The Agenda – February 2017

Property, healthcare CEOs enjoy bumper pay while retail suffers

The Australian Financial Review’s annual executive remuneration rankings have revealed property and healthcare CEOs as faring the best in terms of 2016 reported remuneration, while retail CEOs’ pay stagnated. Overall, average CEO remuneration was flat.

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The paper’s analysis considers total remuneration including statutory long term incentives, an accounting measure that does not have much real-life meaning, but is the easiest data to gather because all companies must report it.

Orica Chairman Malcolm Broomhead commented in the AFR article that this statutory figure was part of the overall pay confusion that had seen the calculation of executive pay become a “nonsense”. He believed remuneration must be simplified, a view that echoes opinions currently being expressed in the UK.

In last month’s newsletter, Egan Associates outlined what information would be useful instead of the current statutory information.

Government-owned organisations urged to consider community standards

Finance Minister Mathias Cormann has warned the Boards of government-owned enterprises to be careful when setting executive remuneration.

“I have written to all Chairs of government business enterprises to remind them that in setting executive remuneration they needed to be conscious of community expectations in relation to remuneration practices for government-owned businesses as well as their requirements to attract effective leaders for their organisations in a competitive market environment,” he said.

He has also asked the Boards to make public all relevant information in relation to their executive remuneration arrangements for the 2015-16 reporting period. This disclosure was previously mandatory until the Abbott Government removed the requirement in an attempt to cut red tape.

The Minister’s comments followed uproar over the level of Australia Post CEO Ahmed Fahour’s remuneration, which Egan Associates commented on here. Other interesting views on the matter can be found here and here.

Sunday and Public Holiday rates to be cut for hospitality, retail, pharmacy staff

The Fair Work Commission has decided that that it is appropriate to reduce penalty rates for Sundays and Public holidays within a number of customer service focussed awards. It has kept Saturday rates the same, at 125% for most of the awards examined.

The Commission said that penalty rates should reflect the disutility associated with working on those days. “For many workers Sunday work has a higher level of disutility than Saturday work, though the extent of the disutility is much less than in times past,” it stated.

Sunday rates for full-time and part-time hospitality workers will be cut from 175% of their standard wage to 150%. For retail, it will reduce from 200% to 150%. For Level 1 (but not 2 or 3) fast food workers, the cut will be from 150% to 125%. Those on the Pharmacy award receive a cut from 200% to 150% for 7am to 9pm work.

Since the rate for Sunday is being reduced, for proportionality, the Commission determined that the public holiday rate should also be reduced. For public holidays, the Hospitality, Restaurant, Retail, Fast Food, Pharmacy awards have reduced public holiday penalty rates to 225%, down from 250%. Clubs Australia’s public holiday rates will remain the same, as the Commission is deferring its consideration for this award.

Casual workers will have rates set at 25% higher than full- and part-time workers in all cases.

The Commission believed the reductions would lead to increased trading hours and an increase in the level and range of services offered on those days.

The Commission noted that the conditions of these industries were unique, so the decisions made “provide no warrant for the variation of penalty rates in other awards”, a statement that is likely to cause disappointment in other industries that were hoping to reduce penalty rates off the back of the decision.

The Commission acknowledged concerns that many workers rely on penalty rates to make ends meet, and stated that transitional arrangements should be implemented to ease the effect of the Sunday penalty rate cuts. It did not conclude what these arrangements should look like and was calling for consultation on the matter.

The public holiday rates will change on 1 July 2017, while the Sunday rate changes will occur in a series of annual adjustments on 1 July each year.

Super Board Governance Report Released

The long-awaited report into superannuation board governance reform by former Reserve Bank Chairman Bernie Fraser has now been released.

The proposed reform involved a government Bill to bolster the governance of superannuation. Its most contentious requirement was that the Board of superannuation organisations comprise a third independent Directors, which would require significant change among many superannuation industry Boards (which have a significant proportion of union or member trustees).

Fraser did not believe that increasing the number of independent Directors on super Boards was necessarily an improvement in governance, stating that there is no evidence that independent Directors are more independent of thought or hold other Directors and fund managers more to account.

“Many of these arguments for mandated minimum numbers of independents rely heavily upon assertion, rather than reason and evidence,” the report noted. Skills and experience were much more important than independence, it continued.

Fraser also questions whether blindly following what is currently considered “best practice” is advisable, noting that some examples of “best practice” in the past have since been shown to be anything but. He also notes that while retail funds may benefit from independent Directors, the nature of industry superannuation funds makes their situation unique.

Fraser made a number of recommendations to improve the governance of superannuation Boards, including the introduction of tenure policies, improving gender diversity and implementing recruitment processes to ensure that Boards appoint Directors with the necessary skills and experience for the role.

Minister Kelly O’Dwyer has already countered the report’s conclusions, claiming that the report could never have been expected to provide a balanced view given Industry Super Australia and the Australian Institute of Super Trustees had commissioned Fraser to write it. Her view has been supported by actuarial firm Rice Warner.

In other superannuation news, APRA has warned that it will invite the Boards and executives of underperforming superannuation funds to discuss their strategy for increasing returns, improving services and reducing costs.

Unemployment falls to 5.7%, wage growth remains low

The news on jobs from the Australian Bureau of Statistics has been positive this month, with unemployment falling on the back of a rise in part-time jobs, while the number of full-time jobs has fallen. The ABS has also published the Wage Price Index data for the quarter to December 2016. The annual growth in the index was 1.9% , equalling the record low growth recorded in the September quarter. The full-time adult Average Weekly Total Earnings in November 2016 recorded a rise of 2.2% from the same time last year.

US CEO-Worker Pay Ratio on hold

President Donald Trump has issued an executive order to commence a review of the Dodd Frank reforms. Following this announcement, the SEC has stated that the requirement for companies to disclose the ratio between the pay of their CEO and their median worker, due to come into effect first for companies with financial years starting 1 January 2017, will be put on hold while the SEC reconsiders its implementation. The decision was partly due to feedback from companies that they were likely to have trouble meeting the reporting deadline.

Australia warned on corruption

Australia is still judged a corruption risk, according to the Corruption Perceptions Index published annually by Transparency International. Australia has fallen from rank 7 in 2012 to rank 13 in 2016, with the most recent concerns being foreign bribery scandals and the government’s comment on the Australian Human Rights Commission’s interpretation of its role.

Industrial relations reform

The government is reportedly planning to introduce new industrial relations laws that will end the four-yearly process of reviewing the 122 modern award reviews. The action follows claims it is draining union and business resources. It is proposed that changes will instead be reviewed if unions or employers request it. The opposition has stated that it agrees with the idea in principle.

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