The push back against big bonuses in corporate Australia will face a major test this week at the annual general meeting of power company AGL, an ASX50 company.
The electricity provider is facing its first AGM after recording a first strike — a vote of 25% or more of shareholders — against its remuneration report at last year’s meeting of shareholders.
If the company gets a second protest vote, the board of directors is spilled and must face a vote by shareholders.
Last year there were more than 100 strikes, some as high as 84%, against remuneration reports at company AGMs, among them the Commonwealth Bank, Australia’s biggest company by market capitalisation.
The annual Governance Institute of Australia Ethics Index shows executive pay is a major issue, with 77% of Australians believing a CEO salary of $3 million a year — about 50 times the average Australian wage — is unethical.
In the case of AGL, former prime minister Tony Abbott has described chief executive Andy Vesey as an “extortionist” who benefits from rising power bills.
In the 12 months since its first strike, AGL has been preparing for this AGM on Wednesday. Along the way it has gathered heat from the federal government about its planned shutdown of the coal-fired Liddell power station in NSW.
A key reaction to the first strike, according to the company’s annual report, is to freeze the base pay of CEO Vesey for the 2018 financial year.
Vesey joined AGL in January 2015 from the US-based AES corporation, a global power company where he was chief operation officer.
Since then he’s had two pay rises at levels well above the national average of less than 2%.
In 2016, the board increased Vesey’s fixed pay by 10.5% to $2.1 million. And last year he got another 9.5%, pushing the base rate to $2.3 million.
Vesey’s total pay was $6.9 million last year, 63.5% of it bonuses.
This is his short term incentive performance scorecard for 2017:
However, this year his bonus has been reduced in size, or at least the potential payout is now smaller.
The short-term incentive is down by $460,000 after the target short-term incentive target was cut to 100% of his base pay from 120%.
Les Hosking, an AGL board director and chairman of the People and Performance Committee, says his main focus over the last 12 months has been listening to the concerns of shareholders following the first strike.
“The board believes Mr Vesey’s remuneration package is warranted by his skills and experience and his remuneration outcomes during his tenure to date reflect strong strategy delivery and financial performance,” says Hosking.
The AGL share price has increased 70%, to $23.40 at Friday’s close from $13.71 when Vesey started.
The board of directors also point out that total shareholder return has increased 104.2% in the same time, as this chart shows:
In 2017, statutory profit after tax was $539 million, up from a loss of $408 million. Underlying profit after tax was $802 million, up 14%.
And the dividends have been flowing. The annual payout to shareholders for the year to June was 91.0 cents a share compared with 68 cents previous year.
However, the Australian Shareholders’ Association (ASA), which has voted against the remuneration report for the last two years, will do so again this week.
It believes that AGL hasn’t done enough to moderate or make bonuses less reliance on so-called “soft” targets.
“ASA would have thought that a full review would have been undertaken by the board (after the first strike),” the association says. “Unfortunately, this did not occur, although limited consultations did occur.”
The association believes the pay rises for Vesey were excessive and that the current non-financial targets for the short-term bonus “appear to be very soft” with performance awarded for completing a to-do list rather than achieving an outcome.
An example of this is the transformation performance measure, where customer experience is a target.
The ASA points out that customer numbers have fallen by 28,000 since 2016 but in 2017 Vesey was still given a maximum score on this.
Proxy advisors are reportedly recommending that this year’s remuneration report be accepted. However, even if all institutional shareholders, which between them hold about 62% of the company, there are theoretically enough retail investors to get a second strike.
The idea that fat bonuses, for doing little more than turning up to the office, should be stopped has so far had a slow penetration into corporate Australia.
There are some stand out examples of CEOs pay getting marked down, such as Rob Scott who will be paid about $3 million less when he replaces Richard Goyder in November at Australia’s biggest private employer, Wesfarmers.
However, the big majority of CEOs at Australia’s biggest ASX-listed companies still get a bonus despite shareholder activism to rein them in.
The latest annual survey of CEO pay by the Australian Council of Superannuation Investors showed 86% of ASX100 CEO’s received a bonus in 2016.
And when a bonus was paid, the median was 69% of the maximum payout. Only 18 CEOs in the ASX100 received less than half of their maximum potential.
“The prevalence of CEO bonuses at consistently high levels raises serious questions about the way performance hurdles are being designed and applied,” says council CEO Louise Davidson.