Excessive salaries, bonuses and termination payments have been the subject of much public outcry over the past year in Australia and globally. National leaders and other politicians have expressed outrage at the exorbitant salaries and ‘golden handshakes' paid to executives, often with little or no connection to the performance of the company they are leading.

However, to date there has been no action taken in Australia to stop these ‘obscene' payments and to introduce regulatory mechanisms to control the remuneration of Australian executives.

The Greens propose six options which are sensible, practical and easily implemented measures to address this problem.

1. Cap executive remuneration at $5 million

Amend the Corporations Act to place a limit of $5 million on the remuneration of senior executives as defined under the Act. Placing a limit of $5 million on total executive pay will impact on a relatively small number of individuals according to Australian Council of Super Investors (ACSI) data which shows that less than 30 CEOs of listed companies would be affected. ACSI found that, on average, total pay for the top 100 company CEO’s was $5.15 million (up from 2006 figure of $4.56 million). This measure would immediately stop the excesses of the past decade while ensuring that the majority of top executives would continue to enjoy extremely attractive and competitive salary packages.

2. Introduce a remuneration formula that sets executive pay at 30 times the average employee’s wage

Amend the Corporations Act to place a limit on the gap between the average wage paid to employees in a corporation and the base pay of its executives. The executive salary would be determined by a ‘multiple’ of 30 times the average wage of the employees.

This approach was adopted by Woolworths during the 1990s – a period in which it was described as “one of the best performers of the past decade”. Paul Simons, who was CEO of Woolworths until 1994, subscribed to the policy that the highest-paid executive was paid no more than 30 times more than the lowest-paid employee.
Calculating executive remuneration against the average wage of around $60,000, a fixed gap of thirty would give a maximum executive pay of $1.8 million.  Implementation of this remuneration measure will not impact negatively on the majority of executives as, according to the ACSI, the average Top 100 company CEO in Australia in 2008 had a base pay of $1.95 million.

3. Give shareholders a real say on annual executive remuneration (not just termination pay)

The government’s legislation, the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 gives shareholders a binding vote on executive termination payments in excess of 12 months annual base salary. It does not give shareholders any say on the annual executive remuneration.

Similarly, while the G20 guidelines on executive pay address the links between executive remuneration and incentives to take excessive risks, they do not address the size of the remuneration packages or the relative inequities with average pay of employees.

The Greens believe this can be readily addressed by giving shareholders a mandatory and binding vote on company remuneration policy through an amendment to the Corporations Act.  Under this measure shareholders approve a binding remuneration policy that sets minimum standards to be included in a remuneration package and therefore, quantifiable limits on the size of remuneration packages covering base, performance and termination pay categories and cash and non-cash rewards. The minimum standards would include setting: 

• a fixed gap between the remuneration of employees and the total remuneration package for the executives;
• a quantified limit on the amount of performance pay bonus available, as a percentage of total net revenue;
• a quantified proportion of variable compensation that can be deferred;
• explicit shareholder approval of termination pay and conditions under which it is paid out.

The remuneration policy would allow shareholders to seek a majority vote to overrule board decisions on performance pay and should be reviewed at each AGM.

4. Give shareholders a real say on executive termination payments

These measures will be introduced by the Greens as amendments to the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 to be debated in the Senate in the October sitting period.

1. The final decision on payment of the termination package is made after the executive has left the company so the payment is based on actual performance not anticipated performance.
   1. Under the government’s proposed legislation companies can seek pre-approval of termination payments from shareholders prior to the executive leaving the company. This measure will ensure that termination payment reflects actual performance.
2. Shareholders vote on the maximum dollar cap of the termination payment, if the decision is made to provide more than one year’s base pay.
   1. Under the proposed legislation shareholders do not vote on a specific maximum dollar amount for the termination pay, although they will be required to approve any payment over 12 month base salary. This measure will ensure that shareholders know exactly how much pay they are approving. 
3. Shareholder vote on termination pay to be separate from other matters. 
   1. This measure ensures that shareholders vote on a resolution that deals only with the matter of termination pay to prevent companies combining the vote on a potentially unpopular termination package with another more popular issue, allowing for conflation of issues to obtain the support they need.
4. Full disclosure of the use of remuneration consultants.
   1. Many companies seek to benchmark their executive pay against their industry peers and appoint at above the average of their industry. The use of remuneration consultants exacerbates this trend. This measure will ensure that, if remuneration consultants are used, the details, including the fees paid, are fully disclosed to provide transparency and accountability in setting benchmark salary packages.

5. Introduce a top marginal tax rate of 50c per dollar earned over $1million

Using the latest Australian Taxation Office (ATO) tax statistics, imposing a 50% marginal tax rate for those earning over $1 million per annum would raise around $750 million in additional revenue per year.  This would increase the tax for approximately 7,000 of Australia’s wealthiest people. While this measure does not directly limit the excessive executive salaries, it does ensure that those Australians earning generous incomes will make a tax contribution that is commensurate with their capacity to earn and accumulate wealth.

6. Immediately implement the principles on executive remuneration agreed by the G20

The G20 agreed in September 2009 to a set of measures to align executive remuneration practices with sound risk management practices of corporations. These are designed to ensure that remuneration packages do not encourage excessive and risky behaviour in these corporations. These measures should be implemented immediately within Australian legislation.

The Australian Government, having agreed to the changes as part of the G20, should legislate to:

• ban multi-year guaranteed bonuses and limit variable compensation to a specified percentage of total profits;
• require a specified portion of variable compensation to be deferred, tied to performance and subject to appropriate claw-back provisions, and to be vested in the form of stock;
• strengthen disclosure requirements to make company compensation policies and structures more transparent;
• ensure that corporate compensation committees are independent;
• empower regulators to review company compensation packages to ensure that they do not encourage excessive large scale risk taking and to take corrective action; 
• enable regulators to modify compensation structures in the case of firms that fail or require extraordinary public intervention.