Local directors benefit from ‘risk-free’ guarantee

Australian chief executives are guaranteed half of their income, irrespective of performance, a national survey has found.

The practice in Australia contrasts with the US and the UK, for example, where the majority of pay is ‘at risk’ and subject to performance.

The survey by Sydney-based consulting firm Guerdon Associates found that, for executive directors at S&P/ASX300 companies, just more than 50 per cent of their total remuneration is guaranteed.

The performance pay that is provided to Australian executives is mostly based on short-term results.

In contrast, Guerdon says that in the UK, almost two thirds of executive pay is subject to performance assessment, while in the US more than 80 per cent is ‘at risk’.

In both countries, the bonuses are tied primarily to sustained long-term performance.

The Guerdon survey also concluded that size matters more than performance when companies determine pay increases for the top executives.

Guerdon director Michael Robinson said industrial companies rewarded size over performance the most.

It found that increases in total remuneration for industrial company chief executives had a very high correlation (83 per cent) with market capitalisation and virtually no correlation with earnings per share or profit performance.

Mr Robinson said the financial services sector was an exception, with increases in total remuneration mostly explained by growth in earnings per share.

He commented that linking the size of pay to the size of companies should not be surprising.

What was surprising was that the rate of increase in pay is more related to size than performance.

Based on this analysis, he said chief executives had an incentive to make their companies bigger rather than lift their profitability.

“These results support anecdotal evidence that the primary beneficiary of mergers and acquisitions seems to be management rather than the investor,” Mr Robinson said.

The Guerdon survey found that chief executives of S&P/ASX300 companies received big increases in total remuneration last financial year.

The average total remuneration jumped by 21 per cent to $1.64 million.

The biggest increases were for long term incentives, such as shares, share rights and share options.

Fixed pay increased by 21 per cent, short-term incentives (typically cash bonuses) by 15 per cent, while long-term incentives (typically shares and options tied to performance hurdles) jumped by 40 per cent.

Overall, the pattern was that larger companies awarded higher increases across the board for all components of pay, including performance components, even if their performance was weaker that smaller companies.

The chairmen of S&P/ASX300 companies also enjoyed good pay increases.

Total remuneration increased by 25 per cent to a median of $284,801.

Most of their remuneration was in the form of fixed fees ($210,917) with a small portion in the form of shares and superannuation benefits.

Non-executive directors received a 23 per cent increase in total remuneration to a median of $102,500.

Mr Robinson said the increase in directors’ fees flowed from two factors. 

Directors have a larger workload, which in turn was a result of the CLERP9 corporate law reforms and the increased focus on corporate governance.

Second, many directors gave up generous superannuation benefits in response to investor concerns, and their increases in fees goes some way to restoring some of the lost value.

“Without an increase in fees it would difficult to retain existing chairmen and directors, and recruit qualified new directors to fill vacancies,” Mr Robinson said.

“Many of these board vacancies have been caused by directors having to rationalise their board memberships brought about by the extra workload.”

PAY PUSH

•           CEO remuneration at Australia’s top 300 companies rose 21 per cent last year.

•           Chairman remuneration increased 25 per cent.

•           Half of CEO income is linked to performance.

•           CEO pay increases are mostly linked to the size of their company.