The Australian Council of Superannuation Investors (ACSI) has published its Annual Survey of S&P/ASX200 Chief Executive Remuneration. Although this is ACSI’s fourteenth study of CEO pay in the S&P/ASX100, and the fourth year that ACSI has extended the study to encompass all of the S&P/ASX200, it is the first to include realised pay for all CEOs in the sample. In its previous two surveys, ACSI had only provided this data for the highest and lowest paid CEOs.
The difference between realised and reported pay is a reflection of the statutory disclosure requirements, whereby a company must amortise the expense of deferred awards over a period of time, discounted for the possibility that the amount will be forfeited. This is an accounting estimation of the cost to the company and provides an incomplete picture of what an executive is actually paid in any given year. Egan Associates discussed the implications of using accounting values to evaluate executive pay in our June Newsletter. The article is available here.
In terms of methodology, ACSI calculates realised pay as cash pay plus the value of equity that vested during the year. Thus there is the potential to overstate or understate the amount realised where vested incentives have not yet been drawn on by an individual. Options with an exercise price are the exception, the value of which is assessed on exercise rather than on vesting,
There has been a lot of discussion in the media regarding ACSI’s findings that CEOs in S&P/ASX100 companies were paid much more than reported. The average realised pay was $5.626 million, which is 12.3% higher than the reported average. The variance was particularly high in the top 10 sample, where CEOs received around $70 million more in aggregate.
The size of the gap was predominantly due to three CEOs – those at Ramsay Health Care, Seek and Sonic Healthcare – who had equity vest in the context of large share price increases.
The CEO of Ramsay had 600,000 retention rights vest at $21.23 million as a result of a more than three-fold increase in RHC’s share price. Consequently, he was the highest paid CEO in the ASX100 on a realised pay basis although he was ranked 9th on a reported pay basis. His total realised and reported pay was $30.80 million and $9.09 million respectively.
The CEOs of Seek and Sonic Healthcare derived significant value from the exercise of options. Collectively, their realised pay was $31.39 million, well over three times their reported pay of $8.04 million.
ACSI reveals that shareholders may begin to push for a change in reporting practices, which presently only reveal “the tip of the iceberg”. ACSI’s CEO, Louise Davidson, stated that while there is nothing untoward about the way earnings are declared, an alternative means of judging whether rewards are excessive compared to return on investment may be welcomed in the future.
Realised pay for CEOs in S&P/ASX101-200 companies, in contrast to those in the ASX100, was close to reported pay for the period. Average reported pay was 1.9% higher than realised pay, at $2.34 million, while median realised pay was $1.74 million, marginally above the reported pay median.
There were fewer cases where realised pay was many multiples of reported pay; the largest discrepancy was due to the exercise of options by Sirius Resources’ Mark Bennett. His reported pay of $1.22 million was just over a quarter of his realised pay of $4.49 million.
The largest discrepancy on a reported pay basis was the result of a single one-off payment issued in connection with an initial public offering (IPO). Nerida Caesar, the CEO of Veda Advantage, received a cash bonus of $1.35 million but the equity she received was either shares subject to escrow or options which vested but were not exercised in 2014. She realised $2.38 million against “accounting pay” of $8.28 million.
Alternatively, Nine Entertainment’s David Gyngell realised most of his IPO award, which had a major impact on his pay outcome. According to ACSI’s calculations, he received $18.03 million of a reported $19.09 million, which made him the highest paid CEO in the sample on both a realised and reported basis. ACSI notes that his pay was so high it would have ranked him among the 10 highest paid ASX100 CEOs, the only CEO from the second 100 cohort to have a pay outcome of this size.
ACSI also found that:
- Median fixed pay for ASX100 CEOs fell 1.1%, with the median ASX100 CEO receiving fixed pay of $1.81 million.
- Median fixed pay for the ASX101-200 CEO cohort rose 3% to $930,000 while the median cash bonus fell 4% to $335,000. However, the sample was distorted by the sharp decline in the number of exploration companies, and by the inclusion of several highly-paid CEOs of newly-listed companies including Nine, Veda and OzForex.
- The median cash bonus in the ASX100 lifted 12% to 1.07 million. The proportion of CEOs receiving bonuses also increased to just over 90%, which is the highest it has been since 2008.
- For the ASX101-200 the average bonus was $609,010, an increase of more than 40%. However, this was mostly due to large bonuses for CEOs of newly listed companies, and the median actually fell 4.4%.
- Excluding two large termination payments to former Leighton CEO Hamish Tyrwhitt ($13.59 million) and former PanAust CEO Gary Stafford ($8.13 million), there were only six payments in excess of $1 million across the ASX200.
The survey is available for download here.