GLOBAL asset manager BlackRock has criticised the way remuneration packages for Australia's highest-paid executives are structured, saying long-term incentive schemes have become too complex and smack of conformity.
It says boards should consider whether long-term incentive (LTI) schemes are delivering the best results, or whether they ought to be abandoned in favour of simpler schemes that combine short and long-term incentives.
The criticism comes a week after it was revealed that ANZ chief executive Mike Smith took home $10.1 million last year, as part of a remuneration package that included a base salary of $3.15 million, with short-term cash incentives worth $1.9 million, up from $1.75 million the previous year.
BlackRock this week plans to release the results of a study that looks at the main features of LTI schemes used by 148 companies on the S&P/ASX 200 Index.
The study found just under half of the companies that got 95 per cent or greater support for their remuneration report in 2011 relied on a "standard" incentive scheme, rather than a tailored scheme that suited their company's strategy and circumstances.
It also found that most Australian boards were taking the lead for their LTI design from proxy advisers and remuneration consultants, rather than tailoring their own LTI schemes.
"Boards know if they follow [the standard model] they will more likely get approval from advisers. It reinforces our belief that companies are reluctant to go it alone," the study says.
"Conformity seems to define LTI schemes, companies appear to be herding around a standard model."
Pru Bennett, BlackRock's Asia-Pacific head of corporate governance, said she questioned the effectiveness of two LTI measures used in Australians LTIs that have become increasingly popular: earnings per share (EPS), and relative total shareholder return (RTSR).
"What are we trying to measure? You want management to be efficient in terms of costs and to be growing the business, and that's not necessarily picked up in relative TSR," she said.
Earlier this month ANZ reported its chief executive Mike Smith was paid $10.1 million this year, as part of a remuneration package that included a base salary of $3.15 million, with short-term cash incentives worth $1.9 million, up from $1.75 million the previous year. But the vesting in 2012 of previously disclosed deferred short-and long-term incentives lifted the total value of his package to $19.1 million.
But Dean Paatsch, the director of proxy adviser Ownership Matters, said linking incentives to the shareholder experience might not be perfect but in many cases it was the least-worst option.
"We are sceptical of short-term measures that are able to be controlled or manipulated by management as they may result in increased risk and not enhanced value for shareholders over the longer term," he said.
But Stephen Mayne, from the Australian Shareholders Association, said ASA believed there should be a greater focus on LTI and a reduced focus on the short term. "The short-term bonuses are too large, and more of them should be paid in shares where they're locked up for a couple of years as well. There's too much cash bonus going out the door.
"We think there needs to be a further shift towards longer-dated, equity-based incentive schemes, and a further move away from upfront, short-term cash."
The BlackRock study relies on a PwC study, published in May this year, which found that Australian executives did not value LTIs as much as short-term incentives, and that most preferred a smaller certain payment to a larger and mathematically favourable risky bonus.
Frequently Asked Questions about this Article…
What did BlackRock say about executive long-term incentive (LTI) schemes in Australia?
BlackRock criticised Australian LTI schemes as becoming too complex and conformist. Its study argues many companies are using a "standard" model rather than tailoring incentives to strategy, and it suggests boards consider simpler designs that combine short- and long-term incentives.
How many companies did BlackRock study and what were the main findings about LTI design?
BlackRock's study looked at LTI features used by 148 companies on the S&P/ASX 200 Index. It found that just under half of the companies that received 95% or greater support for their remuneration report relied on a standard incentive scheme, and that many boards were copying proxy advisers and remuneration consultants rather than tailoring schemes.
Why did BlackRock question earnings-per-share (EPS) and relative total shareholder return (RTSR) as LTI measures?
Pru Bennett, BlackRock's Asia-Pacific head of corporate governance, said EPS and RTSR have limitations. She questioned whether these metrics actually measure what boards want — such as management efficiency, cost control and genuine business growth — noting RTSR may not capture those elements.
What example did the article give of executive pay tied to incentives?
The article highlighted ANZ chief executive Mike Smith, who received $10.1 million in one year that included a $3.15 million base salary and $1.9 million in short-term cash incentives (up from $1.75 million the prior year). The vesting in 2012 of previously disclosed deferred short- and long-term incentives lifted the total value of his package to $19.1 million.
What do proxy advisers and Ownership Matters say about linking incentives to shareholder experience?
Dean Paatsch from proxy adviser Ownership Matters said linking incentives to the shareholder experience may not be perfect but is often the "least-worst" option. He warned against short-term measures that can be controlled or manipulated by management, because they can increase risk without enhancing long-term shareholder value.
What changes does the Australian Shareholders Association (ASA) recommend for executive pay and bonuses?
Stephen Mayne of the ASA said there should be a greater focus on long-term incentives and less emphasis on large short-term cash bonuses. He suggested more short-term rewards be paid in shares that are locked up for a couple of years and urged a shift toward longer-dated, equity-based incentive schemes.
How do executives reportedly value long-term incentives versus short-term incentives?
The BlackRock study relies on a PwC study that found many Australian executives value short-term incentives more than LTIs. The PwC research indicated executives often prefer a smaller, certain payment to a larger but riskier long-term bonus.
What should everyday investors know about the debate over LTI schemes and executive pay?
The article highlights that many boards follow a standard LTI model—often influenced by proxy advisers—and that common metrics like EPS and RTSR are under scrutiny. Everyday investors should be aware that discussions are underway about simplifying incentive structures, shifting pay toward longer-term equity, and reducing large upfront cash bonuses to better align management with shareholder interests.
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