Despite the ALP’s ostensible working-class roots, it appears that curbing executive excess is a non-core goal of the Federal Government. Yesterday, Lindsay Tanner told reporters that giving shareholders binding votes on CEO pay “sounds good”, but may have unintended consequences.

Fortunately for the government, the next time a company removes thousands of workers while quietly giving executives a hefty pay rise, Kevin Rudd and Nick Sherry can at least point to two meaningless reviews to prove they really do care deeply about remuneration.

The Federal Government will soon consider a Treasury review regarding executive pay. Later this year, APRA will release a discussion paper regarding executive remuneration for APRA‑regulated institutions (it is expected in the second quarter of 2009).

One of the key areas being reviewed by Treasury is the level of payments permissible to CEOs who are terminated. Currently, the Corporations Act allows executives to receive seven times their total remuneration (calculated as an average over three years) without first obtaining shareholder approval. The Financial Review reported last week that Treasury is “considering lowering the threshold to a multiple of five times or less and tightening the definitions under the law, which experts say are easily avoided.”

Lowering the limit to five times total remuneration (before shareholder approval is required) would represent a significant win for executives.

That is because it is not merely the remuneration multiple which is the problem, but rather, the fact that the Act allows for termination benefits to be calculated by reference to the executive’s total remuneration (which includes short and long-term bonuses), rather than base pay. For example, even under the speculated lower limit, Telstra’s departing CEO, Sol Trujillo, would be entitled to a termination payment of more than $56 million from the shareholders without the company requiring approval (including short and long term bonuses, Trujillo’s average total remuneration has been more than $11 million over the past three years). Similarly, if Leighton’s Wal King were to hang up his shovel, he may receive $69 million from the company (courtesy of hefty recent short-term bonus cash payments), without shareholders getting a say.

The system is clearly flawed – for example, if an executive received high short-term bonuses for what appeared at the time to be excellent performance, but that performance turns out to be the result of flawed risk taking and the company collapses — that executive is able to “double dip”. That is, their termination entitlements will be calculated by reference to the undeserved short-term bonus payments.

Not only are the quantum and method of calculation out of proportion with Main Street, most companies still choose to pay departing executives “termination payments” even if they are not terminated, but instead, choose to retire (Macquarie Bank was the notable exception to this rule). Pacific Brands’ former CEO Phil Moore, who led the company of a near-fatal debt funded binge, received a payment of $3.4 million after retiring from his role. PBL’s John Alexander collected $15 million from shareholders despite remaining with the company on a lucrative annual salary (albeit in a different role).

Instead of a lengthy review with input from directors and remuneration consultants, a few small measures would quickly rectify the executive termination payment problem.

First, the Corporations Act should be amended to require that termination payments only be applicable in the case of bona fide termination by the company of the executive. Further, if any termination payment is made, the company is required to announce to the ASX the specific reason for the executive’s termination, for example, “Robert Maxwell was terminated by the board for his poor performance due to ill-timed acquisitions.”

Second, instead of calculating an executive’s termination entitlement by using a vague multiple of the executive’s salary, the calculation should simply be made by reference to the termination benefits received by the company’s lowest classed employee.

For example, if Telstra’s most junior cleaner or call-centre worker is entitled to a termination (or redundancy) payment of two weeks for each year of service, then the calculation of the executive’s termination entitlement must be made the same way. Such a rationale is also logical – company directors regularly defend executive remuneration by claiming that Australian executives are in constant demand globally and there is a shortage of executive talent. Based on that reasoning, given the demand for the executive talent, departing CEOs have no need to hefty termination payments as they should have little difficulty in finding alternative employment. (By contrast, the company’s most junior staff, who are currently entitled to far more miserly terminations entitlements than their executives, would have lesser skills and therefore, face a far longer period of unemployment in the event they are terminated.)

Two simple steps would make executive termination payments fair and equitable for shareholders and may even inspire confidence in Australian companies. But don’t expect to read them in a government review.