As the Global Financial Crisis (GFC) first bit back in 2009, it became common for boards to announce executive wage freezes. Telstra, Wesfarmers, Rio Tinto, TechnologyOne, CSC, Spotless, and five of the big six law firms were amongst the companies embracing the trend.
Three years on, and pay freezes, voluntarily declined bonuses or lost rewards due to not meeting performance conditions are still a focus of media attention. This hardly seems surprising given the recent performance of many companies.
In our latest Key Management Personnel (KMP) report (PDF), we showed that from 2007 to 2009, median net profit for ASX 100 companies fell by 6%. From 2009 to 2011, this fall was slowed to 1%. Fixed remuneration for CEOs and top three executives has remained fairly flat over the whole period.
Median total annual remuneration (consisting of fixed remuneration plus short term incentive (STI)) for the top three executives in ASX 100 companies increased slightly, while for CEOs it fell, before increasing again to 2011. Average total annual remuneration for CEOs in the ASX Top 100 has fallen from around $3.3 million to around $2.8 million over the same period. Long term incentives were not included in our analysis, as their real-life value can vary greatly from the accounting value disclosed in annual reports.
Our conclusion was that highly paid CEOs took a hit post GFC to their total annual remuneration, not the other key management personnel. A recently released report by the Australian Council of Superannuation Investors appeared to strengthen this conclusion, showing that the pay of the top ten CEOs had declined substantially from 2010 to 2011. The highest paid CEO in 2011, BHP’s Marius Kloppers, would only have been ranked fifth if he had received the same pay in 2010, the report noted.
We believe it was inevitable that executives at the very top of the pay scale accept remuneration freezes in this difficult environment, which is why almost every financial institution’s executive pay has been affected, as the sector’s executives are highly paid by top company standards.
ANZ has frozen its top executives’ salaries, as has the Commonwealth Bank of Australia. While Bendigo and Adelaide Bank didn’t freeze pay, the executives did not receive their short term incentives, as they didn’t meet their targets.
Mining has also taken a hit as commodity prices fall and costs rise. BHP Billiton directors do not plan to increase fixed remuneration for the company’s top management team or non executive directors. CEO Marius Kloppers and Petroleum head Michael Yaeger had already declined bonuses following the news that the company had to write down ‘oil and gas’ assets. Its net profit fell 35% to US$15.42 billion for the year to 30 June.
The trend moves far beyond just these two industries. Qantas’ Alan Joyce would have been entitled to $792,000 in STI award for the 2011/2012 year, but declined the award, as well as turning down any long term incentive payment. Qantas executives have all had the cash portion of their STI award (two thirds of the STI) converted into share awards that are deferred until next year.
The list of companies where executive pay has been frozen or reduced goes on, including Bluescope Steel, Rio Tinto and AMP.
Of course, pay freezes won’t last forever, and shouldn’t be used as a substitute for well thought out remuneration strategies. Further, some CEOs declining bonuses might not be as altruistic as the media has made them out to be. It’s entirely possible that they were either not eligible to receive a bonus or, if eligible, formed a view in consultation with their Chairman that it was not appropriate in light of the company’s disappointing profit performance.
It is our belief that pay should be strongly tied to company performance and that executive pay should be viewed through the lens of the current economic environment and shareholder returns. Where companies struggle to reach targets and provide lacklustre returns, executive pay should be adjusted accordingly.
We note that the two strike rule, under which 108 companies received their first strike last AGM season, has drawn more attention to remuneration, and that directors are aware that they must justify remuneration decisions for executives.
As mentioned in our KMP report, we believe that KMP performance should be judged using a scorecard made up of financial; strategic; leadership; system processes and innovation measures.
These measures should demonstrate, amongst other things, how executives are restoring lost shareholder value, reducing costs, implementing performance improvement, rationalising product and service offerings, fostering innovation, increasing stakeholder engagement and fostering talent.