Every AGM season, CEO pay makes headlines. Here’s how executive pay packages are built, how much of it depends on performance, and how shareholders can push back.
The chief executive officers of Australia’s biggest listed companies are often paid millions of dollars a year. How that pay is set, and whether it’s justified, is one of the most debated topics in corporate Australia.
How pay packages work
Executive pay usually has three main parts.
Fixed pay is the base salary, plus superannuation and other benefits. It’s paid regardless of performance.
Short-term incentives are bonuses, usually paid annually, based on targets for the year, such as profit, safety, customer satisfaction or strategic goals. They’re often paid partly in cash and partly in shares.
Long-term incentives are usually shares or rights to shares that vest after several years, typically three to five, but only if the company hits targets, such as total shareholder return compared with its peers or growth in earnings.
The idea is to tie a large share of a CEO’s pay to the company’s long-term performance, aligning their interests with shareholders.
What they’re paid
Packages vary widely. The CEOs of Australia’s largest companies can be paid several million dollars a year, and in some years much more when share awards vest.
Pay reported in annual reports can be measured in different ways. “Statutory” pay includes the accounting value of shares granted, while “realised” pay shows what the executive actually received in that year.
Who decides
The board of directors sets the CEO’s pay, usually advised by a remuneration committee and outside consultants.
Each year, listed companies publish a remuneration report in their annual report, detailing executive pay.
The two strikes rule
Since 2011, shareholders in Australian listed companies have voted on the remuneration report at every annual general meeting. The vote is advisory, so it doesn’t bind the company.
But under the two strikes rule, if 25% or more of votes are against the report, it’s a “first strike”. If that happens two years in a row, shareholders must vote on a “spill” resolution. If more than 50% support it, the directors must stand for re-election at a new meeting.
Strikes are relatively common, while spills are rarely successful, but a strike sends a strong message to the board.
Proxy advisers
Big investors, such as super funds, often take advice from proxy advisers, firms that recommend how to vote on company resolutions. Their recommendations can have a big influence on the outcome of pay votes.
The debate
Critics argue CEO pay has grown far faster than ordinary workers’ pay, and that bonuses are sometimes paid even when performance is poor or companies have mistreated customers.
Companies argue they must pay competitively to attract and keep talented executives, who often compete in a global market.
Regulators have also pushed for bonuses to be clawed back when things go wrong. APRA’s rules for banks, insurers and super funds require part of executives’ variable pay to be deferred, so it can be reduced if problems emerge later.
