Home' HR Monthly : August 2019 Contents 6
ut it away Mr Clarke or we shall all have our throats cut. In 1844
the New South Wales Governor, George Gipps, reportedly offered
this advice to a geologist in the colony, Reverend William Clarke,
after the part-time rock hopper openly displayed traces of gold he’d
discovered in the Blue Mountains.
The Governor was concerned about what might happen if the large
contingent of local convicts discovered the gleaming news. The US
gold rush four years later led to a massive workforce exodus from
the colonies as men went in search of fame and fortune in ‘them thar
hills’ of California. This flight of qualified labour caused the then new
NSW Governor to change policy around gold exploration rewards and
incentives so that it was more actively encouraged.
After Australia’s own gold discoveries in 1851, the avaricious hordes
rushed back home from California. Thereafter ‘paydirt’ became a term
synonymous with finding your fortune from furtive and active labour
applied to panning and relentless digging in search of gold. Fine for the
‘haves’ but not so exciting for the ‘have-nots’ – many of whom tu rned to
claim-jumping, ex tortion, robbery and murder.
The term paydirt is better known today for the riches achieved
through the good luck of being in the right time and place. Accordingly,
it’s a term that applies well to certain executive remuneration practices in
Australia over the last couple of decades.
Ten years ago the Productivity Commission reported on executive
remuneration in Australia, and it fou nd that pay levels here were similar
to those seen in a mid-sized European nation. The commissioners also
concluded that there were some very high profile examples of executive
pay excesses, and that the setting of executive pay and bonus levels
required greater transparency, particularly around performance drivers
behind pay outcomes and standards.
Since that time we have remuneration practices consistent with
these findings, three of which I would identify as stratospheric: pay
bench marking, quartile jumping, and bonus absorption.
Stratospheric pay benchmarking occurs when boards link the
remuneration of their executives to pay levels of leading firms in the
relevant global industry. The logic is that the company needs to prevent
poaching by competitors. But the best firms in an industry are the best
for a reason. Industry laggards using the pay levels of those firms as
a benchmarking standard is an obviously bad idea, and one bound to
produce inequitably high pay outcomes.
Quartile jumping can compound the former problem. It occurs when
a significant majority of corporations use the same remuneration index,
and then choose to benchmark their executive pay inflexibly at the
median or third quartile of the index. When this happens across the
board, it’s inevitable that pay levels in the following year’s survey will
lurch upward, thereafter serving to drive the same firms to increase
actual pay levels yet again. Of course this form of corporate tail
chasing is guaranteed to keep both market bench marks and actual pay
adjustments moving north in each and every subsequent year.
Bonus absorption occurs when a large proportion of pu rportedly
at-risk bonuses are structured to vest due to job characteristics or role
functions, and not according to a performance record against critical
business drivers that are genuinely at risk.
Controversially, the 2009 Productivity Commission proposed, and
Parliament later enacted, the ‘two strikes’ rule as a check on such future
excesses. After a second successive annual strike against executive pay, a
board is exposed to being spilled completely.
Over the last year, and following the testimony and the findings of the
Hayne Royal Commission, significant anti-remuneration report strikes
have occurred across major financial institutions. Over this year, the
companies concerned are moving into damage control and attempting
active shareholder remediation.
There is evidence that executive pay levels have increased significantly
in the last five years in response to the strong corporate and economic
grow th in some sectors. But they have been compounded by the
imitation of other corporations struggling to keep pace. There is also
evidence that the blunt two-strikes rule itself produces
good, bad and ugly results for companies and
shareholders, according to major national pay
consultancy Egan Associates.
It was predicted a change in the Federal
Government last May would lead to another
Productivity Commission Review on executive
pay. So many executives breathed easier after
the Coalition regained office, because they felt
it would keep its hands off their pay. But this is
a very erroneous assessment. Parliamentary pay
levels have been held back for some time, and
significant political capital gains
await some active prospecting for
new checks and balances in the
pay policy area. •••
We may have a Coalition government, but executive pay could still be on the agenda.
BY PETER WILSON AM FCPHR AHRI CHAIRMAN
To read past Perspective columns by
Peter Wilson, visit hrmonline.com.au
18/7/19 5:25 pm
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