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'There is no right answer to the question of how much to pay a public company CEO,' said Dr O'Neill, whose PhD thesis examined the issues board members face in setting CEO pay. 'All that the Corporations Law requires is that decisions made in the absence of a shareholder vote must be deemed to be 'reasonable' in terms of the circumstances of the company and the executive. 'But what can be judged as 'reasonable'? There is a wide ambit of discretion for boards to make a decision but there are also a series of competing issues,' Dr O'Neill said. Among the issues boards had to balance was the naive and simplistic assumption that CEO pay would correlate with company performance. 'This assumption neglects the complexity of the CEO role and overlooks the fact that the board has to make an assessment of what to pay their CEO based on a series of factors, some, such as performance, are quite tangible, others are largely intangible,' he said.
Dr O'Neill said boards also had to balance out the fact that disclosure requirements meant that information on what boards were paying and what CEOs were getting was readily and publicly available. 'This disclosure sets general expectations based on the size of the company, particular industry and individual track record,' he said. 'CEOs negotiate their pay and, despite popular opinion, boards do not simply 'rubber stamp' the CEO's demands. 'While it is not hard to find examples of boards which choose not to renew a CEO's contract,the research reveals instances where the board deliberately chose to not pay at the upper end of the market even though it meant turning down an otherwise favoured CEO candidate. 'It would surprise many to know that several, high profile and successful CEOs of major companies were acknowledged as 'B grade' candidates but fitted within the board's remuneration cap,' Dr O'Neill said.
Public disclosure meant boards also had to balance out an acute awareness that any single transaction may have a significant effect on the level and structure of market rates. 'In the 1990s the recruitment of people such as Bob Joss to Westpac Bank in 1990, Frank Blount (Telstra 1992), George Trumble (AMP 1994) and Paul Anderson (BHP 1998) introduced levels of pay well beyond the Australian market norms of the time,' he said. 'Bob Joss' (Westpac) fixed salary was as much as the combined salaries of the CEOs of the three other major banks. The salary packages produced in this time also incorporated a long-term equity component. These high profile appointments were influential in the subsequent widespread adoption of equity-based incentive remuneration systems by Australian corporations.'
Dr O'Neill said boards also had to ensure their final decision was seen by major shareholders as an appropriate level and structure of pay, and thus be defendable within the broader governance community. 'Disclosure requirements mean that the result is freely available in the public domain and is therefore open for broader social and political commentary and debate,' he said. Dr O'Neill said directors also had to balance out their own personal views on what was an appropriate rate to pay a CEO so they could reach a collegial decision with other members of the board. 'The research showed directors' views on CEO pay varied widely from those who regard current levels of pay as 'obscene' and a threat to social equity, to those who see it as not 'out of whack',' he said. Dr O'Neill said the findings presented a dilemma for policy makers.
'The transparency provided by the regulations governing pay disclosure is intended to enable governance advisors and investors to make an informed judgement on whether or not to support pay proposals at an annual general meeting,' he said. 'The increasing frequency and size of 'no' votes indicates that disclosure is having a positive effect on proposals viewed by investors and their advisors as inappropriate. However, there is still further room to improve the consistency and accuracy of disclosures as required by the Australian Securities Exchange and Section 300A of the Corporations Act. '
Graham O'Neil -The Determination of CEO Pay: An Australian Boardroom Perspective
This study is based on interview data provided by 15 non-executive directors.
The core data was supplemented by follow-up interviews with five of the original participants and two further directors not involved in the initial interviews.
These 15 directors represent 36 Australian and three overseas public companies.Four of the Australian companies were ranked in the top 10 listed corporations by market capitalisation and fourteen in the top 50.
Five participants were main board Chairs and between them led eight corporate boards; six of the remaining eight participants held multiple public company directorships.
Six participants, including one board Chair, also acted as chair of a board remuneration committee and all but one participant were currently serving on at least one board remuneration committee.