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Revealed: how ANZ executives can earn 300% bonuses – live Revealed: how ANZ executives can earn 300% bonuses – live
(35 minutes later)
Elliott says another reason why individual executive compensation should not be published regularly is because it can lead to pay inflation across the industry. The day has finished off with Orr asking questions about ANZ’s response to the Sedgwick review.
Elliott: “I think it’s a reasonably well accepted - it may not be - but reasonably well accepted view that actually the regime of disclosing senior executive compensation has actually led to inflation in executive compensation. Elliot will be back tomorrow at 10am, so we’ll hear more from him then.
Commissioner Hayne: “Well, there’s an inevitable arm’s race aspect to it? Stay with me? I’ll gather my thoughts for a wrap of the day’s proceedings.
Interesting.
Orr wants to know if ANZ has a clawback mechanism to reclaim remuneration after it has been paid to its Australia and New Zealand executives.
Elliott: “So I would have to get some advice on this. My recollection is that in practice we do not. Now, whether it’s legally it’s somewhere in the deed …”
Orr: “Are you aware that the panel that conducted the prudential inquiry into CBA recommended that CBA move to introduce the potential for clawback in respect of serious misconduct?
Elliott: “Yes, I am.”
Orr rounds out this line of questioning by asking Elliott about his own remuneration.
Orr: “We know why your variable remuneration has been reduced, Mr Elliott.
“You tell us in your statement that it has been reduced on account of conduct issues raised in the royal commission and consequent reputational damage?
Elliott: “Yes.
Orr: “And I just want to complete this questioning and ask you to reflect on what the difference is between publication of the consequences for you and publication of the consequences for your senior executives?
Elliott: “Well, it’s a simplistic answer but I am the chief executive. I’m the ultimate accountable person beside our board for this. I have a higher degree of responsibility and accountability than anybody else in the company. What comes along with that is more public scrutiny and involvement in, in this case acquiring of shareholder approval. I think that’s entirely appropriate. Could it go deeper in the organisation? That’s open to discussion. But I think I am – it is different for the chief executive.”
Orr: “How much was your variable remuneration reduced by?”
Elliott: “My variable remuneration in total again was reduced – I think it was 23% year on year, if I’m not mistaken, or something like that.
Orr: “It looked to us as though it was reduced to 75% of your short-term target and 83% of your long-term target. Is that right?
Elliott: “So that’s versus target but I didn’t receive a target last year … so year on year the blend was down, I think, 23%.”
Elliott says another reason individual executive compensation should not be published regularly is because it can lead to pay inflation across the industry.
Elliott: “I think it’s a reasonably well accepted – it may not be – but reasonably well accepted view that actually the regime of disclosing senior executive compensation has actually led to inflation in executive compensation.”
Commissioner Hayne: “Well, there’s an inevitable arm’s race aspect to it?”
Elliott: “Correct.”Elliott: “Correct.”
Elliott doesn’t want to be explicit about why ANZ executives have had their bonuses cut because he doesn’t want to create a “culture of fear”.Elliott doesn’t want to be explicit about why ANZ executives have had their bonuses cut because he doesn’t want to create a “culture of fear”.
Orr: “Can I suggest to you that it’s not so much about a public shaming; it’s just a part of holding them accountable?Orr: “Can I suggest to you that it’s not so much about a public shaming; it’s just a part of holding them accountable?
Elliott: “Again, with respect, I understand the attraction of that. I am suggesting there are risks with that approach that I think outweigh the benefits.”Elliott: “Again, with respect, I understand the attraction of that. I am suggesting there are risks with that approach that I think outweigh the benefits.”
What are the risks?What are the risks?
Elliott:Elliott:
We run an organisation that is large. I have 40,000 people who come to work every day at ANZ in 33 countries. They have all sorts of backgrounds. They are all sorts of circumstances, beliefs, religions, ethnicity, etcetera. For me to be able to confidently assess that I can nail that communication and it not to be understood that it not to create a culture of fear, I think would be extraordinarily difficult. And I believe that we can do that in more general communication, rather than, to your suggestion, of essentially publishing performance assessments of the most senior executives of this company.”We run an organisation that is large. I have 40,000 people who come to work every day at ANZ in 33 countries. They have all sorts of backgrounds. They are all sorts of circumstances, beliefs, religions, ethnicity, etcetera. For me to be able to confidently assess that I can nail that communication and it not to be understood that it not to create a culture of fear, I think would be extraordinarily difficult. And I believe that we can do that in more general communication, rather than, to your suggestion, of essentially publishing performance assessments of the most senior executives of this company.”
The royal commission is spending so much time looking at the remuneration regimes in Australia’s banks.The royal commission is spending so much time looking at the remuneration regimes in Australia’s banks.
Do you think it’s a safe bet that Hayne’s final report will contain recommendations on remuneration that won’t be welcomed by bank executives?Do you think it’s a safe bet that Hayne’s final report will contain recommendations on remuneration that won’t be welcomed by bank executives?
An entire global industry has built up around executive pay, with the accompanying growth in vested interests. The gravy train is long and sweet.An entire global industry has built up around executive pay, with the accompanying growth in vested interests. The gravy train is long and sweet.
Orr wonders why ANZ doesn’t send internal communications to its staff to tell them why specific executives had their bonuses cut.Orr wonders why ANZ doesn’t send internal communications to its staff to tell them why specific executives had their bonuses cut.
Elliott says it would be demotivating for ANZ’s executives.Elliott says it would be demotivating for ANZ’s executives.
Orr: “Why not, within ANZ, send a message to your staff by identifying the people who have been the subject to remuneration consequences for risk reasons?Orr: “Why not, within ANZ, send a message to your staff by identifying the people who have been the subject to remuneration consequences for risk reasons?
Elliott: “I understand the attraction of that idea. However, going back to something we talked about before, we’re here to manage the company for the long term. I would hope that it’s understood that implicit in our decisions is my decision that they are the right executives to build the company for the long term. So I wish to retain their engagement and their motivation. That does not mean I do not hold them accountable when things have gone wrong. But I think some sort of ritualistic public shaming of individuals would be of little value and, in fact, potentially significantly negative consequence in terms of attracting, retaining, motivating the very best people for the future.”Elliott: “I understand the attraction of that idea. However, going back to something we talked about before, we’re here to manage the company for the long term. I would hope that it’s understood that implicit in our decisions is my decision that they are the right executives to build the company for the long term. So I wish to retain their engagement and their motivation. That does not mean I do not hold them accountable when things have gone wrong. But I think some sort of ritualistic public shaming of individuals would be of little value and, in fact, potentially significantly negative consequence in terms of attracting, retaining, motivating the very best people for the future.”
Elliott tries to explain himself.Elliott tries to explain himself.
I think in the remuneration report from the directors, they do refer – I would have to refresh my memory – but they do talk about the generic decisions they’ve made about how they come to determine the appropriate [bonus] pool and ranking for people.I think in the remuneration report from the directors, they do refer – I would have to refresh my memory – but they do talk about the generic decisions they’ve made about how they come to determine the appropriate [bonus] pool and ranking for people.
“I think they even talked about – and they will talk about it later – had applied downward adjustment to equity that had previously been awarded to previous executives.“I think they even talked about – and they will talk about it later – had applied downward adjustment to equity that had previously been awarded to previous executives.
“So they talk in general terms but not in specific.“So they talk in general terms but not in specific.
“I accept that on reading the annual report it would be difficult, if not – well – impossible, for anybody to determine why an executive received what they did, whether that was below, at or above target. There is no subjective description of that for them.“I accept that on reading the annual report it would be difficult, if not – well – impossible, for anybody to determine why an executive received what they did, whether that was below, at or above target. There is no subjective description of that for them.
“For myself, it’s slightly different, in the sense that while it may not be in the formal report, there is dedicated, deliberate time at an AGM where my own remuneration or parts of it have to be approved and there is generally a discussion at – of my performance, if you will – on those factors at that time.“For myself, it’s slightly different, in the sense that while it may not be in the formal report, there is dedicated, deliberate time at an AGM where my own remuneration or parts of it have to be approved and there is generally a discussion at – of my performance, if you will – on those factors at that time.
“But the others, you are correct.”“But the others, you are correct.”
Orr wants to know why more detail isn’t included in the remuneration report. “Wouldn’t it be a powerful way, Mr Elliott, to admonish your senior executives for failings in relation to risk, compliance or conduct, to identify those remuneration consequences that had been taken in response to those failings publicly?”Orr wants to know why more detail isn’t included in the remuneration report. “Wouldn’t it be a powerful way, Mr Elliott, to admonish your senior executives for failings in relation to risk, compliance or conduct, to identify those remuneration consequences that had been taken in response to those failings publicly?”
Elliot: “It might be. I think we would have to consider unintended consequences, procedural fairness, etc.”Elliot: “It might be. I think we would have to consider unintended consequences, procedural fairness, etc.”
ANZ shareholders kept in darkANZ shareholders kept in dark
There’s a long discussion about the reasons why, for the 2018 financial year, there were four instances of a current or former ANZ senior executive suffering a cut in their variable remuneration for reasons relating to risk, conduct or compliance.There’s a long discussion about the reasons why, for the 2018 financial year, there were four instances of a current or former ANZ senior executive suffering a cut in their variable remuneration for reasons relating to risk, conduct or compliance.
It turns out ANZ shareholders have been kept in the dark about the details.It turns out ANZ shareholders have been kept in the dark about the details.
Elliott was one of the executives who had his pay cut. The other three executives had their variable pay slashed due to issues with risk management.Elliott was one of the executives who had his pay cut. The other three executives had their variable pay slashed due to issues with risk management.
Elliot says the pay was cut for the three executives in recognition of the fact that ANZ had not met the standards it had set itself for risk management, some of which has actually been publicly discussed at the Royal Commission.Elliot says the pay was cut for the three executives in recognition of the fact that ANZ had not met the standards it had set itself for risk management, some of which has actually been publicly discussed at the Royal Commission.
Elliott: “So, for example, the failure to remediate issues on time would be a good example. That was taken into account. As a result of that, those executives received ... less than their target remuneration.”Elliott: “So, for example, the failure to remediate issues on time would be a good example. That was taken into account. As a result of that, those executives received ... less than their target remuneration.”
But the exact figures are subject to a non-publication order - so we don’t know what they are.But the exact figures are subject to a non-publication order - so we don’t know what they are.
Elliott says they are in ANZ’s remuneration report, but Orr says that’s not the case.Elliott says they are in ANZ’s remuneration report, but Orr says that’s not the case.
Orr: “We’re told that they’re not and that was the basis of the application for a non-publication direction, Mr Elliott. I do want to take that up with you. Do you say that someone reading the remuneration report in your annual report can see that each of those three individuals had their variable remuneration reduced - not just reduced but reduced because of risk, compliance or conduct reasons?”Orr: “We’re told that they’re not and that was the basis of the application for a non-publication direction, Mr Elliott. I do want to take that up with you. Do you say that someone reading the remuneration report in your annual report can see that each of those three individuals had their variable remuneration reduced - not just reduced but reduced because of risk, compliance or conduct reasons?”
Elliott: “No, they cannot.”Elliott: “No, they cannot.”
Orr: “And why not?”Orr: “And why not?”
Elliott: “Well, that’s a good question. I can say it’s not market practice. I’m not sure that’s a terrific answer but it hasn’t been.”Elliott: “Well, that’s a good question. I can say it’s not market practice. I’m not sure that’s a terrific answer but it hasn’t been.”
Not bad for a year’s workNot bad for a year’s work
The royal commission hears about ANZ’s system of executive remuneration.The royal commission hears about ANZ’s system of executive remuneration.
Its system involves a fixed remuneration component that’s paid in cash and a variable remuneration component.Its system involves a fixed remuneration component that’s paid in cash and a variable remuneration component.
The variable component is designed to provide 200% of the fixed remuneration component for on-target performance (for senior executives).The variable component is designed to provide 200% of the fixed remuneration component for on-target performance (for senior executives).
That means if a senior executive does what ANZ expects of them in the performance of their role, they will generally be entitled to receive their target variable remuneration, which is twice their fixed remuneration.That means if a senior executive does what ANZ expects of them in the performance of their role, they will generally be entitled to receive their target variable remuneration, which is twice their fixed remuneration.
And if the senior executive performs above target, they are entitled to up to 300% of their fixed remuneration.And if the senior executive performs above target, they are entitled to up to 300% of their fixed remuneration.
So, if the fixed remuneration for a particular senior executive is $1 million, their target variable remuneration is an extra $2 million, but if they perform above target, they might get up to $3 million in variable remuneration.So, if the fixed remuneration for a particular senior executive is $1 million, their target variable remuneration is an extra $2 million, but if they perform above target, they might get up to $3 million in variable remuneration.
Elliott expresses frustration with the “two strikes rule.”Elliott expresses frustration with the “two strikes rule.”
He concedes individual shareholders have very little say in how a large publicly-listed company is run, despite theoretically being part owners of the company.He concedes individual shareholders have very little say in how a large publicly-listed company is run, despite theoretically being part owners of the company.
He says a consequence of them having so few avenues to express their views on a company’s performance is, when they are asked to vote on executive remuneration, via the two-strikes rule, they often take the opportunity to express opinions on all matter of issues.He says a consequence of them having so few avenues to express their views on a company’s performance is, when they are asked to vote on executive remuneration, via the two-strikes rule, they often take the opportunity to express opinions on all matter of issues.
Elliott: “My views are probably not terribly educated. I do have views. I am concerned that shareholders today, irrespective of their size, have very few avenues for expressing their perspectives to a company. The remuneration report is one of the few avenues given to them. And understandably, I think we’ve seen shareholders use that to have a voice on other issues.”Elliott: “My views are probably not terribly educated. I do have views. I am concerned that shareholders today, irrespective of their size, have very few avenues for expressing their perspectives to a company. The remuneration report is one of the few avenues given to them. And understandably, I think we’ve seen shareholders use that to have a voice on other issues.”
Orr: “Concerned?Orr: “Concerned?
Elliott: “Well, I’m not sure it’s being used for the purpose it was meant. I think the purpose was to talk about remuneration. People use it understandably to express views on all sorts of things to do with the company because they have no other real significant ways or any powerful ways - I mean, the good thing about the two strikes rule, it inevitably has power to it. If you second strike, there is an outcome, as opposed to opposition to general issues that are voted on at an AGM.Elliott: “Well, I’m not sure it’s being used for the purpose it was meant. I think the purpose was to talk about remuneration. People use it understandably to express views on all sorts of things to do with the company because they have no other real significant ways or any powerful ways - I mean, the good thing about the two strikes rule, it inevitably has power to it. If you second strike, there is an outcome, as opposed to opposition to general issues that are voted on at an AGM.
“So I am concerned that it is used for incorrect purposes, if you will. But I think it is shareholders expressing the need to be heard as well.”“So I am concerned that it is used for incorrect purposes, if you will. But I think it is shareholders expressing the need to be heard as well.”
Orr wants to know significant the expectations of shareholders are in setting remuneration structures for executives.Orr wants to know significant the expectations of shareholders are in setting remuneration structures for executives.
Elliott says they have a “very significant” voice, given their ability to vote on particular issues around remuneration means.Elliott says they have a “very significant” voice, given their ability to vote on particular issues around remuneration means.
He argues they have the most significant voice.He argues they have the most significant voice.
Elliott: “I can’t put a number or percentage on it but it is a very, very significant voice. Perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures ... as to the actual absolute amounts for some like myself as a chief executive.”Elliott: “I can’t put a number or percentage on it but it is a very, very significant voice. Perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures ... as to the actual absolute amounts for some like myself as a chief executive.”
Orr talks about the remuneration regime for ANZ’s senior executives.Orr talks about the remuneration regime for ANZ’s senior executives.
She wants to know if there has been an “incorrect calibration” - to use Elliott’s euphemism - of senior executive pay.She wants to know if there has been an “incorrect calibration” - to use Elliott’s euphemism - of senior executive pay.
Elliott says there has.Elliott says there has.
Orr: “In your submissions in response to the interim report you’ve said that, or ANZ said that, as a generalisation over a number of years, and due to various events, the financial services industry has developed a culture that has become overly focused on revenue and sales?Orr: “In your submissions in response to the interim report you’ve said that, or ANZ said that, as a generalisation over a number of years, and due to various events, the financial services industry has developed a culture that has become overly focused on revenue and sales?
Elliott: “Yes.Elliott: “Yes.
Orr: “And this was a point I took up with you earlier today. And also in those submissions, that in cases where ANZ had engaged in problematic conduct, there was often a focus on achieving certain short-term financial objectives, including financial objectives at the expense of the longer term matters?Orr: “And this was a point I took up with you earlier today. And also in those submissions, that in cases where ANZ had engaged in problematic conduct, there was often a focus on achieving certain short-term financial objectives, including financial objectives at the expense of the longer term matters?
Elliott: “Yes.Elliott: “Yes.
Orr: “And ANZ acknowledges that its remuneration and incentive structures have at times not adequately discouraged and may even have encouraged poor conduct. Is that right?Orr: “And ANZ acknowledges that its remuneration and incentive structures have at times not adequately discouraged and may even have encouraged poor conduct. Is that right?
Elliott: “Yes.Elliott: “Yes.
Orr moves on to remuneration, and how it can encourage misconduct.Orr moves on to remuneration, and how it can encourage misconduct.
Orr: “Could each of those steps have been taken much earlier than following the Commission’s inquiry into these matters in the fourth round of hearings?Orr: “Could each of those steps have been taken much earlier than following the Commission’s inquiry into these matters in the fourth round of hearings?
Elliott: “Of course.Elliott: “Of course.
Orr: “And why weren’t they, Mr Elliott?Orr: “And why weren’t they, Mr Elliott?
Elliot: “Because they didn’t receive sufficient attention.”Elliot: “Because they didn’t receive sufficient attention.”
Orr: “Now, since that round of hearings, ANZ has taken several steps directed to assisting Aboriginal and Torres Strait Islander customers living in regional and remote locations?Orr: “Now, since that round of hearings, ANZ has taken several steps directed to assisting Aboriginal and Torres Strait Islander customers living in regional and remote locations?
Elliott: “Yes.Elliott: “Yes.
Orr: “You’ve now committed to working with indigenous leaders to rework your security questions for customers who need to verify their identity over the phone?Orr: “You’ve now committed to working with indigenous leaders to rework your security questions for customers who need to verify their identity over the phone?
Elliott: “I believe so, yes.Elliott: “I believe so, yes.
Orr: “And you’ve decided to offer a telephone service staffed by employees with special training in assisting Aboriginal and Torres Strait Islander customers?Orr: “And you’ve decided to offer a telephone service staffed by employees with special training in assisting Aboriginal and Torres Strait Islander customers?
Elliott: “Yes.”Elliott: “Yes.”
Orr: “You’ve also now decided to cease providing informal overdraft facilities on transaction accounts that you detect are in receipt of certain Centrelink benefits? And the effect will be that from the end of this month, certain Centrelink recipients, as identified by your systems, will be unable to unintentionally overdraw their transaction accounts except in very limited circumstances?Orr: “You’ve also now decided to cease providing informal overdraft facilities on transaction accounts that you detect are in receipt of certain Centrelink benefits? And the effect will be that from the end of this month, certain Centrelink recipients, as identified by your systems, will be unable to unintentionally overdraw their transaction accounts except in very limited circumstances?
Elliott: “That’s my understanding, yes.Elliott: “That’s my understanding, yes.
Orr: “And why have you taken that step?Orr: “And why have you taken that step?
Elliott: “Well, I think it was a recognition that our services had the potential to cause unintended harm to customers who, perhaps, were not as familiar as they could be in terms of how to responsibly use those products. And so while there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk.Elliott: “Well, I think it was a recognition that our services had the potential to cause unintended harm to customers who, perhaps, were not as familiar as they could be in terms of how to responsibly use those products. And so while there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk.
Orr: “And also since that round of hearings you’ve committed to cease charging dishonour fees on pensioner advantage accounts?Orr: “And also since that round of hearings you’ve committed to cease charging dishonour fees on pensioner advantage accounts?
Elliot: “Yes.”Elliot: “Yes.”
Elliott had told colleagues of his, before the fourth round of hearings, to tell him how many ANZ outlets service communities of people that predominantly rely on Centrelink payments.Elliott had told colleagues of his, before the fourth round of hearings, to tell him how many ANZ outlets service communities of people that predominantly rely on Centrelink payments.
About 40 outlets meet that definition.About 40 outlets meet that definition.
Elliot wanted to be on standby for any remediation issues that could arise from the royal commission’s investigation into those communities.Elliot wanted to be on standby for any remediation issues that could arise from the royal commission’s investigation into those communities.