Moderation needed in CEO salary alchemy

Ahmed Fahour at the Australian Open Men's Final. His $5.6 million salary sparked a public backlash.
Ahmed Fahour at the Australian Open Men's Final. His $5.6 million salary sparked a public backlash. Alex Ellinghausen
by Michael Smith

Australia Post boss Ahmed Fahour's pay packet has put the public spotlight on chief executive salaries at a time when even the company directors who determine how bonuses are calculated are confused.

The public backlash over Fahour's $5.6 million salary is largely because taxpayers are footing the bill but it will prompt shareholders to think twice about how much the chief executives of big listed companies are getting paid.

This makes the release of The Australian Financial Review's annual salary survey more timely than ever. Two things stand out this year. The bankers and miners are still there but they have been shunted down the list of Australia's richest bosses by the new corporate stars running booming healthcare and property companies. This is a reflection of the shift going on in the wider economy as bank profits flat-line and miners adopt a more conservative view of the world.

The other notable trend this year is that chief executive salaries are moderating for the first time in years. The average pay for a top 300 chief executive inched up from $2.87 million to $2.88 million. This is mainly because there has been a changing of the guard at companies like ANZ, BHP Billiton and Telstra which means the current chief executives are paid less than their predecessors. Some high-profile chiefs including Wesfarmers' Richard Goyder, former Origin Energy boss Grant King, and Aurizon's Lance Hockridge also copped pay cuts of between 41 and 44 per cent.

Coca-Cola Amatil group managing director Alison Watkins is Australia's highest paid female CEO.
Coca-Cola Amatil group managing director Alison Watkins is Australia's highest paid female CEO. Peter Rae

Where are the women?

There was a disappointing number of female chief executives in the list. Coca-Cola Amatil boss Alison Watkins was the highest-paid female in 41st place with total remuneration of $4.55 million. Close behind at number 42 was Mirvac chief Susan Lloyd-Hurwitz with $4.53 million and Sydney Airports boss Kerrie Mather in 50th place with $3.85 million.

The verdict? Australia's chief executives are still paid too much but the increases are moderating. Boards are showing more restraint, particularly in mining and banking where new chief executives are being paid less than their predecessors. However, chief executives' salaries remain out of step with a company's performance.

The biggest problem is the way bonuses are calculated.

Rethink on pay

Commonwealth Bank boss Ian Narev faced a backlash over his pay.
Commonwealth Bank boss Ian Narev faced a backlash over his pay. Andrew Meares

Long-term incentive structures have become so complicated that even the directors responsible for setting the rules admit they no longer understand them. While a handful of companies are trying to simplify the system, the majority are not. Some are actually making it more complex with the introduction of so-called "soft targets" to calculate bonuses. In some cases this backfired, as Commonwealth Bank of Australia found out when it had to shelve plans to link part of chief executive Ian Narev's bonus to non-financial targets.

Telstra chairman John Mullen has said remuneration needs a "rethink, not a tinkering around". Orica chairman and BHP Billiton director Malcolm Broomhead says the way long-term incentives are calculated is so complex most shareholders are left baffled.

Some familiar names continue to top the list. Macquarie Group chief Nicholas Moore remains Australia's top paid CEO with total remuneration of $18.16 million, a reflection of the company's extraordinary growth in a period when many of its global peers were struggling. James Hardie boss Louis Gries, who consistently makes the top 10, was second at $14.4 million.

Salary survey 2017

Source: Financial Review, company filings | Research: Beverley Uther Data journalist: Edmund Tadros | Graphic: Les Hewitt
Salary Survey 2016
* Peter Cumins' pay is negative because amounts expensed in prior years were reversed due to some rights lapsing, which resulted in some negative long-term incentive values
Australian Financial Review Interactive infographic
Interactive infographic by Les Hewitt