ONE SIGNIFICANT STEP TO SALARY SANITY

Ten years ago the then head of Treasury set out to reform and above all simplify the Australian tax system. The effort collapsed in the usual political heat of a Canberra winter – and the even more torrid and noxious politics of the dying (first) prime ministership of Kevin Rudd.

Now as chairman of the National Australia Bank, the same Ken Henry has set about simplifying – and hopefully reducing – the way the salaries of top executives, including especially that of the CEO, are calculated and paid.

The obvious difference between then and now is whereas Henry’s brief as a public servant was about the whole country’s tax system, what he revealed yesterday was all and only about the NAB. Not even the other big banks have to follow, far less the corporate world more generally.

They should. There’s another obvious difference. Back in 2010 the Henry Tax Review was in the gift of his political masters – one in particular, then Labor Treasurer Wayne Swan. Swan sat on it for nearly a year and then ‘gifted it’ to the dumpster.

As an historical artefact, it’s interesting to note that timing. Swan finally got around to releasing the Henry Review in May 2010; a month later Julia Gillard rolled Rudd and the rest – including Henry’s tax recommendations – would be, as the saying goes, history.

Fast forward to 2018, and Henry’s proposals to reform the NAB executive salary structure are in the gift of – well, Henry. With of course, the assistance of an ‘agreeable board’.

No Swan, no Rudd, no Gillard: it’s a done deal. Indeed, it will be ‘done’ immediately, with the new structure applying to the 2018 salaries.

My observation is that it is a step – perhaps even a big step – in the right direction. But it is only a step; it doesn’t actually get all the way to ‘the destination’.

That’s if we define ‘destination’ as salaries which are generally (and significantly) lower (especially for bankers), have the right balance between the fixed core salary and the performance bonus; and really link performance – and so resultant benefits (or the opposite) to shareholders – with the amount paid the relevant executives.

The last is to avoid, as best it is practical and feasible, the ‘BHP problem’ I noted yesterday.

That’s where the former CEO Marius Kloppers walked out the door with $US16 million ($22 million), in his last pay packet while leaving behind some $US20 billion-plus in losses from the ill-fated plunge into US shale.

Yet his successor Andrew Mackenzie got only

$6.5 million in the latest year for magnificently cleaning up Kloppers’ mess.

I just don’t think you can argue that a company has the ‘right’ structure for executive pay when that structure pays its CEO $1 for every $1000 of red ink he or she splashes in the faces of shareholders.

Clearly BHP’s still relatively new and unquenchably energetic chairman Ken McKenzie – and his board – should have a good hard look at what Henry and NAB have done.

They have kept the base salaries – for CEO Andrew Thorburn, its $2.3 million. They have swept away the complex system of separate short and long-term bonuses, and replaced it with a much-simplified single ‘variable reward’ (essentially a long-term bonus).

That complex system of short and long-term bonuses has been the pervasive model across corporate Australia since last century. The corporate sector was, very simply, sold an expensive pup by ‘clever’ (and over-paid) management and remuneration consultants.

The structure should have been dumped years ago – indeed, it would have been very timely, in the wake of the GFC, to have sent it into the same bin as Henry’s tax review.

In the broad, both the simplification and the shift to a single bonus which only gets finally ‘paid’ four years after it’s awarded, is great.

My two qualifications are with the balance between base salary and bonus and so the total amount that can end up being paid.

Most people would think of a bonus as being some percentage – under 100 per cent – of the salary. Further, especially if you are the CEO, you should reasonably be expected to make a success of your job, so any bonus should only be paid for exceptional outperformance.

In the case of Thorburn he can get paid as much as $6.9 million extra – his bonus can be three times his salary. Even the so-called ‘target’ bonus – the one ‘most likely’ to be paid - is twice his core salary, at $4.6 million.

Sorry Andrew – and all other current CEOs and budding future CEOs – a more reasonable, a more sensible structure and quantum, would be something like a core salary of $3-3.5 million and a bonus up to a maximum of 100 per cent of that figure.

But don’t get me wrong: by this time next year ‘every’ corporate salary structure should look like the NAB one, albeit hopefully somewhat better.