David Bushby (Tasmania, Liberal Party) Share this | Link to 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.

Steve Fielding (Victoria, Family First Party) Share this | Link to this | Hansard source

There are few issues that rub people up the wrong way as much as the massive sums being paid to some company chief executives. While thousands of Australians this year have been sent to the dole queue, some of these company chief executives have enjoyed multimillion dollar payments at the workers’ expense.

Who can ignore the fact that Peter Moore, the former CEO of Pacific Brands, left the company last year with a golden handshake of $3.4 million while, only some months later, 1,850 workers were given the boot. I think it is pretty hard for the company to make the argument that they needed to cut costs. Or what about the case of Owen Hegarty, who was paid $8.35 million on his departure from OZ Minerals despite the fact that the shareholders have seen hundreds of millions of dollars wiped off the value of the company in the last year.

The public outcry on the issue of executive pay has been enormous and it is well deserved. Australians are sick of seeing fat cat executives line their own pockets while ordinary Australians are told that there is not enough money in the company’s budget to allow them to keep their jobs or to pay them a raise of a few extra dollars a week. It is corporate greed at its worst and the government has finally woken up and realised it needs to act.

But the government’s Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 has more holes than swiss cheese. This bill deals with the issue of termination payments, but it does not touch any of the other parts of executive pay. Executive salaries are not only made up of big termination payments; there are also the issues of ‘golden hellos’ or sign-on fees, excessive base salaries and over-the-top bonuses paid according to performance. Back in March, the government set up an inquiry with the Productivity Commission to look at the issue of executive pay. The Productivity Commission is due to release its draft issues paper in a couple of weeks and its full report by the end of the year. Surely the sensible thing to do would be to see the findings of the Productivity Commission report on executive pay before rushing ahead with this bill.

Executive pay is an issue which does need urgent attention, but I am also aware that it is a highly complex issue and, if you rush ahead with a change in just one area of executive pay, you may see the problem transfer to another area—for example, golden hellos. If golden handshakes just turn into golden hellos or golden bonuses, is that really going to fix the problem? On paper, what the government has put forward is a start. They have changed the current thresholds on termination payments so that shareholders need to approve termination payments if they are more than one year’s base salary, instead of what it is at the moment, which is seven times their entire salary.

But, when you look a bit more at the detail of the government’s bill, it is clear that this bill still leaves open the possibility of executives getting excessive salaries through other channels. As was referred to before, it is like a balloon; if you squeeze it on one side, all it may end up doing is pushing out on the other side. Focusing on the issue of excessive termination payments, this bill will simply encourage companies to structure the contracts of executives differently so that they give bigger base salaries, or golden hellos or some other ‘golden’ terminology. There is merit in waiting for the Productivity Commission report so that a more comprehensive solution to excessive salaries can be considered.

All Australians are concerned about the excessive salaries and termination payments being paid to many company executives, but the big question is: where do you draw the line? I think it is right that we reward people for working hard and for doing a good job. But I also think we need to have limits and put an end to over-the-top payments. That is why I think the best way forward is to give more power to shareholders to have a say in all executive termination payments that are over the $1 million level. Family First believes that setting a $1 million trigger for shareholder approval is fair and reasonable. Anything over $1 million in a termination payment would set the trigger for shareholders to have a vote. No company executive should be able to cry poor and say that a $1 million trigger is too low for shareholders to approve. Also, no company should be able to make the ridiculous claim that a trigger of $1 million is an amount that is too small to be competitive and attract talented executives from the global marketplace. If they need to go above that to be competitive, as I said before, they need shareholders’ prior approval.

Family First believe that setting up a $1 million trigger for shareholders’ approval is fair and reasonable. Reigning in executive salaries is an important issue that needs to be addressed, and the government’s bill really falls short of what needs to be done to solve this significant problem.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

As a nation Australia has long prided itself on our egalitarian attitude. We believe in equality of opportunity and we believe in fairness right across the board. But most Australians would argue that we have not seen that fairness when it comes to the remuneration of executives in this country. Between 1971 and 2008 the growth in executive salaries was a staggering 470 per cent. Put simply, the rich have been getting richer. Compare that with the situation faced by average workers who prop up the businesses these executives so handsomely profit from. Between 1971 and 2008 the average worker has experienced an increase in real wages of 54 per cent. So executive salaries have gone up nine times more than the wages of workers in real terms.

Some would argue that the CEOs, as the senior executives of our top 100 companies, are worth the multimillion dollar contracts they have been paid. Others might argue that they are not. The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 is not really about how much a CEO should or should not be paid. It is about giving shareholders some say over how much a CEO is paid when they leave.

If the average Joe or Joanne retires from his or her full-time job as, say, an accountant in Adelaide, they are likely to leave with their annual leave paid out as a lump sum, some super and a farewell party. If Mr or Mrs Smith resigns to take up a position elsewhere, they will probably be paid out their one month’s notice and their annual leave as a lump sum, and the farewell party would be negotiable. But, if Mr or Mrs Smith is sacked due to poor performance, because he or she did not meet his or her key performance indicators or because their work resulted in the business losing money, they would probably be asked to stop work immediately and would be paid out their one month’s notice and annual leave—no reference, no party and no bonus.

Compare this with the extraordinarily generous treatment routinely given out to Australia’s CEOs. The average CEO of a top 100 company in Australia who resigns, retires or is sacked receives a termination payment of around $3.4 million, which is the equivalent of twice their annual salary. If that is not enough, under the current legislation executives are eligible to receive termination payments of up to seven years total remuneration without the need for shareholder approval. That means that a person with seven years service and an average annual salary over the last three years of $10 million would be entitled to receive a termination payment of up to $70 million without seeking shareholder approval. What is even more outrageous than that figure is that more often than not the reason for termination is poor performance. So it is a case of: ‘If you mess up and cost the shareholders a fortune, we will pay you out a fortune as we show you out the door.’ That seems to be the approach in many cases. It is just extraordinary and it is not acceptable.

In 2002 five senior executives of AMP departed with close to $12 million between them, despite the fact that when they were in office, holding positions as senior executives, AMP lost more than $13 billion of its market value. In 2003 the CEO of Southcorp was farewelled with a golden handshake of $4.4 million even though while he was at the helm Southcorp shares lost 40 per cent of their value. In fact, a study by corporate governance analysts RiskMetrics found that one-third of the nation’s top 100 companies in the past three years paid their chief executives a combined $112 million to go away. It seems unfathomable that, while the average Australian may be sacked without so much as a farewell party, an executive is being farewelled not just with a bottle of Dom Perignon but with an unearned outrageous fortune.

I commend the government on introducing this bill, which will reduce the number and size of golden handshakes and will instil a bit more faith in the Australian public and Australian shareholders about our corporate CEOs. This bill will hold to account executives, who for too long have been handed multimillion dollar farewell cheques—cheques that many shareholders would agree they did not deserve. But I have some concerns that this bill will not match its intent. The Productivity Commission is due to release its findings into executive remuneration in December this year. It will address not only termination payments for executives but also pay arrangements and greater powers for shareholders. According to media reports it will call for the votes of shareholders with regard to remuneration to be binding. This is a measure that I fully support

Given this, as well as a number of other concerns I have, I will move a number of amendments during the committee stage that will seek to ensure greater transparency and greater accountability when it comes to termination payments. These include an amendment that requires that shareholders be advised of the reason for the executive’s departure—whether it is resignation, retirement or termination—and an explanation. Too often shareholders are told that the executive is retiring only to be told in the board remuneration report that they were terminated with a multimillion dollar bonus. With all due respect it just shows you how smart some corporations can be when it comes to keeping embarrassing information from shareholders. I have real concerns that removing these golden handshakes will only result in a surge of golden hellos. As such, I will be moving an amendment that will require approval from shareholders for sign-on and performance benefits that exceed the one year’s base salary threshold. We cannot allow one rort but leave the way open for another.

This bill is a positive step to ensuring greater accountability, as the termination payment threshold is set to drop from seven times total remuneration to one year’s base salary. However, as many of these agreements will be finalised during the sign-on stage, well before the possibility of termination is discussed, I believe it is crucial that shareholders have a say in the sign-on and performance bonuses to ensure that they are not beyond expectations. Further to this, I will be calling for shareholders to be able to vote on the maximum money value an executive can receive as a termination payment where it exceeds one year’s salary. Shareholders invest their savings in a company in the hope that they can support and profit from the company. There are many hundreds of thousands of Australians who rely for a comfortable retirement on the dividends from these shares and on the capital value of these shares. They do not want to watch their investment fall while the CEO, after three years of service, leaves with a multimillion dollar pay packet.

Finally, as the Productivity Commission is set to release its final report into executive remuneration, I call on the chamber to support the insertion of a creative sunset clause into this bill—it is not an ordinary sunset clause, but I would like to think that senators will see this as a positive way forward—whereby certain exceptions under this proposed legislation cease two years after the date of assent, which would enable parliament to revisit this legislation. In other words, if nothing is done it would give greater power to shareholders in terms of executive remuneration. It would act as a powerful incentive for the legislation to be revisited in a positive way to strengthen safeguards for shareholders, particularly after ASIC and the Productivity Commission hand down their findings.

This bill is a good step towards holding corporate executives more accountable and forcing them to justify a multimillion dollar payout when the average Australian is finding it difficult to make ends meet. I support the purpose of the bill and, when we look to move amendments during the committee stage on this long-overdue piece of legislation, I hope to have the support of this chamber to close loopholes in the legislation and to improve it for the benefit of shareholders and the Australian public alike.

Nick Sherry (Tasmania, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

I thank the senators who have taken part in the debate on the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. As everyone is aware, there is considerable community concern about excessive termination payments paid to company management at a time when many Australian families are being hit hard by the global recession. Such payments are given to outgoing company directors and executives at a time when they are no longer able to influence the company’s future performance. They provide little benefit to the company and are often regarded by shareholders and the wider community as a reward for failure.

The bill will amend the Corporations Act 2001 to strengthen the regulatory framework relating to the payment of termination benefits to company directors and executives. This is an important initiative of the Rudd Labor government. As highlighted by the global financial crisis, increasingly termination payments have borne no relationship whatsoever to the profitability of the company or to the performance of the recipient. The reforms empower shareholders to reject extreme termination payments that are not in the company’s interest.

The government is taking decisive action. The reforms in the bill reduce the threshold at which shareholder approval is required for a termination benefit from seven times total annual remuneration to one year’s average base salary. The bill expands the scope of the individuals covered by the regulatory regime to include the key management personnel of companies that are disclosing entities. It improves the integrity of the shareholder vote, facilitates recovery of unauthorised termination benefits and substantially increases the relevant penalty provisions.

The bill underwent a four-week public consultation. The government was responsive to stakeholders and decided not to change the shareholder voting arrangements. A number of shareholders identified practical difficulties with changing the timing of the shareholder vote until after the departure of the director or executive. As such, the government has decided to retain the status quo, which allows the shareholder vote to be held at any time prior to the termination benefit being paid to the director or executive.

The regulations supporting the bill have also undergone extensive public consultation. The government has been responsive to stakeholder concerns. The final regulations were released on 3 September. The regulations provide a definition for base salary, clarify and expand the types of benefits which are and are not subject to shareholder approval and prescribe circumstances in which the benefit is given in connection with a person’s retirement. The regulations have been sent to the Ministerial Council for Corporations for its approval, in accordance with the requirements of the Corporations Agreement 2002.

As a whole, these reforms create a sense of justice in the alignment of the profitability of companies and the remuneration of company directors and executives. I note that the Senate Economics Legislation Committee has reviewed the provisions in this bill and recommends that the Senate pass it. In summary, this bill will implement important reforms to strengthen the accountability of company management, empower shareholders to reject excessive termination benefits and promote the provision of responsible levels of termination benefits to company directors and executives.

This is not just an issue in Australia; it is a worldwide issue of concern, particularly in the context of the global financial crisis and some of the grossly irresponsible behaviour we have seen around the globe, particularly in Europe and North America. I note that Australia is one of the first countries to respond with a range of positive initiatives to deal with an important issue that has been highlighted by the global financial crisis.

Debate interrupted.