The Agenda – August

Prominent UK Leaders Release Executive Remuneration Recommendations

A group comprising leading representatives of UK listed companies, investment management and asset owners, has released its final report, making ten recommendations to improve the effectiveness of executive remuneration:

  1. Remuneration committees should have more flexibility to choose a remuneration structure that is tailored to the company’s strategy. This is particularly the case for the long term incentive, which the group believes has become too formulaic.
  2. Non-Executive Directors should serve on the remuneration committee for a year before becoming Chairman of the committee.
  3. Boards should be engaged in setting remuneration, not just the remuneration committee.
  4. Remuneration committees need to be less reliant on remuneration consultants and should put remuneration advice out to tender.
  5. Shareholder engagement should focus on the strategic rationale for remuneration structures.
  6. Companies should focus engagement on the material issues for consultation.
  7. Remuneration committees should disclose the process for setting bonus targets and retrospectively disclose performance ranges.
  8. The use of discretion should be clearly disclosed including what impact the discretion had on remuneration outcomes.
  9. The Board should explain why the maximum remuneration level is appropriate for the company using external and internal relativities.
  10. Remuneration committees and consultants should be aware of the potential inflationary impact of market data on their remuneration decisions.

NZ Director Pay

  1. The NZ Institute of Directors has released the results of its annual Director remuneration survey.
  2. The median increase in non-executive directors’ fees was 3%. For non-executive directors the median rose from $41,610in 2015 to $42,994 in 2016. For non-executive Chairman the median fees increased from $52,500 to $54,000, with the gap between male and female non-executive directors being 10%, a drop from 21% in 2015.
  3. The Institute of Directors also commented that New Zealand Directors are remunerated far less generously than their counterparts overseas, expressing the concern that this could be having an effect on the quality of governance in the country. Egan Associates has previously made similar comments in our annual KMP reports on Australian and New Zealand Director remuneration.
  4. The NZ Institute of Director survey includes a much broader set of companies than Egan Associates’ research on the remuneration of the top 50 NZ companies, which can be found here. Our work on the differences in Director pay by gender here.

APS Remuneration Report 2015

The Australian Public Service has released its 2015 Remuneration Report, which shows that the median base salary for senior executives has increased by 1.4% while the median base salary for non-senior executive service employees has only increased by 0.1%.  The latest wage growth data recorded by the movement in the Wage Price Index to June 2016 reveals that wages increased 2.1% in the year, seasonally adjusted, with the private sector increasing 2.0% and the public sector increasing 2.4%.

Hiring of employees increased by over 100% from 2014 to 2015, as did promotions. This affects the statistics because new hires and promotions tend to start at the bottom of their salary scale: as employees’ tenure increases, they will progress to higher levels of pay. The slow progress of enterprise bargaining has also had an effect. Although 24 new agreements were signed, they were concluded late in the year and would not yet have changed remuneration levels.

The following graph shows the effects of these trends:

Annual Growth in Base Salary Over the last Ten Years


(Source: APS Remuneration Report 2015)

While base salary increased for senior executive employees, the proportion of employees receiving a performance bonus has declined (continuing a trend that has been occurring for the last few years – 2015 bonus participant numbers were a quarter of those in 2011), as have those receiving motor vehicle allowances.

This has led to the increase in the median total reward (including benefits such as motor vehicle and performance bonus) being 0.7 for senior executives and -0.2 for non-senior executive employees.

Australia’s Leadership Not a True Representation of its Population

The Australian Human Resources Commission has released a report investigating exactly how many of Australia’s leaders come from culturally diverse backgrounds. The research examined whether leaders came from Anglo-Celtic, European, Non-European or Indigenous backgrounds, focussing on ASX 200 CEOs, Federal Parliament MPs and Senators, Federal Ministers and Assistant Ministers, Federal and State Public Service Secretaries and Heads of Departments and Vice Chancellors of Universities.

In all of the above categories, more than three quarters of leaders were Anglo-Celtic, while less than 5% were Non-European, with little to no Indigenous representation. Given that only 32% of the Australian population has an Anglo-Celtic background, the Commission suggests that organisations consider sending signals on cultural diversity: making a leadership commitment, collecting more comprehensive data, setting leadership targets, introducing better accountability, and enhancing professional development.

It is Egan Associates’ observation that were this analysis to be carried out for ASX200 Boards, the proportion of non-European Directors would likely be much higher than the numbers in the Commission’s report.

Amendments to AASB2

The AASB has issued AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions, to address:

  • accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments;
  • classification of share-based payment transactions with a net settlement feature for withholding tax obligations; and
  • accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.

The amendments apply to annual periods beginning on or after 1 January 2018.

MSCI Claims Pay for Performance Mismatch. Others Disagree.

MSCI has released a research report claiming that US companies which pay their CEOs more achieved lower levels of 10-year performance over the period from 2006 to 2015. The company proposed a hypothesis that those who grant larger share awards will better incentivise performance. Yet it found that of 429 large-cap US companies observed, companies with total pay below the sector median outperformed companies with pay above the sector median by as much as 39%. In this case total pay included the value of grants made during the year. Total shareholder return was used as a measure of performance.

Executive remuneration specialists Pay Governance, on the other hand, conducted a review of the report, concluding “we believe [the MSCI] study is based upon an incorrect premise of executive motivation and an improper measurement of CEO pay”.

Pay Governance’s concern with the study centres around the choice of measurement “CEO pay”, which includes the accounting value of stock awards at grant date, with MCSI’s hypothesis being that the higher opportunities represented by large grants would motivate more than lower opportunities represented by smaller grants.

Pay Governance points out that the majority of companies target the value of share grants to the median of their peer group, and therefore it would be expected that there is a weak correlation between pay opportunity and total shareholder return. It is the change in value of the equity after the grant that motivates, Pay Governance continued, not the size of the opportunity at grant.

If realised pay or realisable pay (see definitions here) are used to analyse the effectiveness of pay for performance, there is a strong correlation with TSR, it stated.

Most Employees Don’t Disapprove of CEO Pay Levels

Data provider PayScale surveyed over 22,000 US workers, asking if they knew what their CEO was paid, whether they thought this was appropriate and whether knowing the level of CEO pay negatively impacts their view of their employer.

More than half of employees didn’t know what their CEO was paid, but of those who did, only 21% thought the CEO’s pay was excessive and of those who disapproved, almost half said it didn’t negatively affect their view of their employer.

As might be expected, the more an employee earns or the more senior the role they hold, the less likely they are to disapprove of how much their CEO is paid. Interestingly, 16% of Director level employees disapproved of CEO pay.

In terms of generations, more Millennials than Baby Boomers or Gen X stated that the level of their CEO’s pay negatively affected their view of their employer.

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