Redundancies and reductions in pay have been a painfully common experience across a wide swatch of the global economic landscape during the past few months. A report released by the Australian Council of Superannuation Investors finds that executive pay packets have not been immune.
ACSI CEO Louise Davidson says board restraint around remuneration is a welcome trend. “More boards are using sensible discretion to rein in outcomes for senior executives – demonstrated by the fact that 25 CEOs had their bonuses zeroed out where performance was not adequate, compared with only seven a year earlier.”
The pain has been plain across the financial services sector. AMP reported that its wealth management earnings halved in the last financial year; underlying profits were down $149 million. Wealth businesses earnings were down 43%. And, AMP is not alone. CBA announced an 11.3% profit hit with dividends down 31%.
Executives are not be immune to the stresses of business
ACSI’s Davidson says that the volatility in the financial markets has put a strain on people at every level of society, causing financial pain, isolation, and family dislocations. “The ramifications of both the health and economic impacts of the pandemic are still not fully understood – except to the extent that this will not be over in 2020, or even in 2021.”
It’s not just compensation that needs to be address. It’s also the optics of compensation. “Against this backdrop, boards of ASX200 companies will need to be mindful this year of how remuneration outcomes will be perceived externally, given the widespread impact of the pandemic on investors, staff, customers, governments and other key stakeholders,” says Davidson.
Reviewing FY19 pay data for more 156 of the ASX200 companies, ACSI found that all cash pay for CEOs fell. The average decline was 7.4% and the median was down 8.2%. While bonuses were persistent, the average awards dropped. The maximum was 60% of total pay in the ASX100, a drop from 70% in FY18.
The amount of CEOs that received no bonus despite being eligible increased in FY18. 146 of those surveyed were eligible for a bonus and 25 received zero. In the previous year, just seven received no bonus. For reference, the numbers were the same recorded during the GFC.
If you’re worried about these reductions sending executives to the poorhouse, ACSI’s report should provide some reassurance. More than 70% of the ASX100 sample received cash pay of at least $2 million. “This creates a significant buffer of personal wealth should the company’s performance or share price subsequently decline,” they write.
Termination payments shrink
While there is still a windfall for ousted executives, it has dipped. Total termination payments fell to $18.35 million across 14 CEOs, down from FY18’s $26.08 million across 15 people. The biggest termination payment came from AGL Energy’s Andy Vesey, who received nearly $4 million, a reflection of the fact that he stayed on as CEO for several months after stepping down, receiving full salary during that time.
ASX200 company boards are well-placed to respond
“Remuneration trends in 2019 indicate many boards are well positioned to respond to these pressures,” says Davidson. “For others, however, there is more work to be done to make sure they are ‘reading the room’ on executive remuneration.” Davidson says companies need to be aware of optics of remuneration and how they influence investors. “While investors appreciate that recent months have been some of the most demanding ever seen for those running businesses, those extra stresses and strains are not unique experiences to just executive teams.
“As always, the measure of a good incentive system is the ability to go beyond the ‘check-the-box’ approach to ensure pay outcomes reflect performance and the experience of investors in the company.”