AUSTRALIA'S system of executive pay simply does not work for a large number of companies listed on the ASX, according to a corporate governance expert for one of the world's biggest investment funds.
Pru Bennett, of BlackRock Australia, has called for a rethink of the way long-term incentives are used to remunerate executives, particularly for mining and resources stocks in the early stages of development.
Ms Bennett's doubts about the current system were shared by the OZ Minerals' chairman, Neil Hamilton, who said the amount of time companies were devoting to executive pay had got "out of hand".
Ms Bennett voiced concerns that measurements like "earnings-per-share", "relative total shareholder return" and "return on capital employed" were inappropriate for judging executives in companies that were mere explorers or in the early stages of development.
She said those measurements could be undermined by the timing of spending or external factors like weather and commodity prices, meaning they were not an effective way to judge executive performance and incentive payments.
"These companies are finding it difficult to meet remuneration standards once they get into the index, they just don't meet the major proxy advisers' guidelines because they are just not operational, their only revenue is interest," she said. "What we've got in executive remuneration at the moment just doesn't work."
Ms Bennett said options would be a better way to reward executives in such companies, so long as controls were in place to prevent shareholder dilution.
"They can attract and retain good people with options without impacting significantly on the cash flow which is vital to their long-term development," she said.
BlackRock is the world's biggest investor in resources companies, holding stakes in countless companies including the biggest stake in BHP Billiton.
Concerns about executive pay were also raised at OZ Minerals' annual meeting in Melbourne yesterday, where Mr Hamilton expressed frustration that remuneration issues were now dominating discussions with investors and proxy advisors.
"I will probably spend five or six days talking to people about remuneration, and far less talking about the balance sheet and the company strategy, which I think tells you it has got out of hand," he said.
"We have been around the world on this issue a few times and I can assure you it takes an inordinate amount of the board's time."
Despite those comments shareholder advocates at yesterday's meeting urged OZ to extend the term of their incentives from three to five years.