Tue 02 June 2009
AICD submission to the Productivity Commission inquiry into regulation of executive remuneration
Media & Communications: Media Release
Heavy-handed regulation is not the answer to public concerns about excessive executive pay packets, the Australian Institute of Company Directors (AICD) has said in its submission to the Productivity Commission’s inquiry into regulation of director and executive remuneration.
While recognising that some mistakes have been made by boards in setting executive salaries, AICD says legislated constraints are likely to be ineffective, counterproductive and can have unintended consequences.
AICD says that boards are best placed to determine executive remuneration reflecting their company’s own interests and circumstances. Educating boards and the use of voluntary good practice guidelines are more effective solutions to perceived problems than government regulation, particularly in the middle of a recession.
It says linking pay to performance is a complex issue, particularly when market and economic conditions are changing rapidly, and cautions that there is no “one size fits all” model which can be imposed successfully by government.
It argues that there has been no systemic failure in setting remuneration in Australia that would justify government intervention and that the market will adjust of its own accord to changing financial conditions – which is likely to produce a shakeout in the way executives are paid.
AICD says that Australia has a world class standard of corporate governance, that existing regulation of executive remuneration is generally appropriate and that the highly publicised excesses in executive pay seen in the US have not been prevalent here.
“Australia is not America. We have not seen the excesses here that we have seen on Wall St.,” said AICD’s chief executive, John Colvin.
“The Government needs to avoid the mistake of transplanting regulatory ‘solutions’ to problems which don’t exist here or are totally inappropriate or out of proportion to the situation in Australia.”
“The remuneration practices in the United States, which contributed to the sub-prime crisis, have not been common here, thanks largely to some basic characteristics of the Australian regulatory and business environment which differ from the US.”
“These include a majority voting system for the election of directors, the non-binding voting regime for remuneration reports, the separation of roles of chairman and chief executive and a prevalence of non-executive directors on boards of medium to large listed companies.”
AICD says that education, not legislation, is the way forward.
“Many of the issues in executive remuneration today arise because of difficulties inherent in the remuneration setting. We believe the way to address such issues is not through additional regulation but rather education and, depending on the circumstances of each company, a change in the way some boards (and others) approach remuneration issues,” the submission says.
It was in this context that AICD recently issued new guidelines on executive remuneration.
“The vast majority of boards are committed to putting in place remuneration arrangements that are in the best interests of the company they serve. While there have, with the benefit of hindsight, been some mistakes, these have often occurred due to a combination of changed economic circumstances and difficulties inherent in the prevailing paradigm for setting executive remuneration.”
It says legislated regulation or mandated ‘best practice’ standards are definitely not the answer.
“We believe detailed remuneration matters are better dealt with by voluntary guidelines than by detailed legislative requirements. Guidelines assist boards and others to readily ascertain what is considered to be good practice, while at the same time allowing flexibility should a company's circumstances warrant a different approach.”
“While we maintain further regulation of executive and non-executive director remuneration is not required, should it be contemplated we consider an "if not, why not" disclosure-based regime, such as the one adopted by the ASX in respect of corporate governance matters, is the most appropriate. Such an approach caters for differences between companies, between individuals, and over time. It is also less likely to impede further development and refinement of good remuneration practices.”
AICD also considers there is a stronger case for further controls on remuneration where companies have received “bailout” funds from the Federal Government, and where these controls are set out in advance of this financing.
The submission notes that changing market conditions are already prompting Australian boards to reassess their remuneration structures and practices.
“Arguably we are in the process of a paradigm shift: We are starting to see shifts in what is considered to be good remuneration practice (e.g., less emphasis on short term incentives, holding securities post-retirement),” the submission says.
“The types of remuneration arrangements that companies enter into today are likely to be materially different to the types they would have entered into three years ago – and quite possibly, materially different to the ones they will be entering into three years from now if economic conditions have improved.”
“The present market conditions are likely to see a shakeout in executive remuneration.”
“There are reported instances of changes in remuneration structures, and freezes or reductions in executive pay. Where discrepancies remain, we are likely to see new arrangements put in place that are more in line with current conditions, as employment contracts come up for renewal or expire.”
To download and print the PDF, click here
To view the full submission to the Productivity Commission, click here
Media Contacts:
Steve Burrell, General Manager Communications and Public Affairs
(02) 8248 6627 or 0407 708 485
Juliet Chandler, Communications Advisor, (02) 8248 6624 or 0412 580 402
Australian Institute of Company Directors (AICD) provides education, information and advocacy for company directors Australia-wide, with offices in each state to cater for over 24,000 members. AICD members work in diverse corporations such as small-to-medium enterprises, the ASX Top 200 corporations, public sector organisations, not-for-profit companies, large private companies and smaller private family concerns.