Analysis of Executive Pays in Australia - Assignment Example

Executive Pays in Australia – An Analysis Introduction and background In a paper for talking points intended to be used in public consultations, the Productivity Commission of the Australian Government took up the matter regarding the remunerations or compensations of top company executives. Among others, it was pointed out that the firm rise in the salaries of executives and other huge payments to them, even when the company does not perform well, has given a bad impression to the business community and implies that executive pay is becoming unmanageable. There is the observation that the pays for the executives of big corporations seem to have risen fast from the middle of the 1990 up to 2000 and again increased by fifty per cent or more in 2007. However, the subject remunerations fell by 2008 albeit it is not yet definite if the decrease has persisted. Interestingly, the good news is that recent pay enhancements are based on performance. Among the 2,000 public companies in Australia, the actual pays of executives show significant variances. For the top twenty chief executive officers, the average is $10 million, more or less, while for the smallest companies, the figure is around $200,000. On the average, Australian top company officers receive payment comparatively with their counterparts in small European countries and therefore lesser than those in the United Kingdom and the United States of America. The factors that affect these increases in the Australian landscape are globalisation, companies becoming bigger in size and the novel practice of using schemes for incentive pay. It has been noted that public confidence has greatly declined in companies owing to the bad impression on excessive remunerations and to the perception of top corporate officials misbehaving.1 Because of these variables and indicators, good and sound corporate governance is coming in greater significance in order to win back the trust and confidence of the investing public. In the particular situation in Australia, a survey gathered that the chief executives in the country are the third highest paid globally so much so that the circumstance has taken a toll on the reputation of the top managers of the companies. This outrage may provide some kind of restraint remuneration increases.2 As a matter of fact, the topic has become a hot political item. No less than Treasurer Wayne Swan once ordered for an investigation to be conducted by the Productivity Commission into the seemingly abusive executive remunerations. Swan claimed that excessive payments to departing top company officials just a few years ago have shattered public confidence in the business and corporate sector.3 While many disagreed with Swan for impliedly correlating corporate greed in the United States, it is a fact that his plaints are valid and can be supported by proof. The experience in the United States Australia is not alone. Corporate executives who receive high pay in the United States are deemed selfish and greedy and that the remuneration schemes in American companies are pictured as in bad shape. There are a lot of news and stories regarding executives making millions of dollars and, in some instances, even when their employers are in the brink of economic fallout. At one point, corporate executives were called in by legislators for a shaming.4 It is unfortunate though that what seldom are relayed by the press are only information and researches about the salaries of corporate executives. There should be more analytical written opinions on the matter.5 Queries such as concerning levels of executive compensation, the legal implications, the ethical aspect, the role of regulators and the perception of the public regarding the subject have to be answered with proper evaluation. The criteria in seeing whether a company is effectively governed are the manner and program by which compensation concerns are addressed. Executive compensation remains a problem to solve in the United States.6 The case of the United Kingdom In the United Kingdom, listed companies apply the best practice approach in governing the companies which covers the setting of executive pay. The technique is perceived by some as encouraging good behaviour among the top officials in the corporate ladder. It includes taking into account the market rate, the performance level, and the intention of the part of the managers to join the corporation.7 The regulations outlined in the Principles The Corporate Governance Council of the Australian Stock Exchange (ASX) issued on November 2, 2006 its exposure draft of recommendations for the Principles of Good Corporate Governance and Good Practice, herein referred to as Principles for brevity. While the paper is not yet the final one, it most likely would be. It is intended to be the practical guide for public or listed companies, the investors therein, the open market and the public, taking into serious consideration corporate accountability. In this paper only the truly relevant portions of the Principles will be discussed, principally the matters on executive remunerations, good governance and good practice. It is mentioned on page 8 of the Principles that there is a set of recommendations for clarity and disclosures. One of these is that information regarding remuneration of directors and senior executives must be clear. Be it noted though that there are already pertinent provisions in the Corporations Act (or CA for short) covering this requirement on disclosure. The same is true with the Australian Auditing Standards Board (AASB) 124 Related Party Disclosures. As outlined on page 10 of the Principles, one the usual responsibilities of the board or directors is to monitor the performance of the senior executives and this is important because it bears on the performance as basis for bonuses and other benefits. Also in connection with performance, the Principles includes in the corporate governance section of the annual report a statement as to whether the senior executives were evaluated of their performance and whether the evaluation followed the given process. (Principles, p. 12) Box 1.1 enumerates the contents being recommended to be included in the appointment letters of the director. (Principles, page 11) The items in here which are related to executive pays are the ones for remuneration and expenses and for superannuation arrangements. Principle 9 The meat of the provisions for executive remunerations as included in the Principles is in Principle 9. The title itself seems to say it all already, “Remunerate fairly and responsibly”. The policies of a company have to see to it that the level and components of an executive remuneration are sufficient and reasonable and that its bearing on performance is unequivocal. The provisions for compensations, particularly those for executives, always get the attention of investors who are, of course, the owners of the company. In fixing compensation levels and structures, there is a necessity to equitably measure the intention to attract and retain top officers and directors in such a way that remunerations are not paid excessively. As mentioned earlier, how an executive performs must be patently interrelated with how he will be paid. It is also important that any policy or option which becomes the basis of executive remuneration is fully comprehended by the shareholders. A remuneration committee has to be established by the board that will particularly focus on proper and reasonable compensation schemes and guidelines. While the final resolution on matters affecting executive remuneration rests in the power and authority of the board, the remuneration committee does the initial review and filtering process before any proposed policy is passed on to the board. In sum, with a remuneration committee, the board will all but review what is endorsed to it. As suggested in the Principles, the remuneration committee needs to have a charter or constitution and by-law of its own that will define its functions, duties and other essential elements of its creation. The said charter must contain a provision regarding the rules for non-committee members to be in attendance in its meetings. These are all intended to put order and decorum in the proceedings which necessarily will involve personal interests. It must not discount the need for outside expertise. In order to erase any doubt of bias or prejudice, the committee should be composed only of non-executive directors. Majority of its members must be independent directors and its chair must likewise be an independent director. There must be at least three members. The committee has the responsibility of reviewing and recommending to the board of directors the remuneration, recruitment and termination policies and procedures of the company as far as concerning senior executives, as well as the remuneration and incentives provided for the latter. It must likewise be responsible for reviewing and recommending to the board matters affecting superannuation agreements. The remuneration policy of the company has to be designed such that it will motivate top corporate officials to go along the course of it s long-range prosperity. The design must also clearly define the connection between well-deserved remunerations and how top corporate officers perform. It has to be fully understood that no person can be directly involved in resolving concerns over his own remuneration. There must be a distinction in the remuneration structures between those of non-executive directors and those of senior executives. For the latter, the pay schemes have to be patterned such that there is equitable proportion among fixed, incentive and other pays in order that performance objectives are accordingly reflected, taking into account the visions of the company and the situation it is in. Since executive compensation packages always seek a balance between fixed pay and incentive pay, corporations may apply the rules below. Fixed remuneration should be just and equitable. It has to consider the other the factors and variables in the labour market and the obligations of the company. It must go hand in hand with the current developments in the business. On the other hand, performance-based remuneration is always evidently hinged on achievements or effective accomplishments. This is a pro-active scheme that can increase productivity owing to the attendant encouragement. Equity-based compensation can have positive effects if connected to performance-oriented goals while termination payments, if there be any, for executive officers, should be covenanted ahead. Any agreement on termination pay must precisely take into account the repercussion of early retirement or termination. All the foregoing are matters of principles and standards. The same do not have sanctions in law. There are no punitive measures in case of infraction. However, if questions of prudence and propriety regarding executive remunerations arise, those accepted principles and standards will be admitted and weighed by the court in the interest of equity and justice. In sum, the bottom-line is good practice that springs from good behaviour. And good practice leads to good corporate governance. However, any impropriety has always a place in the legal system for some deterrence or constraints. It is therefore important to observe that there are policies and suggestions in the discussed principles that already have parallels or equivalent provisions in the legal framework. The Law The law on the matter is the Corporations Act 2001 (or CA for short) of the Commonwealth of Australia which governs or deals with Australian entities. Said to be the bulkiest corporations law in the whole world which consists of several thousands of pages, it is now undergoing simplifications.8 It regulates Australian companies as well as such matters as forming and operating those entities, duties and responsibilities of the officers, takeovers and funds generation. The topics here being about remunerations or compensations which are considered financial benefit, only the relevant sections of the CA will be taken up. Section 202A of CA provides that directors are entitled to remuneration from the company as may be determined by its resolution. This simply means that any provision for the remuneration of directors must be approved by the members of the company. The approval can be obtained by way of a resolution according to the procedures provided for in Section 218 which mandates that at least fourteen days before the notice to convene the pertinent meeting is given, the public company must lodge or file with the Australian Securities and Investments Commission a proposed notice of meeting that sets forth the contents of the resolution to be proposed. The proposal shall be in the form of an explanatory statement made in writing and shall include the names of the directors who will be benefited by the remuneration. A resolution is passed if at least fifty per cent of the members has voted for it as laid down in Section 253J of the CA. The approval process and mechanics cited here apply to financial benefits not only for directors but for all other related parties. Aside from remunerations, directors are allowed travelling and other expenses which they incur in attending meetings of directors and meetings of committees of the board of directors which they have to attend in official capacities, in attending the general meetings of the company, and in other undertakings related to the business of the company. For expenses, it only means that if the costs to be charged to the company are proper and that the same are incurred in connection with the business of the company, the director or any other company officer for that matter shall be so paid. The fact that remunerations for directors and other executives or officers of the company are subject to the approval of the members only shows that the giving out of pays to corporate officers have to be in accordance with democratic processes. The members are thus given all the opportunity to approve or deny any application for financial benefits. Any attempt to abuse on the part of the officers is not absolute. They cannot just simply dip their hands into the corporate coffers and go into spending splurge. The point here is that the element of check and balance in corporate hierarchy is not lost. What matters is the vigilance of the members or shareholders who are the real owners of the entity. There is no need to further research on the legal implications of this corporate activity. In another way of saying, even if the compensations which the officers or directors receive from the company are perceived to be excessive, abusive and unreasonable for as long as these are with the consent and approval of the members, the true company proprietors, there appears to be no legal issue. As a matter of course, it will be a different story if the proposing party employs deceit in obtaining the go-signal of the members. In that case, the latter have their own options and remedies under the law. There are certain instances where financial benefits are given without any more need for the approval of the members. The first is when the party to be benefited deals with the company under reasonable circumstances and at arm’s length which means that he transacts with the corporation as though he is not connected with it and has therefore no surmises for possible opportunism or taking advantage. Under this exception, the consideration must be less favourable to the party concerned than when it is at arm’s length. The other instance where no members’ approval is needed pertains to reasonable expenses incurred by a related party in the course of the performance of his duties as officer of the public company. It is actually in these exceptions that the wide latitude of discretion on the part of the benefited party lies. This is so because there can be abuse in determining the situation and circumstances which can be considered within the realm of arm’s length. The legal provision itself does not contain a hard and fast rule on how to reckon the boundaries of arm’s length. The same can be true for expenses. The possible queries that come to mind are regarding the reasonableness and propriety of the expenditure and the wisdom of the one who decides what is justified and appropriate under each given situation. In short, everything has still to be addressed to the individual attitude and behaviour of the parties who get the benefits from the company. In the event that the concerned party does not act conscientiously, the owners and managers of the company will be left at the mercy of the doer. And if the latter does it wrong, the process of detecting the mischief and of punishing the culprit will take a degree of time, efforts and resources especially if the costs are material and significant. The procedures alone outlined for good corporate governance and good practice may not be enough. Internal control measures, no matter how tight, are still susceptible of human transgressions. A thief is a thief. No amount of audit and other preventive procedures can easily catch a determined cheater. Yes, there are laws. But plenty are incidents when people can run around the law unscathed. In concluding, it is the assessment of this paper that the excesses of top corporate managers may be deterred by the safeguards of the law. Yet, there are no full guarantees. And, again, company members have to better be vigilant. Any dereliction on this aspect is the contribution of the shareholder in the failure or collapse of the company. References Abrams, Jim. CEOs defend their high pay on Hill. March 7, 2008. USATODAY. [internet] Accessed December 10, 2009. Available at: http://www.usatoday.com/news/washington/2008-03-07-1973881864_x.htm. Bender, Ruth and Lance Moir. Does ‘Best Practice’ in Setting Executive Pay in the UK Encourage ‘Good’ Behaviour?. Journal of Business Ethics. Springer 2006. page 75. Corporations Act 2001. Wikipedia. [internet] Accessed December 10, 2009. Available at: http://en.wikipedia.org/wiki/Corporations_Act_2001. CURRENT ISSUES IN EXECUTIVE COMPENSATION. NYU Journal of Law & Business. page 1. 2007. Westlaw. Franklin, Mattheo and Richard Gluyas, Excessive executive pay in the eye of shareholders. March 19, 2009. The Australian. [internet] Accessed December 10, 2009. Available at: http://www.theaustralian.com.au/news/nation/excessive-pay-in-eye-of-shareholders/story-e6frg6nf-1225689634899. Hill, Jennifer and Charles M. Yablon. CORPORTE GOVERNANCE AND EXECUTIVE REMUNERATION: REDISCOVERING MANAGERIAL POSITION CONFLICT. page 296. UNSW Law Journal. Volume 25 (2). Key points. Productivity Commission Discussion Draft. Executive Remuneration in Australia. page xiv. Productivity Commission. Australian Government. ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT. Corporate Governance and the Financial Crisis. June 2009. page 14. Read More