Shareholders must curb executive pay

Warren Buffett once quipped that “Ratchet, Ratchet and Bingo” would be a good name for pay consultants. The joke wore thin in Australia after the financial crisis. In 2011, investors were given more say over pay. For the next five years, boards kept a lid on executive rewards.

No longer. Bosses’ pay at large companies has hit a new record. The median remuneration realised by ASX 100 CEs rose 12.4% in the 2017 financial year. It has sparked public anger. Prime Minister Malcolm Turnbull warned of a “cult” of excessive executive pay.

Fixed salaries are under control. The median has declined at an average rate of almost 2% a year since 2012 — so much so that headhunters grumble that Australia is struggling to attract “global talent”. Executives can rightly point to positive performance, too. Earnings before interest, tax, depreciation and amortisation grew by 18% at ASX 200 companies in 2017. However, ballooning bonuses are not all connected to standout results. The boss of a top 100 company is more likely to lose their job than receive no bonus for performance reasons. Payouts in 2017 were close to the maximum possible based on targets.

The 10 best paid CEs have jumped to the top of the rankings on share options. The biggest winner was Don Meij of Domino’s Pizza Enterprises, who earned a total of A$36.8m. This reflected a near five-times increase in the share price linked to options granted in 2013 and exercised in 2016. However, it sits uncomfortably with a controversy over underpaid workers in 2017 — and a 30% share price fall in the past two years.

In principle, aligning executive interests with those of investors is a good idea. Shareholders, however, should be concerned about opacity and undemanding targets, such as a “corporate culture” bonus mooted by Commonwealth Bank in 2016. They have the clout to demand answers. Investors should not accept the first number called out by boards. London, July 17