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Recently, I had a lively debate with some corporate remuneration experts about executive remuneration. This discussion was based on two articles published a few weeks ago in the Australian Financial Review: the first followed a speech by Wayne Byers, the Chairman of APRA, concerning the remuneration of bank executives; the second was a rebuttal by Martin Lawrence and Dean Paatsch of Ownership Matters.
Distilling the respective arguments into a concise summary could never satisfy the complexity of executive remuneration as we know it. However, it’s clear that there are two opposing positions promoted by Mr Byers (APRA) and Lawrence & Paatch (OM):
“Attempts to move away from the conventional model of executive remuneration have not been wholly welcomed. [Bank] boards have struggled to gain acceptance that new approaches are needed. … Work on executive remuneration [is needed] to better align potential rewards with a holistic view of performance – regulatory intervention, and a greater degree of prescription, will be required to shift [executive remuneration] practices. … there should be more than a single, share-price based metric … [so Total Shareholder Return] would go from the primary, if not sole, determinant of [long term incentives] to something less than 25%.”
“It is demonstrably false [that] … boards and executive teams are powerless … to prioritise the pursuit of profit, dividends and share price growth. … The chief frustration of institutional shareholders about banker pay is not the inclusion of non-financial performance metrics; but rather that executive rewards are insensitive to performance of any kind. … TSR performance metrics … mirror the shareholder experience over the long-term …”
Our discussion of these conflicting positions raised several issues that are material to the administration of executive remuneration, including:
Of course, there are many other important aspects to consider. Nevertheless, is seems that banking, insurance and superannuation boards will need to make significant improvements to their administration of executive remuneration – otherwise, APRA may start wielding a blunt instrument. Other companies beyond Australia’s finance sector should also take note.