Executive incentives under fire

BlackRock criticised how many of Australia's highest-paid executives are rewarded, saying long-term incentive schemes have become too complex and show too much conformity. In a study of 148 S&P/ASX200 companies, the asset manager (which has about US$3.6 trillion under management) urged boards to consider simpler incentive structures that combine short- and long-term incentives rather than sticking with complicated LTI models.

BlackRock found that just under half of the companies that received 95% or greater support for their remuneration report relied on a 'standard' incentive scheme rather than a tailored one. This matters because it suggests many boards follow a common template—often to secure adviser approval—rather than designing pay packages specifically aligned to their business, which can reduce the effectiveness of executive incentives from an investor perspective.

The study noted that many Australian boards take their lead from proxy advisers and remuneration consultants. Boards believe if they follow the standard model they are more likely to get approval from those advisers, so conformity and the desire for approval has led companies to 'herd' around standard LTI designs rather than go it alone.

BlackRock's Asia‑Pacific head of corporate governance, Pru Bennett, questioned the effectiveness of EPS and relative TSR as LTI measures. She asked what exactly companies are trying to measure, noting that management should be efficient on costs and growing the business—objectives that relative TSR in particular might not capture well.

The article cites ANZ reporting that CEO Mike Smith was paid $10.1 million in the year referenced, including a $3.15 million base salary and $1.9 million in short-term cash incentives (up from $1.75 million the previous year). When previously deferred short- and long-term incentives vested in 2012, the total value of his package rose to $19.1 million, highlighting how deferred and vested awards can substantially increase headline pay.

Views differ. Dean Paatsch of the proxy adviser Ownership Matters said tying incentives to the shareholder experience may not be perfect but is often the 'least-worst' option. By contrast, Stephen Mayne from the Australian Shareholders' Association wants a greater focus on long‑term incentives and less on large short‑term cash bonuses, arguing more short‑term rewards should be paid in shares and locked up for a few years.

The Australian Shareholders' Association, via Stephen Mayne, said short-term bonuses are too large and too much cash is being paid out. He suggested more short-term incentives should be paid in shares that are locked up for a couple of years, and that there should be a stronger emphasis on long-term incentives instead.

Based on the article, investors may want to watch whether companies use standard or tailored LTI schemes, which performance measures (like EPS or relative TSR) are being used, the balance between short‑term cash incentives and share‑based awards, and any disclosures about deferred vesting that can materially increase packages. BlackRock's critique and comments from proxy advisers and shareholder groups signal growing scrutiny of complexity, conformity and the mix of STI vs LTI in pay design.