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ESG Focus: Institutions Gunning For CEO Bonuses

ESG Focus | Sep 18 2019

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Institutions Gunning For CEO Bonuses

An interview with ACSI CEO Louise Davidson suggests bonuses will be a point of contention during the 2019 AGM season.

-ACSI’s 18th survey of executive pay shows a “persistence of bonus” culture
-Institutions to focus on bonuses at 2019 annual general meetings
-There are signs investor pressure is working.
-Top paid CEOs

By Sarah Mills

Executive bonuses are expected to be targeted in the next round of annual general meetings, after the Australian Council of Superannuation Investors (ACSI) came out swinging with its latest investigation into chief executive officer (CEO) pay in Australia.

Its September 2019 ACSI Annual Survey of S&P/ASX200 Chief Executive Remuneration was accompanied by a scathing press release that singled out executive bonuses.

 “The way bonuses are being handed out suggests there is a culture of entitlement whereby supposedly ‘at risk’ pay is not very risky at all,” says ACSI CEO Louise Davidson.

“You have a situation where only one CEO missed out on a bonus … You only have to look at the stock exchange to see that that is not the sort of performance you would expect from those figures.”

“These payments occurred in a year when the Financial Services Royal Commission was in full swing, revealing evidence that executives were not being held accountable for poor conduct, and in the wake of soaring ‘first strike’ votes against remuneration reports.”

“Clearly, corporate Australia is not getting the message that bonus payments should be variable and awarded for stretch performance, rather than being fixed pay under another name. This is a failure of both discipline and leadership.”

Bonuses ring of “fixed pay”. Everyone wins a prize.

The survey shows the median ASX100 CEO received 70% of their maximum bonus entitlement – a figure almost unchanged in four years. Less than 7% of CEOs received less than 30% – a record low.

A stand-out was the fact that the median bonus awarded to an ASX100 CEO in FY18 was $1.61m – the second-highest in the history’s survey despite the departure of several handsomely paid CEOs during the year.

The survey says that bonuses as a proportion of the maximum illustrates that there is minimal evidence that annual bonuses in large companies are genuine ‘at risk’ payments. Half of ASX100 CEOs received more than 70% of maximum but even CEOs who received less than the median were unlikely to receive less than half of maximum.

The median value of realised pay rose to $4.5m.

Institutions to focus on bonuses at 2019 annual general meetings

In an interview with FNArena, Davidson says her members will be in discussions with boards and making decisions and announcements on which CEO bonuses they believe are inconsistent with performance, and by how much, during the 2019 annual general meeting season.

Davidson singled out the banks: “Last year bank investors exercised their displeasure over the way bonuses were paid at ANZ, Westpac and NAB yet. Those three banks insist on paying bonuses.”

“Our members believe that ESG risks and opportunities have a material impact on investment outcomes. As fiduciary investors, they have a responsibility to act to enhance the long-term value of the savings entrusted to them,” says Davidson.

ACSI members include 38 Australian and international asset owners and institutional investors. Collectively, they manage more than $2.2 trillion in assets and own on average 10 per cent of every ASX200 company.

In 2018, the number of ASX100 companies to receive a strike against their remuneration tripled on 2017, and there were many close shaves.  In 2018, large strikes were received against National Bank ((NAB)), Mineral Resources ((MIN)), Westpac ((WBC)), Telstra ((TLS)), and AMP ((AMP)).

Under the two strikes rule, shareholders have the power to spill the board if at least 25% of shareholders vote against the board’s decision on executive pay in two consecutive years.

So this year institutional investors will have a rare opportunity to exercise unprecedented leverage at the AGMs.

How they will exercise this, and the fruits of their labours, will be keenly observed.

Bank shares have rallied strongly in the past quarter, suggesting the banks also have ammunition up their sleeves. Although much will depend on who’s buying. NAB shares have been particularly well sought in September.

Three clear trends in remuneration

Overall, the survey examined what proved to be a moving feast for the 2018 financial year. A large number of CEO turnovers muddied the picture but three trends emerged:

  • That there remained little connection between bonuses and performance; and
  • That fixed pay and cash pay remained fairly stable.
  • CEOS were deferring bonuses and opting for equity over cash, and ensuring incentives were subject to malus or claw-back provisions where there has been poor performance.

On a more specific level, the average bonus awarded increased despite a decrease in the median – up 1.7% to $2.12m, to reflect a move to a combined incentive plan model where either an enlarged annual incentive replaces the long-term incentive (NAB, QBE Insurance ((QBE))), or where an enlarged annual incentive is then allocated as a mix of cash bonuses, deferred equity and long-term incentives (Woodside Petroleum ((WPL)), Telstra ((TSL)) and Iluka Resources ((ILU))). Woodside’s report included both annual bonus awards and long-term incentive allocations, and a sharply reduced cash bonus relative to prior years.

The median and average cash bonus in FY18 fell sharply despite persistence of bonus outcomes relative to maximum.  The median cash bonus fell -16.5% to $927,000 the lowest since 2004, while the median bonus awarded, which includes deferred components, fell from $1.76m to $1.61m (the second highest in eight years).  Newer entrants with lower bonus opportunities drove some of the decline.

The average cash bonus fell almost -15% in FY18 to $1.09m, and the lowest since for several years, and the average bonus fell from a record $2.3m in FY18, to $2m, behind only FY16 and FY17 averages.

Signs investor pressure is working

Davidson says that with the exception of bonuses and median pay, results are promising and suggest investor pressure is forcing changes in behavior.

“I do think that investors are having an impact,” she says. “Fixed pay is stable. I think you will see changes over the next year or so in terms of pay.”

“We have seen a trend among leading companies to lower base pay for incoming CEOs, reducing their cash pay by deferring a portion of awards into equity that is delivered over time, and implementing malus or claw-back provisions to deal with situations where poor performance and behaviours emerge after rewards have been delivered.”

In the press release, Davidson suggests “downward adjustment is in order”, a term that is also used by the Australian Regulation and Prudential Authority (APRA).

When asked in the interview to define “downward adjustment”, she says: “if performance, both financial and non-financial, is not strong – there should be no strong bonuses. Bonuses should be used as incentive schemes that award executives for exceptional performance.”

Whether the term is viewed through the same lense by APRA will be interesting. Davidson suggests as much: “This year’s CEO pay survey confirms these concerns and lends weight to recent observations by the Australian Prudential Regulatory Authority ‘that there has been an absence of significant downwards adjustment to remuneration at executive level’.” Bonuses were the main issue in the report given fixed and cash pay were flat and falling in real terms (again muddied by CEO departures).

Concessions on non-financial metrics?

At the last round of annual general meetings, investors exhibited clear resistance to the use of non-financial metrics but Davidson says some non-financial measures will be necessary to avoid the focus on short-term profit that triggered the Haynes Royal Commission into the finance sector. She expects these will be regulated by APRA.

“We believe non-financial measures can be effective if there is enough rigour around the way those are assessed.

“I think it’s an interesting area and I don’t think there are answers yet. We expect a lot of movement over the next couple of years: what are appropriate measures, and how are they (APRA) going to set them? How will they be reported and disclosed?”

“One of the main concerns about non-financial metrics is that there is not much disclosure, leaving it to board discretion. So long as they have reasonable degrees of rigour and reasonable stretch in them, we support them.”

Davidson expects that APRA will drive equity, malus (the opposite of bonus) and claw-back provisions, and expects boards we will increasingly opt for deferral of remuneration in shares.

Global trends

In a recent environmental, social and governance (ESG) paper on remuneration, Morgan Stanley expects global trends are likely to include a shift between the percentage of fixed versus at-risk pay. However, the ACSI survey suggests that there has not a big shift in overall balances between these components.

CEO’s reeling in the bonuses

Five ASX100 CEOs received 100% of the maximum bonus. CSL’s ((CSL)) Paul Perreault, nabbed the highest bonus of $3.89m. The others included Treasury Wine Estates’ ((TWE)) Michael Clarke, Crown Resorts’ ((CWN)) John Alexander, TPG Telecom’s ((TPM)) David Teoh, and Adelaide Brighton’s ((ABC)) Martin Brydon, which was an unusual form of termination which drew ASCI scrutiny.

The highlights of the ACSI report are as follows:

  • FY18 was a record year for the ASX200 sample in terms of bonus outcomes. Across the 158 CEOs in the sample, of the 147 eligible for a bonus, 140 received one.  Only one CEO received no bonus.
  • The median bonus outcome as a proportion of maximum in FY18 was 70%, effectively in line with FY17, FY16 and FY15. Only one eligible ASX100 CEO did not receive an FY18 bonus, compared with six in FY17.
  • The median ASX100 bonus was $161m, the second-highest in the history of this report, down 9% on the FY17 record.
  • There was a continued trend towards equity over cash, the median cash bonus falling -16.5% to $927,159, showing an increasing trend to bonus deferral.
  • Median ASX100 realised pay rose to $4.5m (includes the actual value of equity vested during the year).
  • The ASX100 hit its second successive record for median realised pay, moving from $4.36m in FY17 to $4.5m in FY18.
  • Median fixed pay for ASX100 rose 1% to $1.79m in FY18, having increased by just 0.2% over the prior decades
  • Average realised pay dropped to $5.66m from $6.23m following the departure of several highly paid CEOs and the fact that only two CEOs realised more than $20m in FY18 – Qantas’ ((QAN)) Alan Joyce and Macquarie Group’s ((MQG)) Nicholas Moore.
  • Average fixed pay fell -1.3% from $1.91m to $1.88m following exclusion of the retiring Westfield Lowy brothers.
  • Average ASX100 CEO fixed pay has fallen 0.3% since FY08.
  • Among ASX101-200 average median fixed pay both fell -2% and -1.5%, although the FY18 median was still the second highest recorded in the eight years the survey has included.
  • Termination costs rolled in at to $25.15m in FY18, down from $33.63m in FY17 due to a decline in terminations from 20 to 15.
  • Only eight terminations topped $1m in FY18, down from 13 in FY17, the highest going to former Adelaide Bright CEO Martin Brydon at $4.43m in addition to $1.47m bonus.
  • After jumping substantially in FY17 to a record of $6.23m, average realised pay for ASX100 CEOs fell in FY18 to $5.66m in line with the averages for FY14-FY16.
  • In FY18 average ASX100 CEO realised pay represented 65.8 years of average adult earnings down from 74.4 in FY17 land the lowest in the five years they have been collecting the data.
  • The increase in average realised pay levels for the ASX101-200 sample was because in FY17 only one ASX101-200 CEO received realised pay above $10m, Sigma Healthcare’s ((SIG)) Mark Hooper, while in FY18 there were three above $11m.
  • Median reported pay, at $2.03m, was the highest recorded in the eight years of the ASX101-200 study, up 8.4 per cent on FY17, the previous highest median.
  • Fixed pay for the ASX100 was largely flat.
  • Median pay topped out at $1.95m in FY12 and tracks well below inflation.
  • In FY18, the median incumbent CEO received a 4.5% increase to $1.84m and the average incumbent a 3.7% increase.
  • Fixed pay for incumbents was -15% lower in absolute terms than the immediate predecessor, and at least -13% lower than the previous to the predecessor.

Top paid CEOs for 2018

Qantas’ Alan Joyce topped the ASCI Top-10 Highest-Paid CEO chart, just pipping Macquarie Group’s Nicholas Moore at the post thanks to a large long-term incentive allocation granted in 2014.

SEEK’s ((SEK)) Andrew Bassat, and Sonic’s Colin Goldschmidt also prospered.

New entrants to the top 10 included Treasury Wine Estate’s Michael Clarke, Challenger’s ((CGF)) former CEO Brian Benari, CSL’s Paul Perreault, Newcrest Mining’s ((NCM)) Sandeep Biswas, Transurban’s ((TCL)) Scott Charlton, and Goodman Group’s ((GMG)) Greg Goodman (thanks to the vesting shares).

As in FY17, almost no Big Four bank CEO made the reported or realized pay top 10 in FY18. Thorburn was the highest paid of the three.

The FY18 reported pay Top 10 list for the ASX101-200 cohort was easily topped by head of operations at Afterpay Touch ((APT)), David Hancock. This was due to a one-off option grant to Hancock with an unusual history.

On taking up his executive role in July 2017, APT promised to grant Hancock two million options with terms to be determined but then did not seek approval for this grant of options until the 2018 AGM. Due to the rapid increase in Afterpay’s share price over the course of 2017 and 2018 and the personal tax difficulties this would create for Hancock on issue of options on the original terms, the company eventually received shareholder approval to grant Hancock 2.7m options at the 2018 AGM with an exercise price of $2.70.

Some signs of corporate self-regulation

Meanwhile, Macquarie Wealth Management’s ESG Equity Strategy report notes that there have been some moves towards self-regulation in CEO remuneration in 2019.

AMP has announced that its CEO’s remuneration package was readjusted to “better reflect the challenges currently facing the company, with share price hurdles lowered but with the value of the awards also lowered.”

At Platinum Asset Management ((PTM)), as a result of underperformance of the funds relative to indices, no awards were made under the profit share plan, and the CEO elected not to receive any variable awards in 2019.

According to Macquarie, companies are about to embark on a series of enterprise bargaining agreements. However, APRA has noted as an area of concern that employees at lower levels of organisations tended to receive downward adjustments to pay that were not always matched by corresponding adjustments at an executive level.

Former remuneration high-flyer Domino Pizza’s ((DMP)) CEO Don Meij was the sole ASX100 CEO not to receive a bonus.

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