David Bushby (Tasmania, Liberal Party) Share this | Hansard source

Prior to my remarks being interrupted, I was talking about what has been referred to as the ‘squeezing the balloon’ effect. This is where executives who consider themselves to be worth a certain amount will seek to adjust their remuneration package by increasing some aspects of it if other aspects are made smaller. I mentioned that every business representative organisation that appeared before the committee indicated that this was likely to occur based on their own experiences.

When this was put to Treasury, their comment was that this would not occur because such increases in other aspects of executive package would show up on the remuneration reports that go to shareholders and would be subject to a non-binding shareholder vote. This may well be the case, but a non-binding vote as to whether to accept a report on the remuneration of the top five executives in a company is likely to be seen as a far easier path by many than selling to shareholders a specific termination package, a package that follows the cessation of employment of an executive after the usefulness of the executive to the company and hence its shareholders has passed, which would involve more than a year’s salary and potentially attract negative media interest.

To argue otherwise also requires one to accept that Australian companies are currently paying more than they need to to secure the services of their top executives—in other words, that it is possible to go out there and secure their services for a lower overall remuneration package than that which they are currently offering. Personally, I would be surprised if Australian boards do not already work very hard to ensure that they pay no more than necessary to land the executives that they wish to employ. If this is the case, it follows that they will still need to offer a package of equivalent value to attract any given employee.

What we are likely to see is an increase in the incidence of golden hello payments, front-loading and sign-on bonuses, in addition to the expected increases in base salary. What is more, the transparency in remuneration reporting referred to by Treasury will apply only to listed companies.

The net effect of all of this is the real possibility that companies may in fact face higher remuneration costs as a result of this legislation, an outcome that is totally contrary to that posited as the reason for its enactment. As it currently stands, most executive remuneration packages contain performance clauses under which part of the executive’s package is payable only upon meeting successful performance criteria. When the executive and the company part ways, the termination payment may or may not include a component based on such performance criteria. It will if he or she has met them and it will not if they have not. But if a higher base salary or front loading is negotiated, such a package will be handed over with certainty and may end up costing more than where a performance component would not have been paid. In this regard, then, the legislation threatens to disturb the alignment of the interests of shareholders and their directors. This is contrary to the aims of the shareholder groups that argue against any disconnect between executive stakeholders and shareholders, as both groups should share sharing in both any pain and any upside. This misalignment occurs because the current form of the bill may encourage executives to move away from incentive based remuneration.

The other specific aspect of this bill which will seriously distort the way executive remuneration packages are constructed is the adoption of base salary in place of total remuneration as the basis for the calculation of the threshold above which shareholder approval is required. This amendment to the legislation will have two very likely impacts which will directly shift senior executives away from short- and long-term pay incentives in favour of maximising base salary. The first is, as already discussed, the ‘squeezing of the balloon’ effect, which will lead to the tendency for negotiated packages to compensate for the risk that termination payments will be curtailed by shareholders. The second is the more direct impact of the threshold being based on base pay, which will lead to a tendency for higher base pay to increase the actual dollar value of the threshold in practice.

On the basis of the evidence presented, coalition senators feel there are a number of issues requiring clarification or further scrutiny. These include the application of the bill to all companies, not just listed ones; the meaning of ‘key management personnel’; the definition of ‘base salary’, which will not be known until the regulations have been released; the definition of ‘termination benefit’, which again will not be known until the regulations have been released; the role of institutional investors in shareholder voting on termination payments; the treatment of superannuation in threshold calculation and its impact on termination payments; the treatment of statutory entitlements; the calculation of the average base salary over three years; the pro rata limit for service of less than 12 months and the fairness in relation to its proposed application; and the treatment of voluntary, out-of-court settlements for unfair dismissal actions and other issues arising out of a forced termination.

Coalition senators also agree with the recommendation of the majority of the committee that the draft bill be altered to permit shareholders to vote on a specific amount over the threshold in cases where it has been triggered. The bill as drafted arguably permits a vote for an unspecified termination payment. This oversight in the framing of the bill is again cause for reflection on the government’s undue haste to intervene in this area and highlights once again that the government is legislating on the run. Referring matters to committees before consultations on the all-important regulations are complete results in witnesses being forced to speculate on the content of legislation, as we certainly observed during the committee stage. The common practice of this Labor government is to introduce legislation that is a bare skeleton, with the key questions on its application yet to be revealed in as yet unspecified regulations.

Coalition senators in their report also welcomed APRA’s focus on the issue of executive remuneration and support APRA in the development of its guidelines for the setting of remuneration for executives of ADIs. In common with coalition senators on the committee, I remain of the opinion that there are sound reasons to await the final report of the Productivity Commission in December 2009 before enacting legislation on termination payments. Similarly, there are good reasons to await the release of the APRA standards due shortly.

I accept the prevailing sentiment that the present threshold is high by international standards and in the view of the community. At the inquiry, I heard a divergence of views of what an optimal threshold would be. Seven years is clearly too much. The evidence suggested that probably two or three years would be ideal. The bigger issue was that of consideration of the salary upon which the remuneration package threshold would be based. In their comments, coalition senators considered that, for the reasons already outlined, there is this clear and strong case for adopting total remuneration, rather than base or fixed pay, as the threshold. I reaffirm this. This is why Senator Coonan has foreshadowed an amendment to try to deliver this outcome and I commend her amendment to the chamber.

It seems to me that interference in private companies’ rights to manage their own affairs should only occur to address extreme cases, the cases that rightly cause outrage in the community, and not the 50 to 60 per cent of termination payments the Treasury has in its sights. Similarly, the provisions in this bill should only apply to those executives whose remuneration is already disclosed in the remuneration report. I commend the bill and I also commend the amendments. I hope that the Senate views them favourably.