Interview: Why CEO pay has fallen to its lowest level in 9 years

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Sean Aylmer: Welcome to the Fear and Greed business interview. I’m Sean Aylmer.

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Sean Aylmer: The average pay for ASX100 CEOs fell last year to

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Sean Aylmer: its lowest level recorded in almost a decade, but it’s

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Sean Aylmer: still 55 times average adult earnings. And bonuses have fallen too,

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Sean Aylmer: coming down from the previous years’ record highs. So is

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Sean Aylmer: this a reflection of economic and business conditions, closer scrutiny

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Sean Aylmer: by investors and boards, or perhaps a bit of both

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Sean Aylmer: and a little bit more? Ed John is the Executive Manager,

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Sean Aylmer: Stewardship at the Australian Council of Superannuation Investors, ACSI. The

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Sean Aylmer: report is CEO Pay in ASX200 Companies. It’s ACSI’s longest

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Sean Aylmer: running report. ACSI itself is a group of 26 super

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Sean Aylmer: funds who manage over a trillion dollars in assets. On average,

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Sean Aylmer: they own 10% of every company on the ASX200. So Ed,

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Sean Aylmer: I’m sure you know what you’re talking about as a result.

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Sean Aylmer: Welcome to Fear and Greed.

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Ed John: Thanks, Sean. Nice to be here. And I hope we’ve

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Ed John: developed some knowledge that we can share with you today.

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Sean Aylmer: So take me through some of the key statistics. Just

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Sean Aylmer: how much has the average realised CEO pay, maybe you

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Sean Aylmer: can explain what you mean by realised CEO pay, fallen

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Sean Aylmer: since those pandemic highs?

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Ed John: Yeah, absolutely. I guess, to begin on that question of realised,

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Ed John: as part of the study, we actually go beyond the

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Ed John: numbers in annual reports to look at realised pay, which

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Ed John: is effectively not only the fixed remuneration or cash-based remuneration

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Ed John: received by executives, but the value of shares that they receive. So it’s

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Ed John: a little bit different to what appears in the statutory

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Ed John: tables or in the annual reports of companies, but we

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Ed John: see it as more accurate or closer to, again, what

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Ed John: CEOs are earning in any one year.

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Sean Aylmer: I’m just going to ask a question. So is this, options,

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Sean Aylmer: for example, if they haven’t vested, is that included or not?

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Ed John: No. Only when they vest.

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Sean Aylmer: Okay. Only when they vest, and then it’s actual share

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Sean Aylmer: entitlements and things like that?

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Ed John: That’s right. So it starts to paint a much more

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Ed John: accurate picture of the sort of value delivered. Again, we

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Ed John: don’t follow it through to the individual’s tax circumstances or

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Ed John: when they exercise options, but as soon as they sort

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Ed John: of vest, they’re included, which makes it much more accurate.

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Sean Aylmer: Yeah. Okay. So what’s happened?

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Ed John: So I guess, the key thing is the average pay

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Ed John: for an ASX100 CEO is still around $5 million per person.

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Ed John: There’s obviously a wide variation within the ASX100, again, as

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Ed John: compared to the average adult earnings, that’s about 55 times.

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Ed John: But interestingly, compared to the prior year, that’s fallen quite dramatically.

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Ed John: So post-pandemic, we saw this bonus catch-up up the prior year,

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Ed John: and so average pay was sitting at about 98 times

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Ed John: average adult earnings in the prior year. So it’s gone

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Ed John: from 98 to 55 over that period. So pretty dramatic drop.

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Sean Aylmer: Yeah. Why? Is that about share prices or is it

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Sean Aylmer: about remuneration?

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Ed John: I think it’s a mixture of both. So one thing

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Ed John: we did see, so in 2020 at the beginning of

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Ed John: the pandemic, we know about that sort of market volatility

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Ed John: and that major drop in equity markets. There’s a huge

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Ed John: focus from investors then to say, “Hey, there’s been a

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Ed John: huge impact on superannuation accounts, on people’s shareholdings,” and boards

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Ed John: really read the room. And so they zeroed out a

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Ed John: lot of bonuses at the beginning of the pandemic in

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Ed John: recognition of those conditions. But then in the following year, which

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Ed John: is financial year ’21, there was effectively a catch- up

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Ed John: in bonuses. So trading conditions jumped, a lot of share

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Ed John: prices jumped over that year. So bonuses sort of came

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Ed John: back with a vengeance. And really the financial year we’re

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Ed John: looking at in this report is that year after. So

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Ed John: flat at the beginning of the pandemic, the kind of

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Ed John: bonus catch-up. And this is a shift back down after

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Ed John: that high.

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Sean Aylmer: I think the report says that Alan Joyce from Qantas

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Sean Aylmer: actually, he was the only one of the top 100

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Sean Aylmer: that didn’t receive a bonus. Is that right?

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Ed John: That’s right. There’s a slight asterisk on that in terms

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Ed John: of there is a deferred equity or a different type

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Ed John: of equity arrangement, which may vest in the current financial year.

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Ed John: But yeah, he’s the only one that sort of didn’t

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Ed John: receive an STI (Short Term Incentive) during the year.

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Sean Aylmer: Okay. So for the other 99, are bonuses back at about

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Sean Aylmer: normal levels then?

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Ed John: They’re a little bit lower. They’re a little bit lower. Again,

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Ed John: hard to comment on the averages because in some companies

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Ed John: it’s very high. In some companies, almost like a hundred

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Ed John: per cent of target becomes the expectation, whereas others, it’s probably a

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Ed John: tougher scale. So they’re generally lower than the longer term trend,

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Ed John: but still around about 70% of maximum is your median outcome.

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Sean Aylmer: Stay with me, Ed. We’ll be back in a moment.

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Sean Aylmer: I am speaking to Ed John, Executive Manager, Stewardship at the Australian Council of Superannuation Investors. Okay. Now, there

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Sean Aylmer: are a number of companies on the list that are

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Sean Aylmer: foreign companies still listed here. ResMed is an example, News

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Sean Aylmer: Corp is another. Do the pay of those foreign CEOs

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Sean Aylmer: differ drastically from, I’m asking this question and I know

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Sean Aylmer: how much the ResMed guy makes, so I think I

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Sean Aylmer: know the answer, but does it differ drastically from local pay?

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Ed John: Yeah, it definitely does, Sean. So in some ways when

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Ed John: you look at the numbers, you think Australian investors large

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Ed John: and small and Australian boards have actually probably applied more

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Ed John: scrutiny to CEO pay over time. And there is a

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Ed John: cultural element around CEO pay. So three of the highest

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Ed John: paid CEOs in this year came from those US companies. And you

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Ed John: often see, say, quantums of $30 or $40 or $50 million incentives come through

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Ed John: in any one year, which I think differs from the

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Ed John: Australian sample. And so I think that probably says something

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Ed John: for the Australian market in terms of scrutiny, in terms

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Ed John: of focus. And when we also step back and look

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Ed John: at the averages just in this year, it was about

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Ed John: $5 million per person higher for those foreign domiciled companies

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Ed John: as compared to Australian CEOs. So there is that gap.

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Sean Aylmer: Okay. Does ACSI have a view on whether it’s too much or

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Sean Aylmer: not? I mean, 55 times average earnings, and at the

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Sean Aylmer: very top of that, you can think of some of

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Sean Aylmer: the, well, one particular banker, and I mean, a bunch

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Sean Aylmer: of people, healthcare companies where people make a lot of

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Sean Aylmer: money. Does ACSI take a view on that or not?

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Ed John: Not so much. I think it becomes a really hard

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Ed John: question about how much is too much and it becomes in

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Ed John: the eye of the beholder. But I think for investors,

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Ed John: and particularly for long-term investors, it’s often a question of

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Ed John: value for money. So do we see these large numbers

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Ed John: where these CEOs and teams have actually delivered for their shareholders over the long term?

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Ed John: Or is it that old case of large numbers where

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Ed John: the performance really isn’t there or people are being paid

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Ed John: bonuses for simply turning up?

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Sean Aylmer: Do you get a sense that boards in Australia are

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Sean Aylmer: realistic and pragmatic in how they’re setting the remuneration based

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Sean Aylmer: on what you just said?

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Ed John: I think boards in general are pragmatic. Things like the

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Ed John: two strikes rule where investors have that sort of ” no” vote

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Ed John: and that accountability. I think the dialogue between investors and

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Ed John: boards and that scrutiny has been an important factor over time.

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Ed John: There will always be outliers, but I think by and

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Ed John: large there’s been a reasonable job done and again, a

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Ed John: reasonable level of scrutiny around outcomes to make sure there

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Ed John: is that accountability.

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Sean Aylmer: So where do we go from here, Ed John from ACSI? Do

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Sean Aylmer: you think that given, let’s say, CEO pay was dampened

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Sean Aylmer: during that financial year, dampened might not be the right

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Sean Aylmer: word, but it’s not totally out of sync, where do

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Sean Aylmer: you think we go from here given the share market,

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Sean Aylmer: what’s happened given the economic circumstances?

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Ed John: I think that is really the key question, Sean, because

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Ed John: anytime remuneration reported, it’s backward looking. So our data really

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Ed John: looks back a year. But we’ll start to see in

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Ed John: two months’ time when earnings season ramps up, we’ll start

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Ed John: to see performance numbers as well as CEO pay numbers

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Ed John: for financial year 2023. And we know it’s been, I

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Ed John: guess, a choppy year in markets and some really varied

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Ed John: results. And so the key question is, is that variation reflected in

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Ed John: outcomes? So particularly where performance is off or companies have

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Ed John: been impacted, does that flow through to CEO pay numbers?

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Ed John: That’s going to be the key test for Australian companies.

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Sean Aylmer: And ACSI, given that your members, the 26 Super funds manage on

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Sean Aylmer: average 10% of these companies, surely you’re going to be

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Sean Aylmer: very focused on ensuring that pay does match performance?

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Ed John: Absolutely. That’s something that ACSI has done for a long time

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Ed John: and is a key element of governance. Are incentives actually

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Ed John: aligned with how companies are performing over the long term?

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Ed John: Are these companies delivering to the kind of end members

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Ed John: of Super funds as a key focus? And I think, again,

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Ed John: in this reporting season, there’ll be particular scrutiny. Some companies

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Ed John: will have had a bad year, but we don’t want

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Ed John: to see boards changing the goalposts in that situation. And

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Ed John: I think it will look particularly bad in light of the

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Ed John: broader economic conditions if we’re seeing some very large numbers

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Ed John: if performance isn’t there.

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Sean Aylmer: Ed John, thank you for talking to Fear and Greed.

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Ed John: Thanks, Sean.

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Sean Aylmer: That was Ed John, Executive Manager, Stewardship at the Australian

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Sean Aylmer: Council of Superannuation Investors. This is the Fear and Greed

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Sean Aylmer: business interview. Join us every morning for the full episode

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Sean Aylmer: of Fear and Greed, Australia’s best business podcast. I’m Sean

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Sean Aylmer: Aylmer. Enjoy your day.