Reality check for exec pay and benefits

by Iain Hopkins13 Sep 2012

Belt tightening has seen executives at CBA and ANZ undertake pay freezes over the past six months, but given Australia’s relatively robust economy, some observers have suggested it’s time to get some perspective on Australian executive salaries. Are they as extravagant as some of their global counterparts?

Jon Finlay, head of executive compensation, Australia at Towers Watson, told HC that an assessment of similar, large-scale companies across the Asia-Pacific region, North America, Europe and the Middle East, demonstrates that the level of executive remuneration here – allowing for differences in currency, pay structure and market practice – is competitive or even slightly lower than many other countries. “Our taxation system is a powerful leveller – after all taxes are paid, many executives are effectively ‘working for the taxman’ for just over three days a week,” Finlay said.

Finlay stressed that the number of Australian companies that could be considered ‘large scale’ “can be counted on your fingers”, and for those senior executives, the pay packets are “healthy but not extravagant”.

“A primary role of senior executives, in Australia and around the world, is wealth creation for shareholders and they often share a small portion of what has been created. It’s strange that Australian media often celebrates the pay packets and conspicuous consumption of footballers, actors or rock stars but questions the remuneration of people who build wealth for all,” Finlay said.

Not surprisingly, given the media scrutiny and the belt-tightening, many organisations have reassessed their non-financial executive benefits. The Sydney Morning Herald recently ran an article outlining some of the perks on offer. For example, Coca-Cola Amatil executives were treated to more than $1.3m worth of perks last financial year including a corporate car, club membership and company products. Expatriate senior executives received medical insurance, subsidised housing and utilities, home leave, school leave and even an "environmental allowance", according Coca-Cola Amatil's latest annual report.

A company spokeswoman told SMH the environmental allowance was "essentially compensation for moving to work in what used to be called a hardship posting", such as Papua New Guinea.

In another example, BHP Billiton provided its executives with free medical insurance and professional services including tax advice which totalled more than $285,000 during the 2011 financial year, according to company accounts.

Chief executive Marius Kloppers, who recently said he would waive his bonus following huge write-downs on recently purchased assets, received $85,708 in non-monetary benefits on top of a $2.1m base salary.

Is it a fine line between perks that are viewed as ‘extravagant’ on one hand and ‘practical & appropriate’ on the other? Finlay said the Fringe Benefits Tax (FBT) has neutered the provision of non-cash perks. “There is more myth than reality about what can be provided to an employee as a genuine perquisite in Australia,” Finlay said. “Smart employers are building ‘stickier’ workplaces – working environments that are pleasant, promote productivity, and provide general benefits across the employee population.”

Companies are required to publish the dollar value of FBT benefits provided to senior executives in their annual reports so, for each disclosed executive, readers can see the value of benefits provided – but again, Finlay advised a word of caution. “It’s important to note that tax is paid on these benefits. For example, if an executive is provided with the use of an aircraft, then the value of that benefit is included in their total remuneration and tax is paid. There is no particular benefit to the company or the executive in making this information available to shareholders through transparent reporting, other than discharging the obligation of accountability,” he said.

However, for those executives who are taking a pay cut or freeze, or have had their perks reduced, Finlay noted there can be an enhancement to the employer/employee relationship if the sense of ‘we’re all in this together’ can be communicated.

A well designed CEO remuneration package will have a significant level of performance-based pay opportunity “baked into the design”, Finlay said.

That means that if the executive’s work is successfully building wealth for all, some of that level of opportunity is realised and the executive earns a share. However, even though an executive may be working even harder during tough times, if wealth is not building, then there is nothing to share – if the owners of the business are not winning, then the executive must be content with their salary. “When employees and others can see that these dynamics are working properly in their company, they do accept that the opportunity many executives have, to earn better reward when the company is performing well, is fair,” Finlay said.

 

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