Productivity Commission report co-author defends lack of salary cap

Providing shareholders with more influence on executive salaries will convince boards to make better decisions when it comes to remuneration, the co-author of the Productivity Commission’s report on executive pay said over the weekend.

In an interview with ABC’s Inside Business, Allan Fels said he does not agree with salary caps because Parliament would be unlikely to establish a reasonable limit on pay.

“Under caps, there’s no sanction for the board,” he said. “As well as the board losing responsibility for pay and handing it over to government process, I’m not confident governments would do a very good job if politicians were in charge of what CEO’s got paid.”
“I reckon that what boards will do is get more careful about pay and not create situations where there are going to be spills and sets of negative votes,” he said.

The draft of the report, which was released last week, recommends that where two consecutive votes are made against a board’s remuneration proposals, the board be put up for re-election.

“Now, to step up and actually have consequences and an actual sanction, that is a considerable escalation (that) I would think will have significant affect on boards and it’s a very strong signal from the community,” Fels said.

But Fels also said there will always be community concern about executive pay, but this could be explained by how much large companies have grown.

“That’s right, there is huge community concern about the amount… there always will be. It’s very hard to explain to people why someone needs $10 million a year to get out of bed in the morning and go to work.”

“There are some reasonable explanations to some extent to what happened… If you link pay with just the growth in the size of companies, there’s a pretty close correlation.”

He also said the report’s proposals are better than alternatives that would allow binding votes on executive remuneration at company meetings, because those would focus on changing contracts that had already been signed.

Business leaders welcomed the report, but raised concerns about some aspects including the “two strikes” rule, and indicated they will give their submissions before the final report is due later this year.

The Government has indicated the report may form the basis of future legislation.