Executive incentives under fire

THE 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.

THE 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 schemes ought to be abandoned in favour of simpler schemes combining short- and long-term incentives.

BlackRock, which has $US3.6 trillion under management, has studied the main features of LTI schemes used by 148 companies listed on the S&P/ASX200 companies 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.

It also found that most Australian boards were taking their lead for their LTI's 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 Australian LTI measures that have become increasingly popular: earnings per share and relative total shareholder return.

"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.

Dean Paatsch, the director of the 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.

But Stephen Mayne, from the Australian Shareholders' Association, said it believes there should be a greater focus on LTI and a reduced focus on STI. "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," he said.