Interview: CEO pay levels dip but bonuses becoming a given: new ACSI CEO pay research

CEO pay levels have decreased in many of Australia’s listed companies, but bonus payments have become the norm, new research from the Australia Council of Superannuation Investors (ACSI) shows. The study reveals that over the past year, a CEO is more likely to lose their job than their bonus.

In FY23, only two ASX100 CEOs received zero bonus.

Ed John is the Executive Manager, Stewardship at ACSI. He talks to Sean Aylmer about the concerns of potential breakouts in CEO pay levels and the responsibility of boards to set performance standards.

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Episode Transcript

Sean Aylmer (00:05):
Welcome to the Fear & Greed Business Interview. I'm Sean Aylmer.
CEO pay levels have decreased in many of Australia's listed
companies, but bonus payments have become the norm according to
new research from the Australian Council of Superannuation Investors. The
study also reveals that over the past year, a CEO
is more likely to lose their job than their bonus.
Realized pay for ASX 100 CEOs fell marginally in the last

(00:29):
fiscal year with a median dropping a touch to $ 3.
93 million. That's the lowest level in 10 years according
to the ACSI study. But CEOs are benefiting from bonuses,
in the ASX 100, CEOs received a median bonus of about
two thirds of the maximum potential. Only two CEOs didn't
take home a bonus last financial year. Ed John is

(00:50):
the executive manager stewardship at ACSI, the Australian Council of
Superannuation Investors. Ed, welcome back to Fear Fear & Greed.

Ed John (00:57):
Nice to be back.

Sean Aylmer (00:58):
What are your key takeouts from this year's survey?

Ed John (01:01):
Well, I think you touched on the introduction, really the
fact that pay levels have dipped in terms of the
realized pay for top 100 CEOs. But there is that
emerging concern around bonuses and bonus culture because a high
level of bonuses are still being awarded. The standard outcome
is about 66% of maximum for a top 100 CEO. So

(01:24):
there is concern that there's a culture emerging where it's
almost becoming an everyone wins a prize conversation, rather than the
expectation I think for many investors that bonuses are really
about excellent performance, not just turning up.

Sean Aylmer (01:39):
So I'll jump into bonuses in a moment. Just a
couple of things. Realized, you measure realized pay. Just explain
what realized pay is.

Ed John (01:47):
Yeah, realized pay is very important because we look at
both the cash elements of CEO pay as well as
the value of shares that have been awarded to CEOs.
So it's more like what they're actually receiving. The challenge
in pay reporting, which you've probably picked up when you
open a company's annual report, it's very complex. There's a
lot of noise in there. There's a lot of estimates

(02:09):
about the future in there. So in our study, realized
pay looks at what's actually received, , cash and shares and trying to
cut through that complexity.

Sean Aylmer (02:19):
So does that mean someone who's issued shares as a
final payment, that's captured in this as well?

Ed John (02:26):
That's right. When those received by the CEO. So if
there are still performance conditions attached to those, we don't
count it. But when they're received, when they're effectively available
to the CEOs, when we count them.

Sean Aylmer (02:39):
Yes. Okay. So let's talk... Again, we will get to
bonus. CEO pay levels are down or have leveled, I
mean, let's say they're flat. Why is that?

Ed John (02:48):
Well, I think the greatest scrutiny from investors, I think
greater diligence from Australian boards has played a big factor
in recent years. We've also seen a pretty significant level
of shareholder opposition. So last year in the ASX 300, there were 41 first
strike votes from shareholders. So effectively a large number of

(03:08):
shareholders voting no on CEO pay. So we think there
is a cumulative impact of that sort of focus and
that sort of work on bonus outcomes.

Sean Aylmer (03:18):
That's a good thing, isn't it? I mean, shareholders should
be more vocal. I mean, they should have their say
about CEO pay and that type of thing. It just
seems that the activist shareholder seems to be having a
moment in the sun, at least in Australia.

Ed John (03:32):
Well, I think we're actually moving from the activist shareholder
to the active shareholder in terms of when we see this
with small retail investors or the Australian Shareholders Association, we see
it from asset managers and see it from superannuation funds.
That being active, engaging with AGMs and obviously voting shares

(03:54):
has become a really important part of the landscape. And
I think it's one reason that the numbers in the
Australian market around CEO pay actually differ quite significantly from
other markets where it feels like things have really spun
out of control.

Sean Aylmer (04:09):
Okay. And your members, ACSI's members, it's kind of the
big end of town. I suppose for smaller shareholders like
me, in a sense, I rely on the big end
of town to make some of these judgements. If I
look at an annual report, it's actually hard to understand
what's going on, number one. But then if be it a
proxy group or a large shareholder actually says, " Hold on,

(04:30):
I'm worried about that," then me as a retail shareholder,
I tend to follow the leader a bit. So to me,
there seems to be a bit of a responsibility that
your members have to be active in what they're doing.

Ed John (04:42):
That's true. But I'd also say for individual shareholders, there's
a lot of, again, research out there. There's just that
broad experience of how has this company performed for me,
either in my individual portfolio for an institution, how it's
performed in the broader portfolio. And I think it's a
good question. Do bonus outcomes actually reflect that performance? Has

(05:03):
this management team and this company delivered for me over
a one three or five year horizon? That's actually a
pretty good window in. If you combine that perspective and
obviously look at what the outcomes are, it's not a
bad starting point. And you certainly don't have to be in
a remuneration boffin.

Sean Aylmer (05:22):
Stay with me, Ed. We'll be back in a minute.
I am speaking to Ed John, manager stewardship at the
Australian Council of Superannuation Investors. Let's talk about bonuses then. In
the top 100 companies, only two CEOs didn't get a

(05:44):
bonus. The median bonus, 66.3% of the maximum potential. Well,
should bonuses be paid for company CEOs who underperform? If
the market's up 8% or 9% last year, should anyone
whose total shareholder return is less than that, should they
be getting bonuses?

Ed John (06:05):
It's hard to comment without knowing the individual company circumstances.
But I think generally speaking, you touch on something so important
that really it's about out- performance or strong performance. Some
companies might be in a challenged industry or going through
a transformation, so it could be quite context specific. But

(06:26):
in general, I think most approaches would be that it's
about performing above and beyond, not just delivering a basic
outcome

Sean Aylmer (06:35):
And should that be judged? I know in your release
you talk about five year total shareholder return, and Mick
Farrell, the head of ResMed, his realized pay is massive,
it's 48 million. But over five years, his total shareholder
return per annum is 19%, which is I think by
any measure, a very strong outcome. It's hard to compare
apples and apples here because we're talking about one year's

(06:56):
pay in a five- year total shareholder return. But is that
how we should be measuring it?

Ed John (07:01):
We just include that as a comparison point. So again,
comes down to the individual company. I guess the investor
lens is may be different to if you ask a
person in the street or in any conversation, people have
different views about how much is too much in quantum.
It's a bit like how much footy players, or film
stars, or others are paid. You'll get various views on

(07:22):
it. We include the performance numbers just as a test
to see how to do those numbers actually compare with
the shareholder experience. And we have had situations over time
where you have some large numbers, but they're actually attached
to quite amazing performance from companies. So if you have

(07:42):
50%, 100%, 150% total return over a period, no surprise that those share-
based payments actually come out with high numbers. It's probably
the situations where the numbers are flat or negative on
the performance side, but very large in the pay column that
really draws the investor focus.

Sean Aylmer (08:02):
So in another example, and I don't particularly want to
pick on the company itself, but News Corp, its boss,
Robert Thomson, number two on the list, its return over
five years, about 8%. But News Corp operates in a
very different sector to ResMed, who's Mick Farrell, the healthcare
sector to the number three is Goodman Group, which is
a booming sector for the industrial operators. It's a bit

(08:25):
tricky then to say, well, (inaudible) Robert Thomson from
News Corp, you shouldn't earn that much money. The fact
that he's kept it going in such a tough industry,
maybe he does deserve it.

Ed John (08:33):
Exactly right. And I think really going back to that
core focus where it's about the individual company and its
context. So it's hard to generalize or pull one CEO
out without digging into that context. Interestingly, the top two
CEOs are US- based. So I think over time, we
have seen that difference in pay culture. And as I

(08:55):
earlier, I think in the Australian market, probably the greater scrutiny,
the more diligent work of boards has seen CEO pay
probably more aligned to shareholder experience. In places like the
US for instance, we've seen some recent research that shows that
average CEO pay is about 200 times the average worker

(09:16):
salary in many companies. And you might have seen the
recent headline with Elon Musk and a CEO pay outcome
in the billions. Billions with a B. Again, a very
different experience in the US market.

Sean Aylmer (09:30):
I want to come back to whether everyone deserves a
bonus, and I think that's a bottom line for many
of (inaudible) shareholders. If my CEO hasn't performed well,
particularly if my CEO has left a company for some
sort of reason, I mean in your view, in ACSI's
view, do they deserve a bonus? Shouldn't we not be
giving 98 out a 100 top ASX companies shouldn't be more

(09:51):
who aren't getting bonuses?

Ed John (09:52):
Yeah, I think we want to see it become more
at risk. I mean, it's called at risk in annual
reports, but there's a question mark in some of these
companies as to whether or not it is at risk.
So we would like to see that number shift over
time. And in some way, it's having a culture where,
which effectively says it's actually okay for a CEO to get
a zero outcome or a low outcome. That shouldn't be

(10:15):
seen as a failure. We should see that difference in outcomes over time. And that statistic about you're
more likely to be fired than to receive zero on
your short- term incentive is a concern. In some ways, it
would be better to see zeros or lower numbers more
often, but perhaps better retention of people.

Sean Aylmer (10:36):
Fair enough. Ed, thank you for talking to Fear & Greed.

Ed John (10:38):
Thanks, Sean.

Sean Aylmer (10:39):
That was Ed John, executive manager stewardship at ACSI. This
is the Fear & Greed Business Interview. Remember, this is general
information only. You should always seek professional advice before making
investment decisions. Join us every morning for the full episode
of Fear & Greed, the business news for people who make their
own decisions. I'm Sean Aylmer. Enjoy your day.