Seize the pay
Tuesday, 17 March 2009 12:35pm
The days when executives get rewards-for-failure could soon be over if legislators back radical remuneration reforms proposed by a governance expert, which includes capping ‘golden parachutes' and issuing share options that can only be cashed out after five years.
Governance expert Regnan, a research outfit owned by eight major institutional investors including BT, VFMC and Vanguard, released a paper outlining how senior executives should be paid.
In the paper, Regnan said that traditional executive remuneration in Australia encourage executives to meet short-term goals with immediate pay-offs at the cost of the company's long-term viability.
To that end, Regnan proposed determining an executive's remuneration based on how successful the company is over five-year rolling periods, regardless of whether they are still employed by the company or not.
For example, a company's board should apply a ceiling to how much an executive can earn each year and if an executive meets or exceeds targets, additional pay should come in the form of shares that can only be vested after five years.
Regnan also proposed that the board should seek shareholder approval if a departing chief executive was to be paid more than 12 months' worth of base salary. This is intended to prevent executives from receiving excessive ‘golden parachutes' particularly when they've destroyed shareholder value.
Shareholders are currently powerless to block multi-million dollar termination payments because the Corporations Act states that shareholder approval is not required for termination payments up to as much as seven times the equivalent of 12 months of total remuneration.
Similarly, the ASX states that shareholder approval is not required for termination payments equivalent to more than 5 per cent of a company's market cap.
"Neither of these legislative requirements imposes a meaningful threshold on executive termination payments requiring shareholder approval," noted Regnan, highlighting how Oxiana's former chief Owen Hegarty received an $8.35 million termination payment even when the company's shareprice fell from $2.63 to 60 cents.
"The global financial crisis has highlighted the misalignment between executive rewards and risks taken by companies," said Erik Mather, Regnan's managing director.
"The time has come to stop talking about the problem and start fixing it."
The proposals come at a time when shareholders are increasingly revolting against excessive executive pay at companies that have received government bail-outs. In the US, local newspapers reported US President Obama's missive for the Treasury to block $165 million in bonuses going towards AIG staff.
Michelle Baltazar
This story was found at: http://www.financialstandard.com.au/news/view/25296
Printed: Wednesday, 8 September 2010 6:48am