DOMINOS AFR PHOTOGRAPH BY GLENN HUNT 3 NOVEMBER 2006. Don Meij-CEO- Domino s pizza. AFR FIRST USE ONLYOne of the big features of the latest corporate reporting season has been the increasing number of companies releasing their annual reports alongside their results, instead of waiting until September.
It’s all in the name of good governance, and it means investors have been able to compare company earnings with the earnings of chief executives straight away.
It did not always go down well in an environment where even a former Goldman Sachs investment banker turned Prime Minister like Malcolm Turnbull has been forced to lash out at the “cult of excessive executive CEO remuneration”.
At that time, he was referring to Ahmed Fahour’s $5.6 million pay cheque from Post in 2016.
Fahour took the headlines again this reporting season when it was revealed he was paid a jaw-dropping $10.8 million for the year just ended, his last with the company.
But big pay was not the prevailing theme this year. It was the sight of corporate titans donning the sackcloth and ashes for their corporate sins, and sacrificing short-term bonuses. Giving up bonuses
The tone was set early with the release of the Commonwealth Bank’s annual results, less than a week after it was rocked by the Austrac allegations of breaching money laundering rules.
The bank’s chairman, Catherine Livingstone, announced that its CEO Ian Narev and his team would not receive any short-term bonuses.
And these bonuses would have been substantial, thanks to another record earnings result. The executive team are not the only ones suffering. The board has also cut its pay by 20 per cent for this year, all in the name of corporate atonement.
It obviously was not enough for some investors: Livingstone later announced Narev’s plans to retire.
Seven West boss Tim Worner also sacrificed what little bonus he would have received last year – which the board was planning to take anyway after what he discreetly described as “not a stellar year”. The not-so-stellar year included the legal fallout from his affair with former company employee Amber Harrison.
And yet another corporation with a tarnished reputation, Domino’s Pizza, followed this path with CEO, Don Meij, and three senior executives handing back their short-term incentive (STI) payments for last year, with an oblique reference to the pizza chain’s wages scandal.
“They each elected to forgo their incentive entitlement to acknowledge the negative effect of publicity in relation to the franchise network,” the annual report said.
But the real surprising news was that, despite the disappointing financial result, Meij was still expected to pocket $660,000 more than for the previous year.
Domino’s chief Don Meij gave up his short-term bonus – and still ended up $660,000 ahead. Photo: Glenn Hunt’Fixed pay dressed up’ as bonuses
This touches on an issue that the n Council of Superannuation Investors (ACSI) highlighted in a report last week: Why are so many CEOs getting bonuses in the first place?
While fixed pay for the CEOs of ‘s 100 biggest listed companies has remained broadly unchanged over the last decade, 86 per cent of ASX100 CEOs received a bonus in the 2016 financial year, according to the ACSI report.
Given that bonuses are commonly understood to be for “exceptional performance”, ACSI chief Louise Davidson says the finding begs the question, “are these amounts truly at risk?”
“It’s a positive sign for shareholders when boards step in and reduce bonuses to zero,” says ACSI’s head of Governance, Engagement and Policy, Edward John.
But he cautions that it is too early to tell whether the rash of bonus forfeiture represents a new trend, or, if these examples are just outliers.
There is a counter-argument – recently supported by KPMG partner Stephen Walmsley – that the problem is investors believe bonuses should be given for outperformance, while executives regard it as “at risk pay” that you only lose for underperformance.
ACSI is not a fan of this explanation.
“It’s fixed pay dressed up” as bonuses, says John.
Cuts haven’t gone ‘far enough’
But the focus on bonuses is not enough for some. Well-respected investor Peter Morgan still has a problem with the size of the pay packets on offer.
“I don’t think it has gone far enough because it got so high,” says Morgan. Banks should slash their pay levels by 25 to 50 per cent more.
He cites Commbank’s highly-regarded former boss, David Murray, as an example.
Murray took home $2 million in pay and bonuses in 2000. Narev received remuneration totalling $12.3 million in 2016.
And it isn’t just the big banks which have been paying handsomely for their chiefs.
Energy company AGL received a first strike against its remuneration report last year in response to the $6.9 million worth of remuneration handed out to its CEO, Andy Vesey.
He has received the same amount of pay for the financial year just ended. Running oligopolies
Morgan’s main problem is that he thinks local companies are overpaying for CEOs who, for the main part, run entrenched oligopolies – like our energy providers – and cyclical companies where pay turns into a lottery payout for CEOs lucky enough to have caught the upside of a business cycle.
This was exacerbated by the steady flow of investment money from our $2 trillion superannuation savings and the local mindset that “the bigger the company, the more a CEO should be paid,” he says.
But the staid oligopoly mindset might not just be a problem for the companies. The market is not rewarding any CEO who actually tries to take even a moderate amount of risk to grow the business.
Perennial boss John Murray says “the market is brutal, if there is any doubt” – citing the experience of Grant Fenn’s Downer EDI, which had a hard time selling its investors on the merits of the company’s takeover for Spotless.
“This is a brutal market at the moment in terms of how investors are looking at CEOs.”
Rather ironically, Perennial is seeing positives from signs of an executive wage boom in one sector of the market – the mining industry in Perth – which is supporting its view that the miners and mining service providers’ fortunes are turning.