Should we pay boards more?
As we head into annual general meeting (AGM) season in Australia, one of the topics that will no doubt receive some focus will be management remuneration. This is increasingly a vexed issue in Australia and other developed markets, with management remuneration generally having skyrocketed in relative terms in recent decades.
As investors, we are happy to see highly skilled managers being appropriately remunerated, particularly if they are applying those skills diligently in challenging operating conditions. We are big fans of reward for merit. However, in aggregate, it is very hard to believe that shareholders in large ASX-listed companies today are being offered a balanced deal when it comes to the overall level of management pay.
This is a difficult issue to address, as boards naturally want to attract “the best” talent, and if other companies are paying at elevated levels then it becomes hard to attract said talent without offering something comparable. If all companies lowered the rate of management pay in concert then a more balanced position might be approached, but absent co-ordinated action the problem has something of a “prisoner’s dilemma” aspect to it, in that a single company going it alone may find itself at a competitive disadvantage over time if others do not follow suit.
Having said that, the rewards for reining in management remuneration could well be worth the risks. Research studies over time have found that companies that are more frugal in terms of remuneration tend to perform better than those that pay up for the “best” talent. Sometimes by a very large margin.
Perhaps one solution could be to reward boards of directors more generously for taking on the challenge of controlling management remuneration. For example, boards could be awarded substantial bonuses tied to delivering outperformance vs peers. The relevant board KPIs could include things like total senior management remuneration as a percentage of profits. I’m sure that remuneration consultants could readily be found to advise on the appropriate structure for such a board incentive scheme.
I imagine that over time this sort of scheme could come to rival the success of the 1935 introduction of cane toads in North Queensland to control cane beetles.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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