How Much Leverage Do the Two-Strike Laws Have Over Executive Pay?
Total Page：16
File Type：pdf, Size：1020Kb
EXECUTIVE REMUNERATION People POWER How much leverage do the two-strike laws have over executive pay? by CHRISTOPHER NIESCHE n 2011, the shareholders of Crown allowed the shareholders to eject a company Since the law took effect in 2011, Resorts took action against what board over pay concerns. shareholders have shown they are prepared I they saw as excessive salaries and Under the laws, a company receives a strike to use their new power, even against lack of disclosure over executive if 25 per cent or more of shareholders vote some of Australia’s best-known blue-chip pay. At that October’s annual general meeting against its remuneration report – the part companies. Along with Crown Resorts, Lend in Melbourne’s plush Crown Towers, they of the annual report which outlines what Lease and BlueScope Steel, among others, delivered the first ‘strike’ against the casino key executives receive in pay and bonuses, have all had their remuneration reports voted owners’ remuneration report, with 55 per and how they are calculated. If a company down a first time – the so-called ‘first strike’. cent of shareholders voting against it. receives two consecutive strikes, then the While these companies all avoided a second The shareholders were taking advantage of investors can vote whether to spill the board strike, remuneration apparently remains a new powers over executive pay they’d been – that is, declare all positions vacant and touchy subject for these companies, as they given under the ‘two-strikes’ laws, which potentially elect new directors. all refused requests for comment. june 2014 – HRmonthly – 27 EXECUTIVE REMUNERATION The strike against Crown prompted a swift doing more of it,” says Cathy Graycon general and angry reaction from executive chairman “IT’S NOT JUST manager, human resources at Westpac. James Packer. He said he disagreed with THEIR OWN In the wake of the global financial crisis, the laws, would use his own substantial Australian financial services companies shareholding to re-elect any directors who EGOS DIRECTORS were hit with a raft of new rules governing were ejected, and would never reveal the ARE TRYING TO executive pay and disclosure, so Graycon says information on bonus hurdles investors PROTECT WHEN it’s hard to put the increased communication wanted to see. down to the two-strike rule alone. Westpac Yet by the following year Crown had THEY SEEK TO hasn’t had a pay strike and the two-strike obviously reconsidered. The key earnings AVOID A ‘STRIKE’.” rule by itself also hasn’t had a great effect hurdles were in the remuneration report and on the way it sets pay. All the changes the company avoided a second strike. in combination have lifted the focus on Investors have been handed a considerable remuneration at Westpac, as well among amount of power, and its effects are being investors and proxy advisers, says Graycon. felt in the pay arrangements of not just those Nonetheless, in the lead up to the two- companies that had received a strike, but strikes rule coming into effect, Westpac did a across the economy. review to check that its governance, policies It’s not just their own egos directors are The laws are encouraging entire boards and processes were robust enough to ensure trying to protect when they seek to avoid a to pay a lot more attention to executive it wouldn’t have any issues. ‘strike’. Studies have shown that companies remuneration, rather than just leaving it all Michael Robinson, co-founder and the market perceived to have high standards to the remuneration committee. Hogan says executive director of executive pay of corporate governance perform better on the legislation has given boards an extra consultancy Guerdon Associates, says there the stock market. impetus to “ensure that the remuneration are now fewer “egregious” outcomes on The main effect of the two-strikes law has approach they’re taking supports the executive pay. Nonetheless, the engagement been in the effort companies make to comm- business strategy”. “If it does that, then the process means there is more tolerance of unicate with shareholders over executive pay, vote should take care of itself,” he says. deviation from the norm in terms of how regardless of whether or not they’ve received a Certainly Westpac is communicating executives are paid, because investors strike or are at risk of getting one. more with institutions and proxy advisers, are better informed about how these pay “It has definitely promoted much more who advise major investors on how to vote structures align with their own interests. engagement between the remuneration at companies’ annual general meetings. Many companies are adopting a more committee chair and/or [the company] “Because the two-strikes rule created tailored approach to incentive payments, to chairman and institutional investors and so much debate on the issue, while we award bonuses to directors for things over proxy advisers around remuneration issues,” have always had a fairly active dialogue which they have more direct control. says Mike Hogan, partner of human capital at and engagement with proxy advisers and For instance, in the past many bonus Ernst & Young in Sydney. institutional shareholders, we’re probably schemes were based on total shareholder 28 – HRmonthly – june 2014 EXECUTIVE REMUNERATION return – a measure of dividends and gain in share price over a year – but it was an imperfect measurement, that could see executives rewarded or penalised for extraneous factors which affected the company share price. Instead, more companies are awarding a larger proportion of bonuses based on Where in other metrics such as capital efficiency, return on equity and earnings per share growth, which ensure that managers are the world? more likely to be rewarded for a strong performance, and less likely to win a bonus Australia is not the only spot where because of good luck. Where many executive bonuses were executive pay is being scrutinised. previously paid in cash, more major companies are deferring those bonuses and oards now have to work harder to get the balance right paying them in equity instead. And there when setting executive pay. “It’s a very important is no guarantee that the executive will Bconsideration. On the one hand they have to pay enough receive the deferred equity bonus because to attract and retain the right sort of people to run the company, they are often tied to sustained earnings but on the other hand they don’t want to be overly generous performance. because they’ll incur a strike,” says Guerdon Associates’ Even when a company does receive a strike, Michael Robinson. more often than not they increase their This has been made easier in recent years by the strong interaction with investors rather than making Australian dollar and the fact that so many of the offshore wholesale changes to their remuneration economies, which might compete for top talent, have suffered a policy, says Daniel Yin, senior consultant at prolonged downturn. “From a migrant executive point of view, executive remuneration consultants Egan Australia’s been in a pretty good position in the past few years,” Associates. And often the better disclosure says Robinson. and explanation of their pay strategy helps In fact, about 17 per cent of the executives leading the companies avoid the second strike, as with ASX-200 companies were born outside of Australia, so a falling Crown Resorts. dollar could add to pay inflation to those companies trying to In some cases shareholders are using attract offshore talent. But maybe not as much as previously. the two-strike legislation to protest Australia isn’t the only country to have reformed executive pay. against governance matters other than In the US, the Dodd-Frank Act of 2010 requires all public remuneration, says Yin. “Shareholders are companies to have an advisory shareholder vote on pay. using it as a means to agitate for action within Companies must report the results and say how they have the companies, particularly for companies responded to these when making decisions on pay the outside the ASX-100,” he says. following year. These votes can cost a smaller company a In the UK, shareholders have had the right to an advisory vote significant amount of time and resources as on pay since 2003 but new legislation effective from last year they try to assuage shareholders’ concerns, means companies are subject to a binding shareholder vote at regardless of the issue that triggered the vote. least every three years. In addition, tougher rules on disclosure The effects of the global financial crisis have been introduced. that prompted the two-strikes legislation The European Commission recommended a shareholder vote are still being felt in the setting of executive on executive pay in 2004. Say-on-pay voting was introduced in pay. Incumbent chief executives have won the Netherlands in 2004, in Sweden in 2006, in Norway and only modest pay rises over the past couple of Denmark in 2007, and in Belgium in 2012. However, the US years and many companies are using the hire reforms are particularly significant, as it was the world’s biggest of a new chief executive as an opportunity to economy that was driving global executive pay inflation. reset the base pay. Remuneration consultants say pay rises this year will mostly match the inflation rate, although there might be some pick up in the second half of the year if the economy improves. HRm june 2014 – HRmonthly – 29.