Commonwealth Bank of Australia chief executive Ian Narev is confident this profit reporting season will be marked by greater transparency around the linkages between company performance and executive remuneration.
He told the Business Council of Australia roundtable with The Australian Financial Review on Wednesday that the focus on pay for performance is being driven by institutional shareholders.
"The pressure is coming from the people who own our companies, and we're responding to it," he said.
"I bet you – in this reporting season – as you look at the nature of disclosures and what companies are saying about the basis on which pay is made, you will see people responding to the fact that they need to be much clearer about it."
The question is: Will this be enough to change the negative community attitudes towards executive pay?
This is an important question for business because it goes to the heart of the efforts to turn around the growing anti-business sentiment among politicians, activist groups and the general community.
The community negativity stems from two concerns. First, there is a belief that senior business people are immune from the economic forces that have caused the slowest rate of Australian wages growth in 20 years.
Second, there is a widespread belief that executive remuneration, particularly in the banking sector, is too high in absolute terms. It is hard to argue with this when CEOs who are household names are being paid between $8 million and $12 million a year.
It is no surprise that when Australian Bankers Association chief executive Anna Bligh fronted the National Press Club on Wednesday, executive remuneration was at the top of the list of questions asked.
"Those who are earning very generous salary packages need to be able to demonstrate the value that they provide to the company, and in some cases beyond the company's interest," she said.
Her line of argument was similar to the one put by Narev. As long as the hurdles for incentive payments were transparent and approved by shareholders, then everything should be OK.
Of course, there are problems with this justification. It is true that incentive share awards to a director of a company must be approved by shareholders under ASX listing rule 10.14. But the significant short-term cash incentives paid to most senior executives in Australia have become so predictable and reliable that they are virtually the equivalent of base pay.
It also misses the burning issue of the absolute size of pay packages.
Coming down again
At the BCA roundtable, Coca-Cola Amatil CEO Alison Watkins said executive pay is starting to come down.
"Obviously, as we're seeing new people hired and new hiring decisions made, there's an opportunity to reset [pay], and I think boards are absolutely taking that opportunity," she said.
Richard Goyder, who is between leaving as CEO of Wesfarmers and becoming chairman of Woodside, said he hopes his successor Rob Scott gets paid as much as possible.
"It was interesting when my retirement was announced that the headlines were 'Scott to be paid less than Goyder'," he said. "My sincere hope is that he maxes out on his incentives every year because, as a shareholder, that will make me very happy.
"One of the things I would say about this is that, when you perform, shareholders are happy. So, we got no pushback from shareholders on the Ian McLeod salary arrangements because Ian achieved great things for Coles, which actually flowed on to the broader economy."
Goyder admits that the quantum of pay will always be an issue but he hopes any discussion includes the need to attract really good people.
The problem for business is the one highlighted by Reserve Bank of Australia governor Philip Lowe in a speech to the Anika Foundation luncheon in Sydney on Wednesday. He explored the reasons why average hourly earnings are now growing at about 2 per cent, compared to about double that rate of growth from the 1990s until a few years ago.
He concluded a pick-up in aggregate wages growth would be positive for the economy.
"The best outcome for both workers and firms is for any pick-up to be underpinned by a lift in productivity growth and more high-skill jobs," Lowe said.
BCA president Grant King and CEO Jennifer Westacott argued that the most efficient route to higher productivity growth is corporate tax cuts. Tax cuts for big business are government policy, but if they are the silver bullet for higher wages growth it will not come soon enough to address the clear disconnect between the community and the management elite.
That means the sort of pay cuts seen at Wesfarmers and those highlighted by Watkins will have to become the norm.
