Movement in executive remuneration
In Australia, a new report from the Australian Council of Superannuation Investors (ACSI) found that CEO remuneration has declined since the GFC, with new CEOs being hired on lower pay. While fixed pay declined, however, the report found that the vast majority of ASX100 CEOs received a bonus in 2015, the largest proportion since 2008. Meanwhile, in the UK, Woodford Investment Management has announced that it has done away with bonuses — employees received an increase to their base pay to compensate for the loss. The fund manager made the move as it said bonuses had proved to be ‘largely ineffective’ and can lead to ‘wrong behaviours’.
CEO remuneration in Australia shrank by 3.3 per cent overall and by 4.6 per cent across the ASX200 in 2015, notes the ACSI study. This seems largely due to new CEOs being appointed on lower pay packages, as the fixed pay of current leaders was either steady or rising slightly.
ACSI expressed the view that the decline in remuneration is a result of the two-strikes rule, which has seen boards engage with shareholders prior to the publication of the remuneration report and framework, in order to address investor and community concern about excessive pay. Similar studies suggest CEO remuneration continues to rise in the US and the UK, where ‘say on pay’ does not have the teeth of the two-strikes rule. The new UK Prime Minister, Theresa May, has indicated that a binding vote on remuneration may be introduced in that country.
While boards appear to be addressing shareholder concern about remuneration in terms of fixed pay, the report found that 93 per cent of ASX100 CEOs received a bonus last year, the largest proportion since 2008. Of concern to ACSI was that the median amount of bonus paid was 76 per cent of the possible maximum amount on offer. ACSI suggests that companies could be using bonuses to increase fixed pay, which in turn suggests that bonuses are not sufficiently linked to performance. ACSI queried how it was possible for three-quarters of the CEOs of ASX100 companies to have ‘outperformed’.
Since the GFC, the gap between CEO remuneration and average weekly earnings has narrowed. In 2007 it stood at 95 times and fell to a 12-year low of 62 times in 2015.
Given the prevalence of incentives across the financial services sector, where it is firmly believed that bonuses are essential to motivate employees, the move by Woodford Investment Management in the UK to dispense with bonuses has reverberated both within and beyond that sector. A second fund manager that is currently being established has since announced that it will dispense with bonuses. Woodford Investment Management has increased the base pay and benefits of employees for the current financial year to compensate for the loss of the bonus.
When announcing the move, the firm’s CEO, Craig Newman, stated that ‘There is little correlation between bonus and performance, and this is backed by widespread academic evidence'. He cited the academic evidence to back the firm’s position, including an article from The Journal of Corporation Law, that states, ‘Financial incentives are often counterproductive as they encourage gaming, fraud and other dysfunctional behaviours that damage the reputation and culture of the organisation. They produce the misleading assumption that most people are selfish and self-interested, which in turn erodes trust.’
Woodford Investment Management was quoted in the media as saying, ‘Many studies conclude that bonuses don't work as a motivator, as expectation is already built in. Behavioural studies also suggest that bonuses can lead to short-term decision making and wrong behaviours.’
With the AGM season approaching in Australia, CEO and executive remuneration is sure to remain a topic of interest to investors.