Bringing home the bacon: Is performance and executive payment linked?

The issue of executive pay levels in Australia has moved to the top of the agenda of concerns raised by fund managers and shareholders. Australian Government ministers and the general public have entered the debates regarding executive payment and the actual performance of executives and the organisations, which they head in light of their salary and non-salary packages. Recent trends have been an exponential growth in the absolute level of executive total cash remuneration, and a shift in the composition of total executive remuneration away from base salary and benefits to incentive pay, in particular long-term incentives such as share options, share purchase plans and share option entitlements (Shields, O’Donnell & O’Brien 2002). This research seeks to determine the relationship between high executive pay and company performance in Australia, the level of value that executives deliver to shareholders for their increasing investment, and the improvements that can be instituted to ensure fairness and procedural justice. Since 1998, the Australian Financial Review has published an annual review of executive remuneration for Chief Executive Officers (CEOs) and equivalent positions in Australia’s largest publicly listed companies, based mainly on information provided in company annual reports for the previous financial year. These annual reviews have been applied to other publicly available information on corporate performance to gauge the impact of executive salaries and options packages for 20 of Australia’s largest companies. Analysis of the data revealed significant growth in executive remuneration levels in Australia coupled with similar growth in options packages with “long-term incentives”. The link between executive pay and company performance is not evident in Australia. In fact, the counter may be said to be true with executives receiving remuneration beyond certain levels coinciding with a lack of company performance and a lower bottom line. A range of strategies are recommended to increase the transparency of executive packages to shareholders and funds managers and increase corporate governance requirements through the Corporations Act, and empower the Australian Securities and Investment Commission (ASIC) through introducing more stringent disclosure requirements.