Tim Lyons opinion piece: Super funds must live up to values on remuneration

Tim Lyons is Assistant Secretary of the ACTU and a Director of major industry superannuation fund.
Executive and director remuneration remains a hot topic. The ACTU has been at the forefront of agitation on the issue, including the adoption of specific policies at our 2009 Congress.  The superannuation industry has also pressed for better accountability of executive pay has come from the superannuation industry, but there is a double-standard that needs to be addressed.

As the leaders of Australia’s industry superannuation movement meet at the Conference of Major Superannuation Funds (CMSF) this week, there needs to be a discussion, and action, about Executive and Director remuneration and its disclosure.

It is troubling that currently only around a third of industry and like funds disclose the remuneration received by Directors in their annual report.  Very few make specific disclosures around CEO pay.

First Super has set the standard for disclosure, with its annual report now clearly stating what fees are paid to Directors, how they are calculated, and if they are received by the individual or their sponsoring organisation. The report also discloses the total remuneration package of the CEO.  This is consistent with ACTU policy.

Given funds collective stance as investors in relation to the disclosure of remuneration in corporations, failure to disclose leaves funds open to charges of hypocrisy.  Globally, institutional investors like us have been at the forefront of pushing corporations to disclose, including via the creation of statutory obligations.  

In Australia, the Cooper review recommended that funds disclose “remuneration details similar to major listed entities.” Our special obligations as the custodians of member’s retirement savings require us to adopt the highest standards in relation to both Director and Executive remuneration. All Boards need a remuneration policy that is transparent and appropriate. There is no justification for funds to provide anything less than full disclosure to members.

Disclosure is critical, but not enough.  We also we need to talk about both the quantum and the proper benchmarks for executive pay. Trustees overseas, including in Canada, are starting to grapple with the same issues.

I know, from discussions with both union and employer Directors who serve on the boards of industry and like funds, that there is widespread disquiet about the recent acceleration of executive pay, its absolute level, and the use of performance pay within the funds.  It is also clear that individual Boards, faced with reports from remuneration consultants about “market” rates, have difficulty tackling the issue on their own.

This is not a criticism of individuals or particular funds. Managing our superannuation funds involves important and responsible jobs.  They are roles that need to be held by quality people who are well remunerated. Our funds are staffed by skilled people who work hard on behalf of fund members.

But pay needs to be kept in perspective.  An employee on a “mere” $180 000 a year (much less than many fund Executives) earns around two and half times average earnings and more than 97% of Australia taxpayers. This suggests we are not offering hardship-postings at senior levels in our funds.  

There are a number of problems with the current way we determine Executive pay in the sector.

First, the use of the level of funds under management as a measure of CEO performance or of the relative complexity of roles is flawed. APRA figures show that almost $2 billion a week was flowing into funds in the December quarter.  This is a function of the compulsory system, not “growth” as it might be understood in industry more generally. Growth in FUM by a super fund is not like increased sales in car company.

Second, there is no genuine “market” for salaries in our funds. The small number of roles, the absence of transparency and lack of real contestability prevents the use of that description.

Third, the very process of using remuneration consultants distorts the process. As the Federal Remuneration Tribunal noted in a submission to the 2009 Productivity Commission inquiry into Executive pay, “such ‘self-referencing’ is a recipe for movements in one direction only – upwards - or, even worse, leapfrogging.”  This critique will ring true for most Trustees.

Finally, wage competition with the broader financial services sector is contrary to our core values, and in any event is not possible.  Pay in industry superannuation is many orders of magnitude lower than the obscene packages on offer at senior levels of banking and finance and will always stay that way.

It is not only at very senior levels that pay in financial services is fundamentally disconnected from community standards. In December 2010 a young Sydney trader was gaoled for insider trading.  The sentencing judge noted that the trader had been hired, at 21 and straight from university, into a “plastic” world where a job “of modest responsibility” paid $350 000 a year.  People motivated solely by pay will not make a career in our funds.  This is an arms race we have no desire or ability to win.

This week at CMSF the industry super movement and other not for profit funds should start a conversation about a sustainable model for Executive remuneration in funds, a model that’s loyal to our values.  Key funds and organisations could appoint a panel of experienced trustees, to be chaired by a independent person such as a retired member of the industrial tribunal, to prepare a report on these issues.  The panel could consider issues like the appropriate external benchmarks for roles, the issues of performance pay and the role of remuneration consultants.

There will be other suggestions, but we do need to find a better approach, and we need to do so collectively.  

An edited version of this article was published in The Australian Financial Review on 29 March 2011 under the headline 'Stop pay hypocrisy at industry funds'.