Corparate Governance and Accountability
Project description
Assessment Task : Case Study

Boards of top-100 companies are paying their chief executives larger annual cash bonuses to avoid an embarrassing investor backlash over pay, experts say.

The fixed pay of CEOs at the top 100 listed companies has doubled over the past five years to an average of $1.8 million – increasing four times faster than pay for ordinary workers, according to a survey of executive pay by the Australian Council of Super Investors (ACSI), which advises 40 superannuation funds that manage more than $250 billion.

The increase compares to a rise of 26.8 per cent in average weekly earnings and a gain of 76.8 per cent in the benchmark S&P/ASX 100 Index over the same period.

ACSI said the more alarming trend was that CEOs were now much more likely to receive an annual bonus. Only four missed out in 2006, compared with one-quarter in 2002.

ACSI said annual bonuses had grown from an average of $769,000 in 2001 to $1.66 million, and more CEOs were receiving them.

‘More and more boards seem to be placating executives unhappy at having to meet demanding performance hurdles to get their options by paying them more cash’, said ACSI executive officer Phil Spathis.

‘Where is the downside for these executives, when so much of their supposed ‘at risk’ pay is delivered much sooner than later?’

Telstra, AGL, MFS, Suncorp, Babcock & Brown Infrastructure, Leighton Holdings, Toll Holdings and Becton Property Group all faced shareholder protest votes against their remuneration reports this year.

Two of these top-100 companies, Telstra and AGL, faced majority votes against their remuneration reports, and two-thirds of Telstra shareholders, including the Future Fund, voted against Telstra’s pay plan and the $11 million pay packet for CEO Sol Trujillo.

Shareholders were concerned his short-term performance pay nearly doubled and the hurdles for his long-term performance pay were less demanding than for other senior executives.

But Geof Stapledon of Risk-Metrics, which conducted the survey, said shareholders typically voted only on long-term grants such as shares, options or equity schemes, rather than short-term annual cash bonuses.
That was one factor driving an increase in the payment of short-term incentives, he said. ‘Directors are paid to make tough decisions and it seems many cannot say no to their CEOs when it comes to pay increases,’ he said.

The top 10 highest paid CEOs all received a total pay packet of $8.41 million or more, up from $6.49 million the year before.

Source: Extracts from Patrick Durkin, ‘Pay backlash prompts shift to bonuses’, The Australian Financial Review.

 
Question 1 (20 marks)(Approx. 1,500 words)

One of the problems in the shareholder/manager agency relationship that pay contracts are designed to overcome is the risk aversion problem. Outline what the problem are, and how the contract between managers and shareholders can be designed to reduce risk aversion.
Question 2 (10 marks)(Approx. 1,000 words)

How does equity as a pay component work to reduce the horizon problem? What role, if any, does accounting information play in specifying the contractual terms of bonus plans designed to reduce the horizon problem?
Question 3 (15 marks)(Approx. 1,000 words)

The article discusses a range of non-salary components that are contained within the management compensation packages of top-100 companies. Evaluate the purposes of including non-salary components in executive pay arrangements?
Question 4 (20 marks)(Approx. 1,500 words)

Why would managers prefer short-term cash over long-term equity bonuses? Why does this not align with shareholder interests? Explain your answer.
Question 5 (20 marks)(Approx.1,500 words)

Shareholders of Australian entities have the ability to vote to show either their support of dissatisfaction with companies’ remuneration reports. While this is non-bi

nding on the Board, they are obliged to take note of shareholders’ views. Explain why shareholders might choose to vote against reports with too high a proportion of p

ay as short-term cash bonuses rather than long-term incentives and evaluate the pros and cons of each term.
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