The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Nick Sherry

Nick Sherry

Minister for Superannuation and Corporate Law

3 December 2007 - 8 June 2009

Transcript of 07/04/2009

Interview with Jenny Brockie

SBS Insight

Tuesday, 7 April 2009

SUBJECTS: Executive Pay; Productivity Commission; Termination payments

How much should our top executives be paid? When high-flyers pocket multimillions during a recession, their salary packages hit the spotlight. President Obama says cash bonuses paid to some American executives are shameful and outrageous. Our own Prime Minister, Kevin Rudd, has talked about obscene pay packages in the financial sector and has launched an inquiry into executive pay. So, who decides executive packages and can they be justified?

JENNY BROCKIE:

Tonight we will take you inside the world of business with board members, shareholders and the minister for corporate law, Nick Sherry. Howard Mitchell, let me start with you. You run one of our biggest media marketing and buying companies - are our CEOs being paid too much?

HAROLD MITCHELL, MITCHELL COMMUNICATIONS:

Usually we can only speak for the things we know. I know in our particular case, our CEO - it's a public company, family - controlled, a fair amount of it. Our CEO is a member of our family.

JENNY BROCKIE:

It's your son, isn't it?

HAROLD MITCHELL:

I didn't want to say that straight away. He would earn about half of what contemporary people in other companies do.

JENNY BROCKIE:

So what does he get?

HAROLD MITCHELL:

He earns a total of $750,000 a year on the public record, half of which he has at risk at any one time and I think that's appropriate for our business - it's a big business. Turnover $1.3 billion and I think that's appropriate there. Of the others, I'd look at only the history of what's happened since the mid-40s - the big bosses, the top people - got between five and 20 times the average worker. In the last five or six years that's moved to up to 80 times. And it's much higher than it ever was. I think, probably on balance, they're getting paid more than they should.

JENNY BROCKIE:

John Colvin, you represent 24,000 board members across the country - boards set these executive packages. Are some of them excessive?

JOHN COLVIN, AUSTRALIAN INSTITUTE COMP. DIRECTORS:

Well, I think the 24,000 members are in the not-for-profit area - they're in the charities and some of them obviously, get paid nothing. In those areas, the answer is - I think they're probably reasonably paid.

JENNY BROCKIE:

We're not talking about not-for-profits, I think here.

JOHN COLVIN:

In the director space, first of all, there's what's happened in the contracts which were entered into several years ago, which are going forward now. There are some which, you know, you could argue have probably been too much, and some which have been excessive. Some cases like that. But in the main there's the 95% rule or 80-20% rule - I think they're paid properly for a very difficult job.

JENNY BROCKIE:

So you don't think many are being paid too much?

JOHN COLVIN:

Well I'd say that they're probably paid appropriately for the job that they have to do. There are cases - and I'm sure we'll hear some of them - where, you know, you could argue that they are, particularly when you get to, say, termination payments for poor performance, I think you would have to say that they are areas of real concern for us.

JENNY BROCKIE:

A bit of eye-rolling knowing on next to you! Stephen Mayne, what's wrong with top execs earning big bucks?

STEPHEN MAYNE, SHAREHOLDER ACTIVIST:

Well, big bucks for big rewards. But there's just too many examples - Babcock & Brown, where $10 billion has been lost and there's still a whole load of multimillionaires running around who were responsible. It's all very well if you're a great success story to make a fortune. But the real problem is that the base has gone up, so we've seen CEO salaries across the board double in six years. And too many of the duds are still retiring multimillionaires.

JENNY BROCKIE:

John, I know you've argued that if sports stars and rock stars can earn multimillions, why not executives? Is that your view that they're in a similar category and they should be earning that kind of money?

JOHN COLVIN:

Well I think the area of most concern is, say, the top 100 and probably the arguments really, in the top 50. The top 50 of just about anything - you know, sport, law, economics, medicine - all those sort of things, they do pretty well. These people in the top level - the really top level - you can argue are where the international comparisons do have effect and we are in the international community.

JENNY BROCKIE:

Mm. Caroline, why were you rolling your eyes listening to this?

CAROLINE ROMEO, SHAREHOLDER:

Well, because I think - I don't think that it's unfair in terms of people getting - the top executives - getting that pay but it would be nice if it had a flow-on effect so that everybody got a proportion of that.

JENNY BROCKIE:

Are you a shareholder?

CAROLINE ROMEO:

Yes, I am a shareholder.

JENNY BROCKIE:

So you feel that there's too much of a gap?

CAROLINE ROMEO:

That's right.

JENNY BROCKIE:

What about you, Suzanne? Are you a shareholder?

SUZANNE CENGIA, SHAREHOLDER:

I am a shareholder.

JENNY BROCKIE:

What do you think about executive salaries?

SUZANNE CENGIA:

Um, I'm pretty shocked at how high they are actually and I wonder what these people are doing to earn so much more money.

JENNY BROCKIE:

Well Yasmin, what are they doing to earn so much money? You're a board member for AIG. Board members set executive salaries, what do you think?

YASMIN ALLEN, IAG BOARD MEMBER:

AIG doesn't pay at the top end – we actually aim our remuneration structure at the medium and half of the remuneration for our executives is incentive pay. We try and remunerate for long-term performance so we look at things like employee engagement and sustainability and earning sustainability – those types of things so trying to align performance, I guess, with what shareholders want, so longer-term performance. I think some of these excessive salaries and short-term have actually come from short-term way of thinking and a short-term earnings grab, if you like, and particularly we've seen a lot of that, I think, in the US. So in terms of taking a longer-term view, I think that some of these excesses will go.

JENNY BROCKIE:

Dean, you are a corporate governance advisor - you advise shareholders on whether to vote for or against some of these pay packages.  What do you think? Are many executives in Australia over paid?

DEAN PAATSCH, RISKMETRICS:

Well, shareholders think they are. Because last year 15 of the top 300 companies had their say on remuneration pay reports defeated. A further 20 of them had votes in excess of 20%. So if you weight that by market cap, roughly a quarter of the value of the Australian Stock Exchange, the shareholders think there's a serious problem with executive pay. It's not all the same problem, so some of it is simply too much, so the quantum in cash pay is way too much. Others, it's the structure. So, executives are getting rewarded while shareholders aren't.

JENNY BROCKIE:

Charles Macek let's talk specifics. You're on the Telstra board. You helped set CEO Sol Trujillo's package - received a lot of attention. In his first year he was entitled to up to $8.7 million in salary and other entitlements. In his second year he was entitled to up to $11.7 million and these are figures from the annual report and in his third year up to $13.4 million. Why was he offered so much money, potentially?

CHARLES MACEK, TELSTRA BOARD MEMBER:

Well, one has to understand that those numbers are an accounting item. They're not actually take-home pay even though most people in the community probably regard it as take-home pay. One really has to dissect the composition and there's a component that is fixed and that's disclosed - that's $3 million, and that's been fixed at that level for four years.  Then he has the potential to earn double that in terms of his short-term incentives - half of which he must take in the form of deferred shares which means the shares are bought at whatever the market price is at the time. He can't get access to those shares - in other words, he can't sell them until after he leaves so if the share price falls, obviously he loses value. He then has the potential to Australian number of options which are performance-based. Last year, the options that he had earned based on performance - he ended up forfeiting them because the shareholders did not get an adequate return. We put that in as an additional safeguard.

JENNY BROCKIE:

He was still potentially able to get that much money, wasn't he? You call it an accounting procedure but potentially that could have been what he got. It's just that the market in and various other things, you know, meant that he didn't get that much.

CHARLES MACEK:

I remember having a conversation a couple of years ago with someone who was commenting on his potential to earn an alleged $20 million a year and the comment I made was that every shareholder ought to be down on their bended knees every night praying that he earns that. Because the only way he could have earn that was if the company generated $40 billion of shareholders' return.

JENNY BROCKIE:

Well that hasn't happened, certainly. A lot of Telstra shareholders at home know that hasn't happened.

CHARLES MACEK:

He hasn't earned that potential.

JENNY BROCKIE:

What I’m asking is, why do you have to offer someone like him that much money?

CHARLES MACEK:

There's a notion that a lot of these executives are greedy and do they need to be paid so much to turn up for work? The honest answer is no they don't. But they are people like the rest of us and we all make relative judgments. So for example, am I tall enough, am I smart enough, am I thin enough, am I rich enough? To them, the scorecard in terms of their recognition, if you'd like, is where they stand amongst their peers. They will work for less money, but not when someone else is earning two or three or four times what they are.

JENNY BROCKIE:

Helen you're a Telstra shareholder, was Sol Trujillo worth the sort of money he was paid? What do you think when you listen to that argument?

HELEN DENT, AUST. SHAREHOLDERS’ ASSOC.:

I think there are some issues here that you need to dissect a little more. As far as the Australian Shareholders' Association is concerned, we want our executives to be paid well. But we don't want them to be paid highly if they only perform to an average level. And I quite agree with what Charles said - as a Telstra shareholder, I would love to have seen Sol Trujillo get a lot more take-home pay because that would have meant that - the company was performing better. But let's wind it back just a year, when the remuneration report had a rather significant 'no' vote. And we were very pleased to support the remuneration report for 2008 because we saw some reasonable changes. I think it's rather a pity that Sol Trujillo has not decided to stay the course to see things through.

JENNY BROCKIE:

OK. We'll get on to a little bit more about his package in a moment. But I'd like to just run through a couple of other examples if we can fairly quickly. Dean, last year you advised Boral shareholders to vote against CEO Rod Pierce's package. Why? What didn't you like about that package?

DEAN PAATSCH:

Because he got paid $5 million in cash when the financial performance of the company underlying that profit went down that year by 17%. That's it. It's simple.

JENNY BROCKIE:

It was that simple?

DEAN PAATSCH:

It’s too much cash.

JENNY BROCKIE:

We did invite Rod Pierce on to tonight and the chairman of the company Ken Moss. They both declined to join us. John Colvin, is that sort of money defensible at a time when a company's suffering a decline in profits?

JOHN COLVIN:

Well, I won't talk about the specifics but what is important is you get the corporate governors aspect right. The AICD is very keen - and we put out guidelines - to make sure you get the building block right. The building blocks really have to be that the board takes control of this issue and that all the, if you like, elements of that, such as remuneration consultants, lawyers, everything - report into the board. And that way you don't get what the Americans call executive capture. And you have - at least you have the basis, then, to go forward, and then set the pay in a proper way. And that may be, in these times, rethinking exactly all the system of pay that's in place. For example - short-term incentives, which we've spoken about, long-term incentives, maybe it's time to have a think about some old models which were simply a base pay, and then a discretionary bonus. The only problem with that is, when I was doing that in about 1850, I think it was something which was low amount of shareholders we weren't in the international market. But it does have a resonance in the sense that you can look at, you know, different models, which I think the directors are looking at in terms of - we are the AICD - putting it out to have a look at other models and other possibilities

JENNY BROCKIE:

Okay Michael Robinson you’re a remuneration consultant and you advise boards on what to pay their CEOs. What do you think of the Boral example?

MICHAEL ROBINSON, GUERDON ASSOCIATES:

I don't know the specifics of Boral, they're not a client. I think it's important to pick up on something John said - to make sure you have governance standards in place so that if shareholders don't like what an executive is paid, they can express their dissatisfaction. Australia is very fortunate in that shareholders can express that dissatisfaction with a shareholder vote. And that impacts directors in a big way, it impacts their reputation, and reputational risk for a director –

JENNY BROCKIE:

Doesn't necessarily change things, though.

MICHAEL ROBINSON:

I think you'll find it does change things. I think those that get large negative votes you'll see the next year around, the great majority of companies have changed their compensation policy. And we've just seen that with Telstra  and it does work quite well. Australia is one of the very few countries that have that governance process in place. There are only about six other countries in the world that have this sort of arrangement. The United States, in contrast, where executive pay is off the planet, does not have the same governance system that we have here.

JENNY BROCKIE:

OK. So everything is fine here?

MICHAEL ROBINSON:

Ahh. Now that's another question.

JENNY BROCKIE:

I'd like a short answer to that question!

MICHAEL ROBINSON:

Gee, Jenny, how long is your program?

JENNY BROCKIE:

Well, is everything fine? Is that fine? Somebody getting that sort of increase when the company is not doing well?

MICHAEL ROBINSON:

I think there are certainly egregious examples but how do you cope with that? We've found in other countries that when you put in black-letter law - law that says "This is exactly how you've got to pay people" - people find ways around that law. In fact, just to take the United States as an example - they've got probably more black-letter law than any other country about how you should pay people. Punitive tax rates and so on.

JENNY BROCKIE:

So you're saying no matter what we do, people will find a way around.

MICHAEL ROBINSON:

Ahh.

JENNY BROCKIE:

No, no - I am going to have to move on. OK. You're not giving me clear answers.

MICHAEL ROBINSON:

I think if you've got a good governance system in place, it's the best thing you can ask for. Shareholders can express their dissatisfaction. If directors don't respond, they walk with their investment.

JENNY BROCKIE:

Nick Sherry over to you. I mean, thank you very much for joining us from Perth. We know the productivity is inquiring into executive pay. Are these examples the sort of things you want to eliminate or are these the kinds of things you want to address?

NICK SHERRY, MINISTER OF SUPER AND CORPORATE LAW:

They're certainly issues we want to address, and examples we want to minimise. There are two parts to this equation. The first is the significant reform the Government's announced in respect to golden parachutes - termination payments.  There is significant anger in the community that's been building up over the last decade, and we've announced that the payout on termination will have to go to the shareholders where it exceeds one year's base pay. That's a very significant change and we'd be very confident that that will see largely the end of these extraordinary payouts on termination or retirement. They're just not justified. So that's an important change we're making.

The second area of course is what will be the contract details, the remuneration-based pay incentives when an executive is first employed. And that set of issues is the subject of the Productivity Commission inquiry.

JENNY BROCKIE:

Charles, on termination payments, I just wanted to quickly raise with you Sol Trujillo's resignation, and the fact that he's getting, I think $3 million as an exit payment. Why do you get paid $3 million when you resign?

CHARLES MACEK:

It was a decision made mutually and it's part of his contract and the contract was written four years a go, recognising that the shareholding community was accepting of the principle that there should be a maximum on the termination payment - the amount that is paid as a consequence of termination as opposed to vested benefits that he's not been allowed to take and that was set at 12 months' remuneration in line with what is proposed by the Government

JENNY BROCKIE:

Stephen Mayne, just a comment from you on that and other examples too, I know Toll Holdings' managing director, Paul Little for example, has come under scrutiny as well for the money he got.

STEPHEN MAYNE:

The Toll Holdings example is the most egregious one I've ever seen, where they were doing a demerger to separate a company called Asiano from Toll Holdings and as part of that, they had to buy out all the options that were outstanding. And they came up with a valuation of $55 million to buy out all these options and it turned out that was assuming the share price would be between $30-$40 in three years' time - the combined share price for the companies now is about $6. So these guys – the three executive directors got $20 million and all up $55 million was a payout for completely worthless options. And it was just outrageous.

JENNY BROCKIE:

Mm. Defensible, anyone? Anyone like to defend it? Michael? John? No?

JOHN COLVIN:

No, I think that's an area where had the Minister and directors would agree - payment for total failure is, I think, a real no-no.

JENNY BROCKIE:

Charles Macek, how do directors arrive at these figures and these packages for executives that we hear about - these multimillion-dollar deals? How do people like you work them out?

CHARLES MACEK:

Well, the starting point is to see what is the, I guess, the going rate in the marketplace. And the marketplace for the very senior executives, particularly of very large organisations, is global. Having said that we recognise that the culture in Australia is different, for example, from America and the level of salaries in America would never be acceptable in Australia. And then consultants are used to inform us with what the appropriate structure might be. Having identified the candidate that we believe is the best person for a job, for the CEO role, it then becomes a negotiation within the framework of what is considered to be acceptable.

JENNY BROCKIE:

Mm. We need a bit of transparency here. You're on five boards. How much are you paid?

CHARLES MACEK:

Ah, well ... In terms of my two public company boards…

JENNY BROCKIE:

Two public companies and three private, right?

CHARLES MACEK:

Yep. The two public company boards - it's on the public record in the case of Wesfarmers it’s in the area of $200,000. In the case of Telstra it is somewhat more, it's $300,000, because I chair the remuneration committee and I also sit on the audit committee.

JENNY BROCKIE:

Mm. Helen, how do shareholders feel about the relationship between boards and CEOs?

HELEN DENT:

It depends on who they are. We have some real problems with? Directors - chairmen in particular - who appear to be captured by the CEOs and who also appear to be captured by remuneration consultants.  It's definitely very worrying to shareholders.

JENNY BROCKIE:

What do you mean by being 'captured'?

HELEN DENT:

If you have, for example a CEO who says "Either you give me this and you work it out however you want to, either you give me this or I'm going to walk," "I can go to the US or the UK and get twice what I'm going to get here." Shareholders often feel that they'd like those CEOs to walk, thank you very much, because we'd like them to prove that they're actually worth what they're getting. Don't get me wrong - shareholders really do want to pay their senior executives, their CEOs in particular, what they are really worth because we want the best. What we don't want is to pay people for mediocre performance.

JENNY BROCKIE:

Harold?

HAROLD MITCHEL:

I sympathise entirely with that and I think people will understand. I was completely captured by the CEO of our business and have been since he was three.... He said to me "If I don't get more from age three onwards, I'm going to walk." It was a bit hard to do that. But I think - I've tried to build a business - I'm fairly new to the public-company business - we've had one since 2000, but a much bigger one in the last two years. Our family controls 40% of the shares. We have three directors and five are independent ones. I pushed very hard to make sure that there is a balance between all of it. I find a problem, sometimes, with independent direct, and I can see in Charles's case there and it's probably welcome to the support of Sol Trujillo's salary night but other than that, the difficulty of being an independent director with so much to do - that's a great problem.

JENNY BROCKIE:

Is the relationship too cosy, though? Do people feel - Stephen, is it a cosy relationship that directors have with CEOs Is it all cluby?

STEPHEN MAYNE:

I think we have a problem with collegiate boards and a lot of top chairmen are former CEOs themselves who have had big payouts. When Don Argis retired from the National Australia Bank, he got to keep his options which he probably shouldn't have. He's worth $30 million and he has gone on to Brambles and Southcorp and BHP and elsewhere. He's been involved in a succession of payouts and he is a former CEO himself who made a fortune. I think there is a problem with not enough strong, independent directors and chairs who can stand up to these very vigorous and aggressive CEOs and actually look them in the eye and say "Sorry, it's a bridge too far."

JENNY BROCKIE:

Yasmin is that hard to do if you're on a board?

YASMIN ALLEN:

I haven't had to do that, but yeah, I think it is hard to do. I think the board and management have to drive a middle line. You have to have an understanding of where each other was coming from, and you have to work together for the best interests of shareholders. So stand-up fights in the boardroom is something we try and avoid.

JENNY BROCKIE:

Nick Sherry is it too much of a cosy club that exists between directors and executives? How do you feel about the way these packages are being set?

NICK SHERRY:

It depends on the board. I mean, you don't have to have a stand-up fight with the CEO to hold them accountable, to question them and I think any effective board will do that without the necessity for brawls and arguments ongoing. It's important that you have contestability and questioning at board level. It's also very important, I think, that you have accountability independently to the board from a chief financial officer and the compliance officer. I think they're some important issues. I think generally in Australia - generally in Australia - boards do a pretty good job. But as far as setting remuneration goes, boards should be making that decision. There will be an input from the remuneration committee. There will be an input from consultants. But ultimately, it's the board who makes that decision and they should make the call and make sure it's done in a thoroughly transparent way, an accountability way and incentives are there to reward the executive if he performs - not just tracking the market index but he adds growth and value to shareholders in excess of the market index

JENNY BROCKIE:

So not just short-term incentives - not this kind of risk-taking that we've heard being encouraged by short-term things?

NICK SHERRY:

Well, incentives need to be long-term. And if, for example, it involves equity shares, they should be vested in the long-term some years beyond an executive leaving the company. I think there's been too much focus, particularly in financial institutions overseas, not so much here in Australia but overseas, short-term rewards - bonus - which have been to the detriment of the financial institution entity, and ultimately the detriment of the financial system.

JENNY BROCKIE:

Of course, shareholders do get a chance to vote on executive pay. Grace Muirhead, you own some shares in Telstra, is that right. How did you feel about Sol Trujillo's pay?

GRACE MUIRHEAD, SHAREHOLDER:

Oh, overwhelmed - Couldn't see myself even proving that type of thing. But obviously the board sees he does the job right, but I can't see the

JENNY BROCKIE:

Did you vote at all on the salaries?

GRACE MUIRHEAD:

I didn't vote, but in my conscience I did. I believe that if we've got some big problems at Telstra and we're not getting what we're paying for as a –

JENNY BROCKIE:

So why didn't you vote? Did you go to the meeting?

GRACE MUIRHEAD:

I'm a silent voter, I vote from my conscience. I don't have to go to the meeting, I just listen to what's on TV and take my own perspective. I don't have to be there, but I still have a vested interest.

JENNY BROCKIE:

OK. Adam Butler, you have quite a few shares, I think. Have you ever voted on CEOs' salary packages at a meeting?

ADAM BUTLER, SHAREHOLDER:

Yeah, I try and get involved all the time. I don't think it's worth anything but I try and get involved. I mean - one of the companies that I have shares in - 80% of the shares are owned by 150 shareholders. The other 17% or thereabouts, is owned by 232,000 shareholders. So what I'd like to see is a board of directors with representation from mums and dads. I mean, I'll put my hand up to be on the board of directors if it means I'll getting $200,000 to get information from consultants to, you know, make decisions.

JENNY BROCKIE:

Tess, what about you? You're a share owner. Have you ever voted for a CEO's salary package?

TESS LYMBERATOS, SHAREHOLDER:

Yeah, I have. And I have no problems with their salaries provided they're doing their job and they're bringing me money in at the end of, you know, as they're working. I have no problem.  If we vote against them or vote for their pay to go down, if they're not doing their job, then they wouldn't be there in the first place. If I'm getting my investment coming through, not a problem, I have no problem what money they get.

JENNY BROCKIE:

Pru Bennett, you're from Regnan, a corporate governance organisation. What percentage of shareholders actually vote on executive pay?

PRU BENNETT, REGNAN CORPORATE GOVERNANCE:

Looking at widely held companies, companies that don't have a major shareholder, it's just over 50% now and that's increased quite markedly in the last 10%. when it was below 30%.

JENNY BROCKIE:

What rights do shareholders have if they don't like the way a company's executives are being paid?   

PRU BENNETT:

Well, from institutional shareholder perspective, they can vote against the remuneration report, which is non-binding and that can send a strong message to the board and if they feel the message isn't getting to the board, they can turn to the election of directors, and in particular the chair of the remuneration committee. In Australia, we have a system where more than 50% of the shareholders vote against the director, that director can be voted off the board.

JENNY BROCKIE:

So they can vote people off the board?

PRU BENNETT:

Correct, so if they are really unhappy then that is a solution for them.

JENNY BROCKIE:

That doesn't happen that often, Stephen Mayne, and you know you've run unsuccessfully for 33 boards. Why?

STEPHEN MAYNE:

I run just to raise attention, but I'm the only person who loses corporate elections in Australia. The average director in Australia gets 96% of the vote. I was amazed last year when the chairman of ABC Learning when it collapsed, who'd been the chairman of their audit committee for several years beforehand, was re-elected to Trans Urban and Lend Lease – two of our top 50 companies with more than 65% in favour.

JENNY BROCKIE:

So that that mean that the shareholders are happy?

STEPHEN MAYNE:

Well the 34% vote against was considered a revolution, but he's still got another three years and $700,000 to … in my view if you preside over a billion dollar collapse you should be out. In Australia the shareholders just won't vote against directors because it's too much of a club and they don't want to upset the apple cart.

JENNY BROCKIE:

You've got a fan up there! Maybe he'll vote on you on a board. Helen Dent, why aren't people getting voted out? If there is unhappiness - we know people are really unhappy with some executive salaries. Why isn't something giving here?

HELEN DENT:

Well, the reason why, often, shareholders don't take seriously their responsibility, and therefore don't vote, is because they don't think that they can make a difference. That's where an organisation like the Australian Shareholders' Association can, in fact, come into its own. The gentleman over here said he couldn't see that there was any point in actually voting. But there is a point. Often - and increasingly more often than not - the Australian is Shareholders Association finds itself in the situation where it has voting power equivalent to a top-10 to top-20 shareholder. The only we can do that is by aggravating votes.

JENNY BROCKIE:

What about institutional shareholders? We hear about individual shareholders all the time.

HELEN DENT:

We put pressure on the institutional shareholders to take their position responsibly. They are, in fact, just another retail investor. They should be telling their investors how they are voting and why.

JENNY BROCKIE:

Talieh, you're in the management team of the superfund, with 21 billion under management. How often have you used your muscle to try and get executive salaries voted down?

 TALIEH WILLIAMS, UNISUPER:

We vote against remuneration reports in around 10% of instances. In terms of directors we vote against directors around 15% of the time. And we vote all our stock both domestically and internationally. We take our role as an active shareholder extremely seriously and we think that voting and engagement is very important.

JENNY BROCKIE:

How often do boards take notice of you?

TALIEH WILLIAMS:

I would say quite regularly, because we are quite a large shareholder. So, for example, where there has been contention around remuneration reports in the past, those organisations have been very proactive in meeting with UniSuper and other large shareholders to discuss any potential changes they might be making to those practices to see or gauge how comfortable we are as a shareholder with those.

JENNY BROCKIE:

Charles, at Telstra's AGM in 2007, the shareholders voted against Sol Trujillo's package, didn't they? A majority of shareholders?

CHARLES MACEK:

A majority of those who voted, yes.

JENNY BROCKIE:

Yet it still went ahead. Why?

CHARLES MACEK:

You can't renege on an existing contract. The board firmly believed that what was put in place at that time was appropriate for the company. Having said that, no board, I think, is insensitive to its shareholders. We actively engaged with them and that's certainly been one of the major positives coming out of the non-binding vote. There is a lot of dialogue and communication between the board and shareholders as opposed between management and shareholders and  we certainly took on board that feedback and improved our communication, changed the format for the following year and we got a resounding approval.

JENNY BROCKIE:

Dean, you advised Telstra shareholders twice not to approve Sol Trujillo's pay. Is that right? I mean, is that the response

DEAN PAATSCH:

Well, Charles is right in saying that there were significant improvements last year. But I think we've got to accept that there actually is a mismatch between the very high vote that directors get as an endorsement and it's not the same as saying that shareholders are contented. I think there was an outgoing chairman of Wesfarmers who made a very good point last year at the AGM when the Wesfarmers report was voted down. He said "Look, there's an inconsistency that the same directors that put this package in place were re-elected with 96% of the vote." There's an information problem. We don't - the institutional shareholders really can't work out which directors are doing a good job and which directors are doing a bad job or they're just not prepared to vote against them.

JENNY BROCKIE:

Nick Sherry, the Opposition has suggested that shareholder votes should be binding in order to control executive salaries. You've rejected that idea. Why?

NICK SHERRY:

Well, there are some practical issues here. In contrast to termination payments, golden parachutes, where I certainly believe it is practical for shareholders to exercise the vote where it exceeds one year's base pay, there are difficulties in presenting a package for a executive to be employed. You want some certainty around when that person is going to start work and practically it might take a significant number of months to receive approval from the shareholders. And if they reject it, you go back again. So I think that set of practical difficulties needs to be considered and the Productivity Commission will do that. To come back to your earlier issue about accountability and the role of superannuation funds - I think if we look at superannuation in Australia, it's almost unique to comparable economies - the community are shareholders - Compulsory superannuation - they are indirectly the shareholders of about 26%, on average, and it's increasing. And I think there is an important role - the majority of superannuation-fund trustees exercise their duties and responsibilities on behalf of their members, but a significant minority do not. And I think we can improve accountability, particularly around what is a disconnect, quite often, between shareholders voting against a remuneration package of a board - board decision - and then re-electing the same board some years or a year later. There's a disconnect there, so improving accountability through superannuation funds, I think, will have a very, very powerful impact, particularly if they, as major shareholders, act together. I think that will be very, very powerful and bring about very powerful change. And that's going to be one of the issues that the Productivity Commission will consider as a package of reforms.

JENNY BROCKIE:

Michael Trail, you were the executive director working at the Macquarie Group for 15 years, I think, before you walked away with between $3 million and $4 million. Were you worth it?

MICHAEL TRAILL, FORMER MACQUARIE GROUP EXECUTIVE:

I never felt I actually was, to tell the truth. The day I started at Macquarie Bank as a kind of wet-behind-the-ears 27-year-old, I started on a package that was slightly in excess of that as my father, who is a high-school teacher and principal of a 600-student school. It never occurred to me that I was worth more than what he was doing in a very important job to society. I've always had this notion that I was lucky enough to play a game where I was paid extremely well for performing and for staying around.

JENNY BROCKIE:

How much did you return for the company and how much did you get each year after that?

MICHAEL TRAILL:

I mean, the Macquarie pay fall philosophy is to reward people when they perform. That's not a fixed formula, but you have the opportunity to earn equity and bonuses which, if you stay around, they vest over time. So there's a big incentive to stay there but ballpark, that can vary between 3% and 5% of what you might be directly attributable for in terms of what you generate.

JENNY BROCKIE:

Of course Macquarie has just recently announced the slashing of cash bonuses to a number of its senior people. The highest paid exec we've heard of is Allan Moss, whose remuneration package was up to $33 million in 2007. You were at Macquarie when he was there. Was he worth it?

MICHAEL TRAILL:

He was a very good CEO but I think the point about this - Harold Mitchell raised it before - is that as a society, we have to be sensitive about the explosive acceleration of CEO packages. I mean, do we think that it's reasonable that over a 6-year period, CEO packages have, in aggregate, grown 96%. This is top 100 CEOs while the average weekly earners - the growth has been 32%. I think there are a few issues around how we assess what it is people are worth and how they're paid.

JENNY BROCKIE:

I should point out we invited Allan Moss on tonight too and unsurprisingly he declined too to come on the show. Dean Paatsch I did mention that Macquarie has cut the cash-bonus system to some of its staff but under Allan Moss, the share price did go right up. I mean, it went from $19 in 1999 I think, to $52 in 2008. It's gone back down again now. But why not reward him handsomely for that?

DEAN PAATSCH:

Well, if paying the most gets you the best that means that Phil Green from Babcock & Brown, who is the mini Macquarie, was the second-best CEO Australia has ever seen. It means that the CEOs of the insolvent US banks were the best management teams of all time. The two things don't necessarily go together.

JENNY BROCKIE:

What so what are you saying? What is the salary tied to, is it tied to success, or is it not? Is it tied to failure, to the share price? What determines who gets the money?

DEAN PAATSCH:

I don't think anyone begrudges people earning very well if they create genuine long-term performance of the company. Our beef has always been with these types of packages that they pay far too much out in cash on short-term fictitious, or bogus, accounting profits. That's not the case with Macquarie. Macquarie have changed their scheme much to the better. But if you look at the US examples and closer to home with Babcock & Brown, that's certainly what they were doing. And it's been shown to be a sham.

JENNY BROCKIE:

John Colvin, a response from you to that?

JOHN COLVIN:

Well, I think the main thing is that, you know, we have really good corporate governance as a whole in Australia. We have non-executives in the main - non-executive directors which are not the executives - controlling pay. That has been a huge influence on Australian pay and keeping it in check, unlike America, where you can have the executive also being the chairman and so you get those mixtures. That's one issue. The other issue is we, in Australia, the AICD, which we are very proud of, run an education for directors which is regarded as the world's best practice. And education, training and in particular in relation to remuneration committees, how you do these sort of things, is vital. I think we're in a reasonably good shape in this area.

JENNY BROCKIE:

Michael, do you think Australian shareholders are getting value for money from their CEOs?

MICHAEL ROBINSON:

On a global basis, yes. You look at our CEOs or executive pay in general relative to other countries- it's certainly lower than the United States. The US chief executive would be paid two to three times an Australian chief executive for managing the same-size company. In the UK, it would be 20%, depending on the kind of industry you were in, sometimes 30% more - France, about 15% more. And so on. It's not bad on a global scale. There aren't many other countries with as good a value for money, I think - maybe Japan, obviously, is a good example, and Sweden might be another one, but very few others.

JENNY BROCKIE:

Stephen is raising his eyebrows here about value for money.

STEPHEN MAYNE:

Well we have some sensational CEOs – like Brian McNamee at CSL who took a company to the world and we don't begrudge the fact that he is worth $30 or $40 million. I think it is over the top in some examples and this AGM season coming up - we've got a big vote at Westfield and Frank Lowey the founder and his three sons they took out $32 million last year in salaries - down from $35 million from the year before. And the share price has halved. They're getting almost $200 million a year in dividends. Why can't they be more like James Packer or Harold Mitchell and work for nothing? There are some chairs who work for nothing.

JENNY BROCKIE:

Harold is not getting nothing, but you're not getting salary.

HAROLD MITCHELL:

Stephen always speaks kindly of me - thank you so much for raising that whole thing. Just to explain that, Jenny - when we had a big public company, I took the view that we have a lot of shares, many which we have bought and others which came into the business over 30 years of building our family business. So I didn't take a salary as chairman. And I think that's right and proper. I get paid quite well, Stephen - it's all OK, thank you for worrying about me - because I take out what all the other shareholders do - an amount of dividend per share.

JENNY BROCKIE:

What does that represent?

HAROLD MITCHELL:

I happen to have a lot of shares, so that's - 85 million shares, Stephen, by 3.9 cents.

STEPHEN MAYNE:

About $2.5 million a year.

HAROLD MITCHELL:

Incredible.

JENNY BROCKIE:

I'm glad you did that!

HAROLD MITCHELL:

I don't have to take a salary because of that, and it's the same with my son. He's got a lot of shares too.

JENNY BROCKIE:

What about performance, that's what I'm interested in. How well-tied to performance are these figures - how do you measure it - should it be measured by the share price, or not

HAROLD MITCHELL:

In my case, that was the view that I took - it would be exactly by the share price. I have got no problem at, all as many have said here - if someone is very well paid if the shareholders are doing enormously well. And the figures I said before where we're getting well ahead of the odds - often that was international - mostly that was American. And it was 0.1% that makes it really bad for everything else. We've got incredible companies here led by amazing people who should be very well paid.

JENNY BROCKIE:

Dean?

DEAN PAATSCH:

That's - this is just not happening, though. Last year, top 100 companies - 45% of top-100 CEOs got a bonus in excess of 100% - a short-term bonus in excess of 100% of their salary. Only 6% got a bonus that was less than half of their salary. And if you look at what happened across the top 750 companies in Australia, last year, base pay - what they got just for turning up at work - increased. So cash pay increased by 20% last year. In a year where the stock market cratered by 40%. These things - the cash pay - is not tied to performance. The LTI, the options, the shares, may be.

JENNY BROCKIE:

Long-term incentives, folks at home, LTIs.

DEAN PAATSCH:

They may be. There's not a lot of evidence at all that short-term cash pay is tied.

JENNY BROCKIE:

Charles, is that right?

CHARLES MACEK:

To some extent. We need to bear in mind that, right now, we're going through a global financial crisis. I think the Australian Government is making it very clear that this economy is not immune to the influences of what's happening globally. And I think that if one looks at the opinion polls, the Australian community accepts the reality that it is not the fault of the Australian Government. And yet when we talk about executive compensation, we are blaming corporate Australia for the low share price which, in fact, reflects the impact of the global financial crisis. There's a double standard being applied.

JENNY BROCKIE:

Stephen, is that reasonable?

STEPHEN MAYNE:

Babcock & Brown went to zero. How low do you want to go Charles? They took out a couple hundred million in cash since it floated and blew up 10 billion and I just think it is wrong.

CHARLES MACEK:

I agree with you, Stephen, but you're highlighting the exception to the rule, and you're using the exception to the rule to blacken all corporate executives.

STEPHEN MAYNE:

I thought we just heard that base pay has gone up by 20%. I haven't seen average weekly earnings go up 20%. Base pay up 20% in a falling market - shouldn't base pay be steady or coming down a little bit, rather than going up when things are tough?

CHARLES MACEK:

Don't you think it's hard managing in this sort of economy? The job is toucher, much tougher.

JENNY BROCKIE:

I want to hear what you want from this Productivity Commission inquiry and what you think it might achieve. Stephen Mayne, what would allow you like to see?

STEPHEN MAYNE:

I'd love to see the tax concessions to CEOs who get to pay only 26% on their shares eliminated. I'd also love to see far more power for shareholders and things like CEOs being up for election. In Australia, CEOs don't get put up for election. You never vote to see Sol Trujillo being on the board cause he’s got an exemption - get rid of things like that, disclose funds managers pay, make institutions reveal how they're voting. A whole shopping list of stuff they should do

JENNY BROCKIE:

Dean what would you like to see?

DEAN PAATSCH:

I'd like to see the myths challenged that pay is tied to performance. I think that we need some rigorous work on that - that it is a functioning marketplace for executive labour. Like Stephen, I'd really like to see the taxpayer subsidy on CEO pay removed. It's an outrage that –

JENNY BROCKIE:

Can you explain that how that works for people at home

DEAN PAATSCH:

Basically, I can construct a scheme for you to pay you in shares. The most that you will pay in tax is 26%. I mean, that's a joke. That's an absolute joke. All pay should be tax-neutral. It's the result of your labour, and you should pay income tax on it.

JENNY BROCKIE:

Nick Sherry, your response to that? Is that the kind of thing you'd like to see the Productivity Commission recommending, a change in that area?

NICK SHERRY:

Well, what they will deal with that issue because I've specifically asked them to. It's a legitimate concern. To go back to an earlier point that was made - I don't believe the Australian community, or anyone, for that matter, are blaming corporate Australia in the leadership of corporate -- and the leadership of corporate Australia for the current financial and economic crisis. It is well understood in the Australian economy that the current financial and economic crisis has its origins in the United States and we're not immune from that.

What I do think needs to be understood is, in the communist, and where I live, I have people raise these issues about executive pay and their superannuation fund returns every day of the week - there is an anger, because they have seen executive pay and particularly termination payments, grow rapidly over the last decade when we had a booming economy. What they want to see now - and I understand and agree with the sentiment - is that if the share price and we know the share price is coming down - then logically, if it was tracking up, pay was tracking up when the share price was going up and the economy was doing very well - it is going doing to need to track down on the same logic of the argument when times are not so good.

 And the community view, particularly given my earlier example of their ownership through superannuation funds - the community view and the community expectation, adding on top of that growing unemployment, cannot be separated from the decisions that boards make in this regard. And the other point I'd make is it's important to maintain faith and restore confidence in a capitalist and market economy. I mean, faith and confidence in our market economy, particularly overseas, has taken enormous battering. This is part and parcel of the necessity for government where it sees excesses in a capitalist-market economy - it is necessary to intervene at times in a selective way to provide - to underpin confidence in the economy going forward. Because faith is declining rapidly and whether it's legitimate or not, the bulk of the community see this as a legitimate concern that they want Government to deal with, and boards are going to have to do that as well and face up to that.

JENNY BROCKIE:

OK. We are going to have to leave it there, I'm afraid. I still had a lot I'd like to ask you, Nick Sherry and a lot I'd like to talk to everybody here about. Thank you very much for joining us.