Inquiry verdicts are in: end executive pay excesses

IN THE heat of the
global financial crisis, highly paid executives were almost friendless
- some deservedly so. The role of executive remuneration in creating
instability, by driving high-risk, short-term strategies, was high on
the agenda of the Group of 20 developed nations. The public was angry,
and political leaders heeded that anger.

After a G20 summit last
September, Prime Minister Kevin Rudd said: ''Millions of ordinary
people have suffered, not through any fault of their own but through
gross excesses in terms of financial markets and various financial
institutions.'' In late 2008, he had called for an end to ''extreme
capitalism'', which had produced ''the triumph of greed over
integrity'' as executive pay reached ''obscene'' levels. The Australian
Prudential Regulation Authority was asked to review its guidelines
governing banks and insurers. Later, the Government asked the
Productivity Commission to examine remuneration of directors and
executives. Executive pay inflation has been extreme: top CEOs'
earnings have more than tripled since 1993. The commission found that,
in 2008-09, average chief executive pay in the top 20 companies was
$7.2 million, 110 times average full-time earnings. (In 1990, chief
executives' pay at the top 50 companies was 18 times the average.)
Directors' pay has also soared.

In recent months, economic
recovery - and of the sharemarket in particular - has taken some of the
heat out of the inquiries. When the Government released the
commission's final report yesterday, it was evident that both bodies
had softened key proposals in their draft reports. Commission chairman
Gary Banks denied the reforms had been weakened, although the Business
Council of Australia welcomed the rethink of a ''two strikes''
provision under which a board spill would be triggered if remuneration
reports were twice rejected by 25 per cent of shareholders. A BCA
spokesman said it was still concerned that the revised proposal
''elevates executive remuneration above other strategic issues''.

However,
one of the lessons of the financial crash is that the structuring of
executive pay was a key issue because it encouraged excessive risk
taking. That was why the G20 asked the Swiss-based Financial Stability
Board to set new remuneration standards by March - when the Rudd
Government is also due to respond to the commission's report. (APRA's
new guidelines take effect in April.) ''Reforming compensation policies
and practices is an essential part of our effort to increase financial
stability'', the G20 communique said.

Many G20 goals - linking
pay to long-term performance, greater transparency in disclosure of
remuneration packages and independence in the setting of executive pay
- are reflected in the commission's recommendations. Some of the
biggest GFC survivors such as Goldman Sachs already have measures such
as limiting bonus guarantees to one year, evaluating performance over
years and paying a larger proportion of bonuses as stock, the value of
which is determined by company performance. Morgan Stanley and Credit
Suisse are other firms that have adopted a G20 proposal to claw back
bonuses if performance declines. It is not for government to set caps,
but executive pay should be justified transparently to shareholders.

Executives
work for companies owned by shareholders, who have a right to plain
English reports that clearly disclose pay and performance criteria, so
they can decide if they are getting value for money. Directors must
serve as shareholders' agents, not as executives' mates. However,

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