may have an effect on the country’s poor record in corporate governance.

Japan’s  strengths noted by KPMG and ACCA were requirements for remuneration committees, shareholder rights and risk governance. Its weaknesses were requirements on Board diversity, Directors’ time and resources and performance evaluations.

South Korea

Regulations enacted by the South Korea National Assembly came into effect at the end of 2013. South Korea previously required only the toal amount of compensation for all Driectors to be disclosed. Now Director compensation must be disclosed on an individual basis if it exceeds 500 million Korean won (Around AU$530,500). This compares to Japan’s limit of 100 million yen (AU$992,731).

Korea’s strengths as identified by KPMG and ACCA were requirements for the remuneration committee, audit committee and financial integrity and shareholder rights. Its weaknesses were requirements on Directors’ time and resources, Shareholder engagement and communication and Board diversity.


ISS Group recently released a study of shareholder voting and engagement in China. It found that shareholder voting at meetings was low in China with mainland listed companies achieving around a 55% turnout, compared with 62% for dual-listed companies, 74% for Hong Kong companies, 70% for French companies, 74% for UK companies and 87% for US companies.

It suggested that Chinese retail investors tend not to make the effort to vote at shareholder meetings because they do not believe their votes will matter. Chinese institutional investors may often share this view because of the controlling stakes held by the state.

The approval rate of management proposals is also high. Forty per cent of proposals were approved unanimously, 90% were approved with 99% of shares voted in favour. This compares to a the US and the UK which had 0% and 1% of proposals approved unanimously and 29.8% and 51.8% approved by 99% of shareholder votes. ISS conjectured that this could be due to the highly concentrated shareholder base, however, this is also the case for dual listed and Hong Kong listed companies, which had lower approval levels. ISS decided this was likely due to higher levels of foreign ownership.

Looking at the type of resolutions, Chinese voters are more concerned by share issues, related party transactions and mergers and acquisitions than Director elections or equity issues and executive remuneration, with the latter being the least contentious.

In a survey with a small sample size, ISS asked institutional investors about their perceptions of Chinese corporate governance. Almost 75% of respondents rated practice as poor or very poor. Those who were not investing in China most often named corporate governance concerns as the reason. Lack of transparency was the biggest bug bear.

China’s strengths according to KPMG and ACCA were requirements for remuneration committees, nominating committees and Director independence. Weaknesses were requirements for assurance, Board diversity and risk governance.

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