Investors need to take tough action to stop company executives being paid too much

As sharemarkets around the world rebound, Australian executives have been quietly slipping on lifejackets loaded with shareholders' funds.

While poor shareholder returns and lower earnings figures might have made many equity incentives virtually worthless, a Mercer survey this year indicated that short-term bonus payments for executives of ASX-listed companies rose by 14 per cent last year.

Executives' base pay also jumped 5.7 per cent, despite a widespread sharemarket cataclysm.

Investors should not be surprised. Market volatility has made options grants less attractive, leading executives to recast their expectations towards continued rises in base pay and short-term cash bonuses.

The same flawed logic that rewards executives independently of long-term share price performance is encouraging a trend to substitute "at risk" pay for more certain cash payments.

Shareholders and directors appear to have different views of what constitutes appropriate executive pay. Consider the case of the infrastructure services company United Group, whose share price has fallen from $21.80 in November 2007 to about $13.50 now. Last year, with shareholder returns tumbling, the board, led by the chairman, Trevor Rowe, increased the cash pay of the chief executive, Richard Leupen, by 50 per cent to $2.56 million.

Despite almost 40 per cent of shareholders rejecting the decision, the trend continued this year when Leupen received a short-term cash bonus of $2.25 million (a 55 per cent rise). Shareholders suffered a loss of more than 15 per cent.

Leupen's bonus grew at almost 10 times the company's increase in earnings per share. Last month 51 per cent of United shareholders rejected the company's somewhat generous remuneration practices.

Asciano directors also faced challenging questions at its annual meeting last month. From its peak in 2007 to its low last year the company lost more than $5 billion of shareholder value. Despite the share price collapse, the chief executive, Mark Rowsthorn, received $3.1 million in cash last year.

The board saw no problem with awarding Rowsthorn 70 per cent of his maximum bonus, despite his overseeing the botched (and costly) attempted takeover of Brambles last year. This folly alone was responsible for $108 million of the $182 million loss last year.

Asciano also rejected a takeover offer of $4.40 a share from private equity firms, only to run into debt problems and be forced to undertake a highly dilutive capital raising at only $1.10 a share.

While retail shareholders were badly diluted (and the company reported a $244 million loss), Rowsthorn's bonus increased this year. Rowsthorn was not alone. Despite Asciano's shares falling almost 90 per cent since listing in 2007, board members obtained a 50 per cent pay rise for themselves this year.

Leighton Holdings' largesse dwarfs Asciano and United combined. In 2007, the board agreed to pay its chief executive, Wal King, an annual bonus equivalent to 1.25 per cent of the company's entire net profit.

King was entitled to collect only $5.6 million under the terms of his deal but mysteriously the directors "rounded up" King's payment to an even $6 million on top of his $2.7 million base pay.

Last year, despite Leighton's share price being halved, King's short-term bonus rose to $7.6 million, while his base pay rose to $3.1 million. The board appears as effective in imposing pay restraint as Amy Winehouse would be in dispensing etiquette guidance.

Excluding votes cast in its favour by Leighton's parent company, Hochteif, 61 per cent of Leighton shareholders rejected the company's generous cash-based remuneration practices.

The big problem with most short-term bonus schemes is that, unlike their longer-term equivalent, they are frequently unlinked from shareholder return. Even worse, while equity grants to directors usually require shareholder approval, companies are free to pay their hired help as much cash as they like.

The most unpleasant result is that shareholders fire rubber bullets at the directors in a "non-binding" vote against the company's remuneration report.

So, what can be done to bring directors back to reality? The "two strikes" suggestion of the Productivity Commission is a start but has the potential to cast stones indiscriminately, and punish innocent directors.

Direct action by shareholders seems the most sensible response. If investors resolved to vote against any director involved in unsustainable remuneration practices  specifically those on the company's remuneration committee and its chairman  we might eventually see a clampdown on unwarranted cash pay.

Until that happens, executives will not only continue to avoid going down with their ship, they will continue to sail away in expensive lifeboats.

Adam Schwab is a former corporate lawyer.