Payback power against big salaries

FORMER BHP board chairman and business guru Don Argus last week told shareholders that if they didn't like high executive salaries they could "sell their shares".

"If you don't like a company, you sell it," he said at the launch of a report into share voting by the Australian Institute of Company Directors (AICD).

Of course, he is right in one sense. But if all the chief executives of the top 100 companies are being paid quite well - the average total reported pay for CEOs in 2010 was $4.98 million - and you don't like that, it kind of puts you out of the equity market.

Not long before the AICD released its report, the Australian Council of Superannuation Investors (ACSI) put out its annual report into CEO pay at the top 100 companies. You can see what the 10 top-paid CEOs got paid last year in our table (right). Disclosed pay is what companies say they will get and realised pay is what they actually get. Sometimes executives receive a portion of their pay in equities, so their price changes will impact realised pay.

You'll also notice the change in share price over the same period. This is a simple measure of a company's performance. It doesn't take into account earnings or profit and in a market that has been as volatile as ours lately, some might argue whether it really is a true measure of value. But, regardless, it does give you an idea. And there are some companies that have managed to see their share price value increase even in a falling market.

ACSI has been researching CEO pay for the past 10 years. In 2001 the average annual fixed pay, that is excluding bonuses and other incentives, was $888,407 (if you included News Corp, which moved to the US in 2005, it would have been $1,008,012). In 2010 it had risen to $1,929,062, which was actually a fall on the 2009 average of $2,016,923.

For comparison purposes the ASX/S&P 200 was 3206.2 at the end of 2000 and 4745.2 at the end of last year an increase of 48 per cent compared to the 117 per cent increase in base pay for executives.

Argus, and others in the directors' club, will argue that you need to pay executives well if you want to get the best person for the job. Others say that because there are so many opportunities offshore, we have to pay even more to entice people to stay in Australia.

The problem is that once executive salaries rise so high, it's very difficult to bring them down. But selling your shares isn't the only way you can effect change. You can choose to vote against remuneration reports - which outline what a company pays its executives. Prior to July 1 this year, even if a remuneration report did receive a large vote against it, companies didn't have to do anything about it - those votes were non-binding - but it did send a powerful message.

Since then a "two strikes" rule has been introduced, which means that if a remuneration report receives an against vote of more than 25 per cent for two years running, shareholders can vote to "spill" or get rid of a board. That vote requires a 50 per cent majority. Shareholders can then put forward their own nominees for the board at that spill meeting.

If the rule had been in place since last year, at least five Australian companies would have faced a board spill.

Some of the largest institutional shareholders in Australia are superannuation funds and they have been quite vocal when it comes to remuneration reports. Last year, superannuation funds averaged a vote of 43.5 per cent against remuneration reports, according to the AICD report. Managed funds averaged an against vote of 21.5 per cent.

Retail investors don't have the power that larger institutional shareholders have but you can actively lobby your superannuation fund if you don't like the way executives in particular companies they hold are being paid. It just means that selling your shares isn't the only thing you can do if you don't like how someone is being paid. More power to the people!