CEOs gouging shareholders?

The number of CEOs running our top 300 companies who earn more than $1 million a year, has risen 16% to a record 226 in 2012.

That’s according to the Australian Financial Review’s (AFR) 14th annual survey of executive salaries. Executives have become skilled at convincing boards to increasing their pay packets, despite poor financial or share price performance. No wonder so many companies are receiving ‘strikes’ against their remuneration reports, which often provide for increases in executive salaries, that bear no relation to the company’s performance.

The AFR has reported that the federal government is set to release new rules that would require companies to claw back wrongly paid bonuses and disclose chief executives’ actual ‘take-home’ pay. Several companies have already adopted this approach including Qantas Airways Limited (ASX: QAN), BlueScope Steel Limited (ASX: BSL) and Macquarie Group Limited (ASX: MQG).

The problem for boards and shareholders is that remuneration packages have also become more complex, with salary increases and cash bonuses exchanged for deferred share incentives, and other benefits. According to the AFR, in some cases, it’s impossible to work out the value of short-term and long-term incentives for some companies’ CEOs. The Australian Shareholders Association says that boards are compensating for bonus cuts by inflating base pay and increasing long-term incentives.

As an example, Australia and New Zealand Banking Group’s (ASX: ANZ) chief Mike Smith took a pay cut last year, but still managed to increase his take-home salary to $12 million, thanks to options and shares granted in previous years.

The Foolish bottom line

Several directors have suggested that new laws will increase complexity and force boards to spend more and more time on remuneration and less on creating shareholder value. On the other hand, paying executives over-the-top salary packages could be argued as destroying shareholder value. The onus is now on directors to create remuneration strategies that are simpler, easier for shareholders to understand and don’t take up so much of their time.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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