The KMP Report: Non-Executive Directors’ Remuneration ASX Top 300 & NZ Top 50

Our review of Non-Executive Directors’ (NED) remuneration covering the ASX 300 and the NZX 50 through to the end of the 2017 calendar year reveals generally modest fee increases.  Increases appear to be more prominent at the level of Chairman than that of Director, with Directors’ incremental fees being significantly influenced by an elevation in fees payable in certain committees.

With movement of the constituents in each of the ranked sectors on the ASX, a number of organisations that have progressed through the lower ranks into the ASX 200, or from the second 100 to the top 100, have not immediately adjusted the fees payable to Directors reflecting their increased market capitalisation and relative standing on the ASX.

Directors’ fees are not adjusted with any direct alignment to movement in executive reward where there tends to be a lag with the frequency of increase in Directors’ fees being every two or three years rather than annual in many instances.

This fee adjustment strategy among listed companies is not broadly adopted by governments which adjust Directors’ fees modestly on an annual basis, generally reflecting the underlying level of inflation.

In the 2017 calendar year, inflation in Australia rose to 2.1%.  The mid-year Fair Work Commission’s adjustment to the minimum wage was $18.93 per hour or a 3.5% increase. Unemployment levels remained broadly consistent over the period and while there has been employment growth the level of underemployment has remained broadly consistent over the last 24 months.  Our data also reveals that the frequency of Directors’ meetings, both as a committee and as a Board, have also remained relatively stable.

Australia’s GDP growth from December 2016 to December 2017, was a seasonally adjusted 2.4% change, and the trend from the same period was 2.6%.

Overall, the consumer price inflation (CPI) rose to 1.9% from the December 2016-2017. Prior to this, the December quarter during 2015-2016 was 1.5%.

The AUD/USD exchange rate in December 2016 was 0.7236 and increased in December 2017 to 0.7800. The Australian Dollar historically reached an all-time high of 1.10 during July 2011 and was a low of 0.48 in April of 2001.

The employment trend in Australia from December 2016 to 2017 increased in all states and territories, excluding South Australia, which decreased by 200 persons. The highest increases were in New South Wales (up 11,55 persons) and Victoria (up 5,600 persons). There was an increase with the unemployment trend rate, which in the Northern Territory was up 0.3 percentage points (pts), and Western Australia up 0.1 pts. In other states the unemployment rate was unchanged.

The wage price index trend from December 2016-2017 was 2.1%. In the public sector it was 2.4% and the private sector it was 1.9%. From the December quarter to 2016 – 2017 the company operating profits (CGOP) trend was 5.2% and the seasonally adjusted trend was 4.3%.

Outside of the economy, gender diversity has been a strong Board theme. Although diversity improvements have been recorded by Boards, they have decelerated, causing the AICD to raise concerns that its target of having 30% of ASX 200 Board seats filled by women will not be met by 2018. Gender diversity continues to be a core topic among Boards, as well as the culture of the Board and the company.

There have been several concerns of culture with the proceedings of the royal commission into the misconduct in the banking, superannuation and financial services industry. Former ASIC Chairman Greg Medcraft in the revelations of the banking royal commission said,

“I think it comes down to culture and ethics. When I raised culture as an issue three years ago, someone said to me ‘culture is not the responsibility of the board.’ But the reality is, a business’s values are at the centre of everything and the tone is set from the top”.

Increasingly, Boards will need to consider not only prevailing legislation but community expectations when making decisions and disclosures in these areas. In general, the process of remuneration setting has been a challenge for Boards. Directors have railed against executive remuneration’s complexity and questioned whether the current incentive structure works. The tension between Boards and investors who either want or do not want the inclusion of non-financial performance hurdles have also caused a high level of angst.

Egan Associates believes that Directors will need to put more time into identifying, implementing and disclosing the correct remuneration structure for their organisation.

New Zealand

New Zealand’s annual net migration in 2017 decreased by 600 people as this figure was 70,600 in the December 2016 year.

New Zealand’s cash rate is marginally higher than Australia’s at 1.75%. The cash rate has seen a steady fall since January 2015, when it was 3.5%. The GDP annual growth in December 2016 was 4% and in December 2017 the annual growth was 2.8%.

On the 1st April 2017 the minimum hourly wage rate was $15.75. The seasonally adjusted annual change in the unemployment rate in September 2017 was -0.3 pts During this same period the annual change of the employment rate was +1.2pts, and the participation rate was +1.0pts.

In terms of the Boardroom, New Zealand Directors are facing similar discussions to Australian Directors on how to foster the long-term sustainability of their business, how to promote a positive culture that reduces risks as well as attracts and retains talent, and how much companies should disclose to meet community expectations without endangering company confidentiality.

In New Zealand, there continues to be concern over whether remuneration levels are adequate to attract candidates with the necessary skills to ensure best practice corporate governance.

The NZX’s Corporate Governance Code is the same as it was last year with recommendations on;

  • The creation of a code of ethics;
  • Board composition and performance;
  • Reporting and disclosure;
  • Remuneration;
  • Risk management;
  • Auditors; and
  • Shareholder rights and relations.

It will be interesting to see the effect of additional disclosures on the level of executive remuneration. If detractors of disclosure are correct, it should see significant pay rises as executives discover the salaries of their counterparts and ask for “me too” pay rises.

You can download the full report using this link.