The Productivity Commission has found no systemic fault in the private sector’s approach to executive remuneration, but recommended a series of measures to strengthen transparency and remove conflict of interest, in its draft report this morning on Executive Remuneration.

The PC found that the problem of obscene executive payouts was primarily confined to Australia’s largest firms, with the top 20 CEOs averaging $10m, or 150 times Average Weekly Earnings, compared to less than $200,000 for CEOs of small companies. The problem has particularly developed since the mid-1990s, the Commission found, when pay started growing at 13% a year (higher for bigger companies), although growth moderated this decade to 6% per annum, still far ahead of ordinary wages. However, Australian executives are paid on average less than US and European executives for similar work — although the US and UK are well ahead of Europe.

The reason for the acceleration in executive pay, the PC says, lies with a combination of globalisation and consolidation, so that Australian companies became larger, and the indirect impact of massive increases in US executive remuneration, and the move to a greater reliance on incentive pay, which increased executive bonuses without any corresponding increase in company performance.

However, the PC specifically rejected the line pushed by companies over the last decade that greater transparency had led to higher remuneration. Indeed, the PC notes, the rate of growth of moderated in recent years.

The PC made 15 draft recommendations, which are of a piece with the Government’s preferred approach of avoiding regulation in favour of greater transparency.

  • Only AGMs to set the maximum number of directors, removing the discretion of boards to prevent the introduction of new directors
  • A new ASX300 rule that board remuneration committees have a least three members, who are non-executive directors, and chaired by and with a majority of independent directors.
  • Two recommendations that key executives and all directors (and associates) be barred from voting their personal shares, or undirected proxies, on remuneration matters.
  • A ban on hedging of unvested or otherwise locked performance bonus shares (which is consistent with the G20 approach to de-coupling financial sector risk and bonuses)
  • Proxy holders to cast all directed proxies on remuneration matters
  • Remuneration reports to include a plan English summary, identifying policies, actual levels of pay, and all shareholdings of those identified in reports. Actual fair value of equity to be used for remuneration reports.
  • Disclosure of remuneration for “key management personnel” rather than for the top five executives
  • Remuneration consultants to be used by boards directly, independent of management
  • Disclosure of remuneration advisers, the circumstances of their appointment and reporting, and what other work they have undertaken for the company
  • Institutional investors to regularly disclose how they voted on remunerations matters
  • Changes to taxation trigger points for deferred shares and rights
  • Confirmation that electronic voting at AGMs does not require amendments in company constitutions
  • Where a remuneration report has received a 25% or greater “no” vote, the board must report back explaining how shareholder concerns were addressed. Another 25% “no” vote for the next remuneration report will require a board spill and re-election.