Home' HR Monthly : October 2014 Contents 6
SINCE THE GLOBAL FINANCIAL CRISIS,
governments in major developed economies have
shown concern over the critical role played by flawed
executive remuneration practices. In the United States
in 2011, the Financial Inquiry Commission reported
that the critical causes of the fi nancial meltdown
were unethical business practices and over-leveraged
pay schemes that encouraged an excessive supply of
low-start mortgages in the US.
Global government outrage was no doubt justifiable.
However, it will take time to tell whether the resulting
regulations on executive pay are a cure worse than
the disease. Part of the current problem for business is
that a consistent and sensible set of global regulatory
actions on executive pay has not yet emerged.
In 2008, the US government used moral suasion on
its banks to quarantine any bonuses until the worst
was over, and as a condition of bail-outs. Many former
executive carpetbaggers were incarcerated. Many
others got away scot free, with at least nine of their 10
previous years’ bonus payments intact.
In Australia, shareholder activist groups have
increased their agitation with target companies,
and their boards. This has been assisted by the
Productivity Commission’s 2011 report on executive
pay. While the commission found Australia’s company
pay practices were, by and large, reasonable when
compared with medium-size European corporations,
it recommended the introduction of the controversial
‘two strikes’ policy, which now forms part of
Australian corporations law.
The European Commission and the Bank for
International Settlements reviewed these events, and
introduced new pay and equity capital regulations as
of 1 January this year. The BIS capital requirements
will affect all banks, and subsequently other businesses
that compete with them for top financial talent. The
EC regulations on executive pay and capital will
have significant effects on the remuneration practices
of all international banks through the competitive
workings of executive employment markets. The most
controversial part of these regulations, known as the
Capital Requirements Directive IV (CRD IV), is to
cap bonuses for senior staff deemed to be ‘material
risk-takers’ to 100 per cent of fixed pay, or up to 200
per cent if approved by shareholders.
Before the GFC, there were many examples of
senior executives, particularly in investment banking,
receiving bonuses of up to 20-times fixed pay and
more. There are still 10-times examples among leading
global investment banks with significant operations
in Australia, and short- and long-term incentive pay
outcomes of around two to four times the fi xed pay
for senior staff at our ‘big four’ banks.
Senior H R executives in Australia believe
competition for top staff will keep total fi xed and
variable rewards constant, but the CRD IV bonus
caps will drive up the share and quantum of
fixed pay outcomes for staff competing
with European banks, to pre-empt an
exodus of talent.
From that first phase of change,
it’s expected that general executive
salaries at banks will alter their mix
towards higher fi xed pay and de
facto compliance with the 100 per
cent bonus cap. Those changes will
percolate across all top -listed ASX
corporations through the effect the
big banks have on executive pay
benchmarking data. This surge,
with an imminent doubling or
trebling of fi xed pay, is bound
to further excite shareholder
CAUGHT IN THE GLOBAL PAY PLAY
The Productivity Commission may have given our executive remuneration practices
a big tick, but now European bureaucrats have entered the picture.
BY PETER WILSON AM, AHRI CHAIRMAN
To read past Perspective
columns by Peter Wilson,
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