The Agenda – January 2017

Retail banking remuneration review

Stephen Sedgwick has released an Issues Paper on Remuneration in Retail Banking, as part of an independent review being conducted for the Australian Bankers Association. Interesting points included:


  • Even where a bonus is low, ambitious targets can lead to misselling of financial product due to staff fears of losing a job or peer pressure.
  • Complex bonus arrangements can lead to risky behaviour because staff may focus only on easily controllable elements such as sales or referrals.
  • Accelerator payments where payments ramp up when staff hit a target are likely to lead to poor outcomes for customers.
  • Cross sales targets, especially when used as gateways, are also risky. In general, financial gateways were considered to increase the risk of misselling. Sedgwick asked whether bonus weighting on financial measures should be capped, for example at 35%.
  • Although team targets might aim to take the pressure off individual sales, they can also lead to significant peer pressure to meet targets.
  • In the same vein, while discretion could be effectively used to reduce risk, in practice it may lead to more risks where there is a deeply ingrained sales culture.
  • Senior management’s incentives will affect how they approach performance management for those reporting to them, leading Sedgwick to ask what proportion of senior management’s bonuses should be dependent on sales and what principles should be applied when designing incentives.

The major Banks have pledged to implement recommendations from the final report.

In the wake of the paper’s release, ANZ announced that it would adjust the way it rewarded staff. Customer satisfaction will become a more important indicator than sales targets in its new system. (70% dependence on customer and team metrics and 30% on sales target metrics.) The bank is also cancelling accelerator payments, financial gateways and cross selling incentives.

The bank found it was necessary to retain some focus on sales targets after conducting a trial where some staff were eligible for bonuses that did not take performance against sales targets into account.  Sales subsequently fell across a number of products.

FWC Vice President resigns, claims the Commission is biased

The resignation of Fair Work Commission Vice President Graeme Watson has created another challenge for the Federal Government.

Watson reportedly resigned via a ten-page letter outlining numerous reasons that led him to believe the workplace relations system was “undermining the objects of the Fair Work legislation”.

“I do not consider that the system provides a framework for cooperative and productive workplace relations and I do not consider that it promotes economic prosperity or social inclusion,” he stated.

Watson criticised the “unpredictable” outcomes of unfair dismissal cases, the “complex and confusing” nature of adverse action provisions within the Fair Work Act, the “unduly complex and technical” enterprise agreement approval provisions and the old-fashioned award safety net. He was also unhappy with a procedural focus that he believed sacrificed the spirit of the law.

“The workplace relations system is understandably regarded as a “danger zone” for business. There is an increasing understanding in the business community that the Fair Work Commission is partisan, dysfunctional and divided,” he wrote.

Blackrock steps up on remuneration

Blackrock’s UK arm has sent a letter to the Boards of FTSE 350 companies to warn them to restrain executive pay.

“We consider misalignment of pay with performance as an indication of insufficient board oversight, which calls into question the quality of the board. We believe that shareholders should hold directors to a high standard in this regard,” the letter reportedly said.

Executive salary increases should also be in line with those for workers, the letter said, stating that Boards who do not comply with Blackrock’s expectations will face adverse votes at annual general meetings.

2017 Proxy Guidelines released

Glass Lewis and ISS have also released 2017 proxy guidelines for multiple markets (but not Australia). Markets covered included the US, Canada, Malaysia, Singapore, Korea, Indonesia and Thailand.

Boards need to watch subcultures

ASIC’s Greg Medcraft has stated that while Bank Boards and executives have embraced the issue of improving their corporate culture, there were still subcultures that were carrying on with little to no change.

“Every single board is focused now on culture. They now know that getting a good culture is not about employing an army of compliance people, it’s actually about making sure you’ve got the right people and setting the tone from the top,” he told the Australian Financial Review.

“But the hardest thing for many of them is to recognise if you’ve got a subculture that is in conflict with the values you want to drive as an organisation.

“Stop saying it’s a few bad apples. At some point you’ve got to look at the damn tree and say, what’s wrong with us as an organisation? That’s what I am saying to these guys.”

ABS updates employment data

The ABS has released its biennial survey of employee, earnings and hours. One interesting finding is that gender roles appear to be changing – the proportion of women working in part time roles has decreased by almost 2% since 2014, while the proportion of men holding part time roles has increased by 1.5%.

Despite a fall in investment in mining, employees working in the industry still record the highest average weekly earnings, while accommodation and food services workers recorded the lowest average weekly earnings. The miners earned almost five times the figure of the hospitality workers.

Average weekly total cash earnings for all rates of pay increased with employer size, being the lowest in businesses with under 20 employees ($908.30) and the highest in businesses with 1,000 and over employees ($1,402.10).

Additional findings can be accessed on the ABS website.

Deutsche Bank hopes retention awards will retain staff despite low bonuses

In the wake of an expensive settlement with the US government over the bank’s behaviour in the lead up to the financial crisis, Deutsche Bank has decided to severely limit bonuses to staff. Bonuses will be offered at a maximum of 10% of base pay, with crucial employees to be offered a long term incentive spanning up to six years. Across the industry, bonuses have been down by around 15%.

Should more NFP directors be paid?

A recent Australian Institute of Company Directors (AICD) article into Director remuneration raised the point that significant changes to the NFP (Not for Profit) sector may require an increase in the number of NFP Directors who are paid for their work. This proportion has remained static at 15% over the last 7 years, despite wide ranging regulatory reforms and significant funding volatility.

56% of Directors receive no payments at all for their service, according to AICD research. 3% receive an honorarium and 24% are reimbursed for expenses.

Directors are more likely to be paid if they are serving on the Board of a large NFP, with 30% of Directors of organisations with annual income over $20 million being paid. This compares to 2% for charities with income under $250,000.

The governance expectations of larger organisations are much higher. The AICD article noted that as NFPs grow or merge they may need to consider remuneration of Directors. It also drew attention to a trend towards Directors spending more time on their NFP commitments. In 2013, AICD research found 13% of Directors were spending more than 5 days a month on their NFP. In 2016 the proportion of Directors had risen to 19%.

TSR and EPS questioned

A recent UK research report has found little correlation between CEO pay and company performance. This report, commissioned by CFA UK and carried out by the Lancaster University Management School compared executive pay to company performance measured by ROIC (Return on Invested Capital) adjusted for the WACC (Weighted average cost of capital).

Although the report found a link between pay and the creation of economic profit “at a primitive level” – CEOs generating positive economic profits receive 30% higher median total pay than their counterparts generating negative economic profits – it stated that the correlation between pay and ROIC was negligible. It also found that TSR and EPS, the most commonly used incentive measures, correlated little with “value creation” measures like ROIC.

“Firm size, industry, and previous year remuneration remain the primary drivers of CEO remuneration in the UK. These dimensions may correlate with aspects of value-generation; but at best they represent imperfect tools for assessing long-term corporate success,” the report noted.

The report authors believed its findings showed a disconnect between pay and fundamental value generation for capital providers.

“The research suggests the need to redirect the spotlight on CEO pay away from a focus on pay levels and broad calls for more performance-related pay arrangements, towards a more refined discussion about the type of performance measures employed,” the report said.

US City votes to tax companies with high pay inequality

In December, the US city of Portland voted to place a 10% business licence tax surcharge on companies with a ratio of CEO to median worker pay greater than 100. Those with ratios of over 250 will incur a 25% surcharge.

There may be a number of problems implementing such a tax. Firstly, the council would be relying on ratio data published to comply with a SEC rule. The rule allows companies leeway on how to calculate the ratio. The additional taxation may give companies the motivation to be creative in their implementation. Another problem is that President Donald Trump may roll back a number of Dodd Frank regulations, including the ratio rule.

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