CEO pay outpaces shareholder value, remuneration should be tied to long-term incentives: Report

Businesses must start examining the pay structures they have put in place for chief executives and ensure these are connected to long-term rather than short-term goals, a new report on executive pay has warned.

The report from the Australian Council of Superannuation Investors, which examined the CEO pay of the top 100 Australian companies, found that CEO pay and bonuses have risen over 200% over the past 10 years, although return to shareholders has only increased by 31%.

The findings highlight the growing concern over executive pay now the Government has introduced laws that will ensure companies whose shareholders vote against their remuneration structures may be forced to undergo board re-elections.

ACSI chief executive Ann Byrne says the report, the company’s tenth, is designed to educate shareholders on various remuneration programs and to make them aware of any disconnect within their own investments.

“Over the past 10 years, fixed pay has gone up, median bonuses have gone up, but shareholder value has only gone up by 31%. There isn’t a true alignment between pay and shareholder value,” she says.

”This is of major concern as paying CEOs cash bonuses and high cash salaries protects them from the volatility experienced by shareholders,” the report also states.

The report showed that average CEO fixed pay for 2010 actually fell for the first time by 4.4% to $1.9 million, with the median rising from $1.8 to $1.82 million. However, “despite the decline in average fixed pay for top 100 company CEOs, it remained at levels above the last pre-financial crisis year of 2007”.

The report showed that 90% of the top 100 also received bonuses, an increase from 82% the year before.

And over the last decade, the report found that chief executives saw their median pay increase by 133%, while bonuses grew by 190%. ACSI points out that while the correlation between bonuses and performance is imperfect, there should still be a connection.

“If this is not the case bonuses have been paid either on mistaken assessments, or performance has been assessed using criteria unrelated to company performance.”

Byrne says businesses must start examining long-term incentives, instead of short-term cash bonuses.

“Businesses must look at their incentive structures to make sure they are aligned with shareholder value. There is one indication that this may be happening, because more incentives are being handed over long-term.”

The release of the report also comes as listed businesses are figuring out how to deal with the new two-strikes laws that will ensure shareholders greater control over remuneration plans.

“There were a number of companies had received greater than 50% votes against their pay structures last year.”

“We are seeing more shareholders taking ownership by voting against these particular structures, and they are discussing with the boards of these companies to make sure they have correct structures in place.”