The Agenda – October

APRA to review remuneration practices

Following the remuneration regulations APRA introduced for Authorised Deposit Taking Institutions, Insurers and Superannuation Organisations in 2010 and 2012, the Authority now intends to take a “stocktake” of current industry remuneration practices to see how well existing requirements are being implemented and how they are interacting with the risk cultures of institutions. It will also compare its remuneration requirements with recent international developments.

The Authority has advised that this will entail reviewing the remuneration arrangements of some senior executives starting this year and continuing into 2017.

Unemployment falls, but so does the number of jobs

The unemployment rate has fallen to 5.6%, despite the loss of 9,800 jobs. While 43,200 part-time jobs were added, 53,000 full time jobs were lost. The reason the unemployment rate fell was that the participation rate (people in work or looking for it) has fallen from 64.7% to 64.5%.

Reserve Bank Governor Phillip Lowe examines low wage growth

In a recent speech, Dr Lowe explained low inflation and wages growth in Australia citing three factors.

  1. Low economic growth (due to the lingering effects of the global financial crisis and the weight of debt) has created excess capacity and decreased labour utilisation. Those who are finding jobs are often finding part time jobs and would like more hours.
  2. Falls in commodity prices have led to lower inflation, which has resulted in workers agreeing to smaller wage increases, which has in turn factored into low inflation outcomes.
  3. There has been a shift in the perceived pricing power of many workers and businesses, which Lowe believes is a symptom of the globalisation of markets and technology, which has increased competition.

The Reserve Bank of Australia (RBA) and the Australian Bureau of Statistics (ABS) collaborated to gain further insight into the trend. They found that there had been a decline in the frequency and size of wage increases, mainly due to a drop in the share of jobs where wages are increasing. Almost six years ago, around 40% of the 18,000 jobs the RBA and ABS examined experienced wage increases over 4%. Over the last year, only 10% experienced such increases.

One set of employees for whom wage increases have picked up are lawyers, according to legal recruitment company Mahlab. It found salary freezes that had been in place were coming to an end. The average national salary increase over the past year was 3.8% in private practice and 3.4% for in-house lawyers.

AGM season

There appears to have been increased pressure on remuneration report votes this voting season, with proxy advisor reports focusing on pay increases and bonus payments where there has been no alignment with shareholder outcomes or where performance criteria have been inadequately explained. Egan Associates will publish our annual AGM Season round-up in December.

A paper by the University of Cincinnati investigated whether Directors suffer reputational consequences from votes against their organisation’s remuneration structure. It examined Directors of companies within the S&P 1500 where the say on pay approval vote was less than 70%.

The paper found that such Directors lose the equivalent of US$435,000 in future remuneration at other companies where they serve on the Board. Those Directors are also more likely to lose Board seats and remuneration committee positions at those companies. The authors believe this shows that low support votes cause the market to reduce its estimate of a Director’s quality. This reputational penalty occurred primarily when the vote was driven by excess remuneration rather than due to poor performance or high, but not excess, remuneration.

Fair Work Commission suggests replacing penalty rates with higher weekly rates

The Fair Work Commission has proposed the introduction of higher hourly rates to replace weekend penalty rates into retail industry awards. Currently, the introduction of such rates requires adding them into an enterprise bargaining agreement.

The Australian Council of Trade Unions have expressed concerns that such a swap would not be beneficial for part time employees.

Victorian Public Sector Commission recommends increased remuneration

A recent review of Victoria’s executive employment and remuneration framework found that Victoria’s remuneration for similarly valued roles is lower than in other states.

Victorian Public Service Remuneration Executive OfficersSource: Victorian Public Sector Commission

This had led to issues where organisations have been unable to attract executives from other jurisdictions.

The report recommended that Secretary remuneration increases be considered. It also recommended that a total remuneration package including superannuation be offered to avoid issues when Commonwealth superannuation requirements change.

US SEC issues Pay Ratio guidelines

The Securities and Exchange Commission has issued guidelines for US companies to calculate pay ratios between their CEO and the median employee. Companies must report this ratio for the first financial year beginning on or after 1 January 2017.

The SEC said that companies have to pick a date from within the last three months of the financial year on which to assess their employee population, which should include employees of the company or its subsidiaries (including foreign employees) but exclude contractors. There was no guidance on foreign-based employees, which are also to be included. The continued inclusion of foreign employees is unlikely to meet with approval, given that employee entitlements vary from country to country.

The SEC also clarified queries in a recent Compliance and Disclosure Interpretations document around using a “consistently applied compensation measure” (CACM) other than total annual compensation to identify the median employee. Since it would be onerous for many companies to calculate total annual compensation for all employees, companies can use an alternate measure, with the appropriateness of the measure varying depending on the company’s circumstances. Hourly rates of pay were not considered to be appropriate as a CACM, although many other possibilities exist, for which the SEC provides guidance. It also clarifies the treatment of furloughed employees and explains how organisations should determine if an employee is an independent contractor.

Mercer this month released the results of a survey into how high CEO pay ratios are likely to be after the introduction of the rule. It found that pay ratios are expected to be less than 100 to 1 in 2018, less than the 300 to 1 ratio that has been frequently published in the media.

Ratios differed by industry, with the highest ratios in the retail/wholesale and consumer goods sectors and the lowest ratios in the banking/financial services and technology sectors.

Value of Board Diversity in the Eye of the Beholder

A PWC survey of almost 1000 Directors in the US has found that while 89% of female Directors very much believe that Board diversity leads to enhanced company performance, only 24% of male Directors do.

Another study conducted by the University of Toronto’s Rotman School of Management found that women Board members were likely to bring half a dozen skills important to decision making that weren’t well represented on their Boards before their arrival: risk management, human resources, sustainability, politics or government, regulatory or compliance and corporate governance.

McKinsey and Company has published its annual Women in the Workplace study into the employment pipeline for women across North America. It found that for the 132 companies examined, women are promoted and hired at lower rates than men, leading to fewer women becoming senior leaders.

At each step up the ladder, the representation of women declines — for every 100 women that are promoted, 130 men are promoted. While at entry level there are 54% men and 46% women, this changes to 63% and 37% at the manager level, 67% and 33% at senior manager level, 71% and 29% at the vice president level, 76% and 24% at the senior vice president level and 81% and 19% at the C-suite level.

At senior levels, women tend to shift from line roles (positions with accountability for profit and loss, or a focus on core operations) to staff roles (positions that support the business such as legal, human resources and IT). This shift damages their chances of becoming a CEO, since CEOs are generally drawn from the ranks of line management.

Credit Suisse also published an update of its global Gender 3000 report, last completed in 2014. Its results echoed those in 2014, finding that companies with higher participation of women in decision making roles generated higher returns on equity while running more conservative balance sheets. Where women were the majority in top management, businesses showed superior sales growth, cash flows and returns on investment.

Since 2014, there had been a significant amount of progress on hiring more female Directors – women occupied 14.7% of Board seats over 3000 companies globally, a 54% increase. However, this increase may have come at the cost of the number of women in senior management. Depending on how the data is analysed, there has either been no meaningful change in the number of women in senior management roles or a decline in the number of women in senior management roles since 2014.

The release of a report by the University of Sydney’s US Studies Centre showed that the share of female Directorships had doubled over the last decade in Australia and the proportion of women participating in the workforce has increased by 5%. By comparison, female participation in the US fell 5% and the share of female Directorships rose less than 2%.