In recent weeks, the Australian Council of Superannuation Investors (ACSI) published their annual review of CEO pay in the ASX 200. Research is conducted on the organisation’s behalf by Ownership Matters, an Australian governance advisory firm.
The report highlights differences between statutory disclosures and realised reward. It also reports remuneration in a manner which differs from the majority of consultants in that it provides information on the median and average levels of pay as well as the highest and lowest levels of pay for the ASX 100 and those organisations ranked between 101 and 200. In that context, it also provides information on percentage changes in realised reward over the relevant 12 month period. Its research covers all Financial Years ending in the 2017 calendar year.
Realised pay is an interesting construct though the primary variability between statutory disclosures and realised reward reflects the actual benefits a CEO receives on exercising their entitlements primarily under equity-based incentive plans. It would also include the benefits arising from deferred awards which were settled in the 2017 calendar year.
In recognising realised pay, the report does not annualise the benefit of reward which could cover a one, two, three, four or five-year period. By annualising such reward, the highest paid executives’ reward outcomes in the majority of instances would be substantially reduced. It does however, in this context, reveal that disclosed remuneration, in a number of settings, is below realised remuneration. Statutory disclosure of long term equity-based incentives are amortised over a three to five year period. Further, up to one third of CEOs fail to meet performance hurdles set under their longer term incentive plans which traditionally require meeting a relative total shareholder return measure or an earnings per share measure or both.
In a relative total shareholder return construct, theoretically 50% of participants will not benefit as they will not achieve a median or better than median result. This circumstance is also influenced by the benchmark set for the company which might be an index, such as the ASX 100 or the ASX 200, it might be an industry or series of industry subsets of the ASX 200 or it might be a selected peer group which could include international comparators, particularly for large organisations with a global operating footprint.
In reporting on the top 10 highest rewarded CEOs (leading an ASX100 company) on a realised reward basis, there is a ratio between the top paid executive and the 10th highest paid executive of greater than 3:1. In the second ASX 100 the ratio is similar from the highest paid through to the 10th highest paid.
Due to movement in and out of the index and circumstances such as retirements, temporary incumbents in the CEO role or short tenure, the research provided information on 84 CEOs in the ASX 100 and 77 in the second 100, and on a year-to-year comparison basis the number of direct comparators were significantly less.
The report is available online using the following link – ACSI CEO Pay in ASX 200 Companies.
In exploring the actual reward outcomes, the report does not consider the impact of alternate methodologies in determining the number of securities issued under a long term incentive plan including Black Scholes, risk adjusted Black Scholes, Monte Carlo or binomial simulation valuations, or fair value in relation to rights. These methodologies for equity allocation have a significant impact in a number of circumstances on the actual outcome of reward realised in any one calendar year. Realisation is also influenced by the CEO’s choice on whether to exercise their entitlements or defer them to a future year in anticipation of share price growth.
The research is thorough, retains its consistency and footnotes are comprehensive and clear. The report also highlights the variability between realised and reported pay from the 2016/2017 year and provides useful historic data in relation to the median and average reward arrangements from the 2017FY back to the 2011 Financial Year.
In addition to commenting on realised total reward, there is also a similar perspective offered in relation to median and fixed remuneration over a 12 year period dating back to the 2005 Financial Year, which for that period indicates a relatively flat adjustment to CEO fixed remuneration, having regard to inflation and average weekly earnings over that period.
The report further highlights the degree of variability in incentive or bonus payments over the last 10 years and provides interesting insights into termination payments over the same extended period.
For Directors and senior executives interested in trends it is a research document worthy of a read.