SYDNEY, Aug 23: Australian bosses, including Qantas’s Alan Joyce and BHP Billiton’s Marius Kloppers, are forgoing big bonuses this year as tough new laws on executive pay give more power to shareholders to sack them and their boards.
But it is far from clear whether the gestures represent a long-term change of heart or are just a one-off public relations exercise that can be abandoned next year.
The catalyst for many of the bonus announcements has been a tough new law introduced last year that empowered shareholders to dump a company board if they are unhappy with the pay regime.
Under the so-called ‘two strikes’ rule, if more than 25 percent of shareholders vote down the executive pay scheme for two consecutive years, the board can be thrown out and new elections held.
‘It isn’t a magnanimous gesture to hand back a bonus,’ said Australian Shareholders’ Association (ASA) Chief Executive Vas Kolesnikoff. ‘It’s more of an acknowledgement that the contract and bonus structure is fundamentally flawed.’
At a time when institutional investors are growing weary of holding falling shares while executives reap big rewards, the law is influencing nervous boards anticipating tricky annual general meetings.
Since the law’s introduction last July, 108 listed companies have recorded first strikes.
Among the bigger names to have already earned a black mark are BlueScope Steel ; Pacific Brands, the group behind brands including Dunlop, Hush Puppies and Slazenger; casino group Crown ; and mining equipment manufacturer Emeco Holdings.
Only a handful are expected to chalk up a second strike this year as companies have been trimming or cutting bonuses.
The fact that Qantas and BHP have avoided a first strike is credited to preemptive action because of the law.
BlueScope’s O’Malley got in early last week, saying he would not claim his performance bonus or salary increase to take responsibility for a A$1.04 billion ($1.09 billion) full-year loss. Last year, he took home $2.7 million in recommended bonuses and salary rises.
BHP’s Kloppers has passed on his multi-million dollar bonus after the world’s biggest miner said it was booking $3.3 billion in writedowns.
Qantas said that Joyce, who caused a furore when he accepted a salary package including bonuses of A$5 million last year despite a sharp fall in profits, would not seek bonus options this year. The Australian flag carrier has said it will on Thursday post a net loss for the year, its first since privatisation in 1995. Joyce will still take home a base salary of A$2.3 million.
Rio Tinto’s Tom Albanese kicked off the trend in February, forfeiting his 2011 bonus payment after the firm took an $8.9 billion writedown on assets bought under his watch.
John Egan, principal partner at Egan Associates, a leading corporate remuneration advisor, said shareholders were waking up to the fact that many Australian companies were underperforming relative to growth paths before the global financial crisis.
‘Until 2010, we felt OK in Australia because we weren’t being beaten up as badly as the U.S., UK and Europe,’ Egan said.
‘Now, there’s a recognition that while our performance has been better than many of those internationally, we haven’t done that well.
‘The line’s being drawn not on the relative performance in comparison to the worst, but where they should be.’
GLOBAL MOVE, BUT TEMPORARY?
The Australian bonus trend is part of a global move toward waiving bonuses as public and political pressure for responsible capitalism also builds in Britain and the United States.
A British government-backed report has recommended that companies link their directors’ pay to long-term business performance, with incentives to be provided only in the form of company shares to be held until after the executives have retired.
The United States last year adopted shareholder ‘say on pay’ laws that require companies to provide shareholders at least once every three calendar years with a vote on compensation for the CEO, CFO, named executive officers and the company’s three other most highly compensated officers.
While the Australian laws are tough, not all CEOs are running scared.
James Packer, the billionaire chairman of entertainment group Crown, has made it clear that he will use his voting power to ensure the board is reelected unchanged even if its does get a ‘second strike’ and directors are forced to stand down.
The ASA’s Kolesnikoff believes the real test will come next year when he expects the bonuses to return.
Martin Lawrence, co-founder of corporate governance advisory group Ownership Matters, said the perception of power the two-strike rule gives shareholders is almost as valuable as any real power.
He said the rule and the rush to sacrifice bonuses was allowing companies to win some positive PR.
‘It’s a bit of an empty gesture, but it’s a gesture that’s available to every CEO. Executive austerity is the new black.’
($1 = 0.9523 Australian dollars)
(agencies)
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