EXECUTIVE PAY in the top 100 ASX-listed companies has increased more rapidly than pay levels of the overall workforce, with median pay increases for CEOs in the 2005 financial year at 10.4 per cent and 6.9 per cent for other disclosed executives
EXECUTIVE PAY in the top 100 ASX-listed companies has increased more rapidly than pay levels of the overall workforce, with median pay increases for CEOs in the 2005 financial year at 10.4 per cent and 6.9 per cent for other disclosed executives.
Speaking at a recent executive remuneration briefing in Melbourne, Garry Adams, principal and executive remuneration specialist at Mercer Human Resources Consulting, said pay increases for the overall workforce were in the range of 4 to 4.5 per cent.
“We are seeing a similar level of increases in the current round of disclosures in relation to financial year 2006, and we expect that increases for financial 2007 will continue at pretty much the same rate.”
Annual bonuses have also increased significantly in the past two years as companies report record profits, and Adams predicted that annual incentives will be strong again this year, based on profits announcements to date.
Adams also said that boards are increasingly focused on the governance issues. “Australia has a transparent reporting regime in relation to executive pay, and boards are very concerned to achieve remuneration outcomes for their companies that are reasonable from both the shareholders’ and executive perspectives,” he said.
Remuneration reports in company annual reports provide both tabular and qualitative commentary on remuneration policy issues, Adams noted.
“There has also been a significant increase in shareholder activism in recent years, with bodies representing both retail and institutional shareholders subjecting executive remuneration issues to more extensive scrutiny,” he said.
Adams said a significant area of interest is in the results of non-binding votes on the remuneration reports in the annual shareholder meetings.
“These provide a litmus test of both shareholder acceptance of specific remuneration arrangements and, to some degree, overall company and Board performance as it is one of the few opportunities shareholders have to register dissent.”
Adams also noted a number of trends in how companies are structuring executive pay packages, with more attention given to executive retention and ensuring an alignment with shareholder interests.
“The most common approach to doing this is to structure executive packages combining fixed remuneration, annual incentive plans and long-term incentive plans,” he said.
“Packages are structured relative to a market, usually comprising peer group companies, and the quantum and the mix of the remuneration package is designed to incent executives to deliver superior performance.”
There is more innovation in areas related to variable pay or incentive components of remuneration, he added. For senior executives in major companies, more than 50 per cent of the remuneration opportunity is now typically delivered by variable pay.
“For example, long-term incentive plans are designed to align executive interests with those of shareholders and to provide attractive wealth creation opportunities for the executives when shareholders also do well.”
One of the key aspects of such plans is that Boards are taking a serious look at the composition of the peer group they use for relative performance measurement and compensation positioning.
“Is it really a suitable group against which to measure performance? Does the volatility of the share prices in the peer group relate to firm specific, industry or overall market risk?”
