Annette Hurley (SA, Australian Labor Party) Share this | Hansard source

I think it was the onset of the global financial crisis that saw a renewal of public concern about the trend to large termination payments for senior executives. Despite the more benign financial circumstances in Australia, we here also saw very large termination payments. That rekindled the debate that had previously been had. There were well publicised examples of excessive termination payments, or golden parachutes, paid to senior executives. Particularly companies were drawn to our attention where they had posted reduced profits or significant losses and this served to heightened public anger at what was felt to be a reward for failure.

Under the current legislation an executive can receive up to seven times his or her total annual remuneration before shareholder approval is required. Under the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 shareholder approval will be required if a termination payment exceeds one year’s average base salary for directors and all executives named in the company’s executive remuneration report. I wish to emphasise that this bill does not impose a cap on what can be paid as a termination payment, but simply forces a shareholders’ vote if it exceeds the threshold of one year’s base salary. In other words, the executive and the company have to justify the termination payment if it exceeds one year’s base salary.

There has been argument about using the base salary as the point. The coalition have said that this may lead to an increase in base pay and have noted that Australia has the lowest base pay threshold for its executives. Indeed, this indicates the imbalance of executive remuneration in Australia. If we do have the lowest base pay threshold, it means that the bonus and incentive payments form a disproportionate percentage of the remuneration of those executives. This is exactly what has led to the problem in the global financial crisis. These incentives and bonus payments resulted in some executives taking undue risks, putting the company in danger, resulting in poor company performances and then being bought off by the golden handshake.

There is no inherent ill in the base pay rising if this addresses some of the problems with bonus and incentive payments that are unbalanced. This is clearly not a problem in itself. There is provision for a review of this proposal after two years. Shifts in remuneration can be examined at that stage; if there is a problem with the so-called golden hellos or with excessive increases in base pay, they can be addressed at that time. Treasury argued during our hearing that the existing rules in the corporate law for setting executive base salaries would act as sufficient restraint on increasing salaries as a result of this bill. They said:

Such payments are required to be disclosed in the company’s remuneration report, and the company is required to clearly explain the policy for determining the nature and amount of remuneration and a discussion of the relationship between such policy and the company’s performance.

Since the report was brought down, Minister Bowen has released regulations and explanatory material which provide a definition of ‘base salary’, provide clarity around the definition of ‘termination benefits’ to ensure that statutory entitlements are not included as payments requiring shareholders’ approval, and prescribe the circumstances in which a benefit is given in connection with a person’s retirement, which addresses a number of issues that were raised during the inquiry.

In conclusion—I do not want to take too much of the chamber’s time—these excessive termination payments and the broader issue of executive salaries and entitlements have been much debated aspects of corporate accountability standards for some years. I commend the government in taking this action on termination payments, because they have been lacking in transparency, accountability or disclosure due to the ridiculously high and internationally out of touch threshold needed to trigger shareholder agreement. One year’s base salary is a much more realistic value.

With workers and their families facing the real prospect of unemployment and falls in their superannuation returns as a result of the global financial crisis, it is particularly galling that those at the top of the tree could be in an environment where they can potentially reap up to seven times their total annual remuneration as a golden parachute even if their performance has been poor. Given the stark juxtaposition this presents for the people of Australia, I urge all senators to strongly support this bill and give their support to the reassessment of the way that termination payments are treated in corporate law.