Productivity Commission draft clamps down on executive salaries

Company executives and key management personnel should face regulations that would give shareholders power to reject a board if a remuneration policy is voted against at two successive meetings, the Productivity Commission has recommended.

In its draft report of an inquiry into executive remuneration, the Productivity Commission has recommended a “two strikes” rule in which two successive votes against a remuneration policy would see a board face re-election.

Other recommendations include having ASX300 companies set up a remuneration committee of at least three members, with the majority of members being non-executive directors, along with proxy holders being required to cast their directed proxies on remuneration reports.

The draft report did not include a recommendation for a cap on executive salaries.

The report recommended that institutional investors should be required to disclose how they voted on a remuneration vote, while company executives should be prevented from hedging any unvested equity remuneration.

Other recommendations include where a remuneration report receives a “no” vote of over 25%, the board will be required to report to shareholders in the next report explaining how these concerns were addressed, and if not, the reasons why.

Inquiry chairman Gary Banks said in a statement that while “on the evidence, the strong growth in executive pay has had much to do with the growth and global reach of Australian companies themselves… there have also been episodes of excess and poor pay practices”.

The draft report finds that for the country’s 100 largest companies, executive remuneration grew by over 250% since 1993, while for the top 20 chief executives, the average pay nears $10 million – 150 times the average weekly salary.

“A catalyst for this inquiry was concern that executive pay had got out of hand,” the report states. “This perception was fuelled by practices in financial institutions abroad that were seen as a key contributor to the global financial crisis.”

“Accordingly, this inquiry has been tasked with ascertaining what has actually happened to executive pay in Australia’s publicly-listed companies, as well as identifying what can and should be done about it. The appropriate test for any policy intervention is that it promotes community wellbeing: hence the Commission has explored the likely drivers of executive pay and the economic implications of current pay levels and structures.”

The final report is due later this year, with the Government expected to introduce legislation incorporating recommendations from the Commission.