Superannuation – Are Executives Funding their Retirement?

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While there is a general observation that senior management receiving salaries above $250,000 take full advantage of concessional tax rates of up to $35,000 annually on superannuation contributions , our research reveals that this is not the case among the majority of the ASX 300 listed company CEOs and other KMPs. Our research does not draw information on concessional benefits flowing to every executive in a listed public company, nor senior management or proprietors in private companies of varying scale where the evidence may well not reflect our research outcomes.

It is our observation that wealth creation and provisioning for a comfortable retirement is, in part, being supported through public company executive participation in equity based incentive plans.

Disclosed Contributions

Figures 1 and 2 below reveal employer superannuation contributions for CEOs and the Top 5 Executives in ASX 300 companies. The companies have been ranked based on market capitalisation at 30 September 2015, and the figures are based on annual reporting periods for the respective calendar years.

In this sample, Executives have been excluded if they were with the company for less than 183 days in the reporting period or if they are based overseas.

The most recent equity incentive issued is the latest grant of all unvested LTI grants made in the current year with a post allocation hurdle.

Figure1:  CEOs in the ASX 300 – Median Superannuation as a Percentage of Fixed Remuneration and their Most Recent Equity Incentive Issued

Figure1

Figure 2: Top 5 Executives in the ASX 300 – Median Superannuation as a Percentage of Fixed Remuneration and the Most Recent Equity Incentive Issued

Figure2

 

The median fixed remuneration for CEOs and Top 5 Executives in 2013 was $612,163 and $326,537 respectively, and in 2014 $600,750 and $311,014 respectively. The decrease in fixed remuneration over this period is not significant (less than 5%) and reflects the variation in the market capitalisation of the constituents in prior years.

The median disclosed superannuation payment for CEOs and Top 5 Executives for 2013 and 2014 was close to the maximum contribution amounts for those income years; that is $17,775 for 2013/14 and$18,783 for 2014/15.

Taking the median figures for each respective year, superannuation payments are lower as a percentage of both fixed remuneration and the most recent equity incentive issue than as a percentage of the Executive’s salary (i.e. above 9% of ordinary time earnings). These figures have remained relatively unchanged from 2013 to 2014.

In this context, the median contributions are lower for CEOs than for the Top 5 Executives. The discrepancy is most apparent when we consider superannuation as a percentage of the most recent equity incentive issued; there is a difference of 6% in 2013 and 2014. This difference is partly due to the fact that a greater proportion of CEO remuneration is awarded in the form of equity.

Figure 3: CEOs and Top 5 Executives – Most Recent Equity Incentive Issued as a Percentage of Fixed Remuneration in 2013 and 2014

Figure4

 

We can observe in Figure 3 that CEOs’ current equity incentives issued are substantially higher as a proportion of fixed remuneration. The average figures for 2013 and 2014 are 58% and 61% higher respectively, and the median figures for 2013 and 2014 are 45% and 42% higher respectively.

Comment

Taking these factors into consideration, it may be prudent for Executives, in particular CEOs, to re-evaluate their salary sacrifice arrangements to ensure they are taking full advantage of the available concessional contributions limit.

Salary sacrificed concessional contributions are generally taxed at 15% in the fund, which is typically much lower than an Executive’s marginal rate of tax (up to 47% plus a 2% Medicare levy).  The concessional contributions cap for the 2015/16 income year is $30,000 for employees under 48, and $35,000 for those aged 49 years and over. Those earning over $300,000, however, must pay an additional 15%, doubling the tax to 30% for high income earners.

Another benefit of making salary sacrificed contributions, aside from reducing the Executive’s marginal rate of income tax, is that any earnings in the fund are taxed at a maximum rate of 15%, in contrast to earnings on savings or managed funds which may be taxed up to 49%.

The decision of whether to make non-concessional contributions (capped at $180,000 for the 2015/16 year) is more complex; as these are made after tax, a larger proportion of the executives’ pay packet is sacrificed.

The amount that an Executive should contribute each year into a retirement fund is not a straightforward matter and will depend on a range of factors, not least maintaining quality of lifestyle; however, in making this decision, Executives should take into consideration not only their short term earnings such as fixed remuneration, but also the value of equity that is expected to vest in the longer term.

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