Government cracks down on executive pay

The Rudd Government has announced a crackdown on executive remuneration by slashing the size of the “golden handshake” termination payments and introducing criminal sanctions for directors that fail to follow the new rules.

As community anger grows about giant termination payments made to executives around the world, Treasurer Wayne Swan has introduced a rule cutting the cap on termination payments for executives and directors from seven times total annual pay to just one year’s average base salary. Higher termination payments will require shareholder approval.

Swan has also launched a Productivity Commission inquiry into executive pay, to be led by former Australian Competition and Consumer Commission chairman, Alan Fels.

“I think the community has been rightly offended by some excessive payments…because some termination payments have borne no relationship whatsoever to the profitability of the company or to the performance of the executive,” Swan said yesterday.

“Some of these have been outrageous and it’s time action was taken, and the Government is acting.”

In an extraordinary move, Swan even named two executives who he believes received excessive termination payment: Owen Hegarty of mining company OZ Minerals (who received $8.35 million, more than six times his annual base salary) and John Alexander of Consolidated Media (who received a $15 million termination payment, around four-and-a-half times his annual base salary).

Shareholder groups, including the Australian Shareholders’ Association, have welcomed the move. Institutional investors such as fund managers and superannuation funds are also supportive.

But business groups and company directors are worried about the potential for government interference.

Australian Industry Group chief executive Heather Ridout argues most companies have already acted to curb excessive pay by freezing salaries or taking pay cuts in response to the downturn. She says excessive regulation in this area could be “counterproductive”.

“Australian companies and the regulatory framework they operate under are not responsible for the current crisis. The crisis is not of their making, and they shouldn’t be over-regulated in response to it.”

The Australian Institute of Company Directors has warned that bringing in overly harsh rules would make it extremely difficult for local companies to attract top foreign executives.

Respected director and former Woolworths boss Roger Corbett say he understands community concern, particularly given examples of outrageous payouts in the United States.

But he too remains concerned with prescriptive rules.

“Interference with the free process of the marketplace always tends to be counterproductive.”

Related articles:

• Carrot on a stick remuneration is bad news
• Politicians spinning us out on executive pay