Identifier
Created
Classification
Origin
08CANBERRA1266
2008-12-12 04:16:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Canberra
Cable title:  

AUSTRALIA TACKLES EXECUTIVE PAY - DON'T EXPECT TOO

Tags:  EFIN ECON AS 
pdf how-to read a cable
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DE RUEHBY #1266/01 3470416
ZNR UUUUU ZZH
R 120416Z DEC 08
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 0672
INFO RUEHWL/AMEMBASSY WELLINGTON 5555
RUEHDN/AMCONSUL SYDNEY 4041
RUEHBN/AMCONSUL MELBOURNE 5833
RUEHPT/AMCONSUL PERTH 4103
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 02 CANBERRA 001266 

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E.O. 12958: N/A
TAGS: EFIN ECON AS
SUBJECT: AUSTRALIA TACKLES EXECUTIVE PAY - DON'T EXPECT TOO
GREAT A CHANGE

UNCLAS SECTION 01 OF 02 CANBERRA 001266

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON AS
SUBJECT: AUSTRALIA TACKLES EXECUTIVE PAY - DON'T EXPECT TOO
GREAT A CHANGE


1. (SBU) Summary. Prime Minister Rudd has been outspoken on
the need for reform of executive pay to better balance
compensation with risk management. Australian regulators are
working on high-level general principles on executive pay
with an eye on what emerges as the international consensus.
This would extend existing rules on corporate governance,
risk management, and capital requirements, focused on the
structure of executive pay and on the incentives built into
compensation plans. The principles will seek to encourage
behavior by management that supports the interests of
beneficiaries. This will not include specific dollar figure
caps on salaries. We expect any changes will be moderate and
principles-based. End summary.

PRIME MINISTER OUTSPOKEN ON EXECUTIVE PAY


2. (U) As the global financial crisis has intensified, the
issue of executive remuneration has received great attention
in Australia. Prime Minister Kevin Rudd has been very
active, saying in speeches and media interviews over the past
three months that people are "fed up and angry" with
"outrageous packages paid to financial company executives".
He has stated that what is needed is a set of principles for
executive remuneration that balances pay levels with risk
management, and has stressed the importance on doing this in
the international context as well; Australia is taking an
active role in the Financial Stability Forum (FSF) and G20.
Rudd has, however, refused to be drawn into making any
judgments on actual dollar figures. He has said that the
GOA, through the Australian Prudential Regulatory Authority
(APRA),would work through details for changes in rules to
discourage excessive risk taking.


3. (U) There have been some shareholder challenges at annual
general meetings (AGM) against planned executive
compensation; Telstra's executive compensation plan last year
failed to gather a majority of votes of those present at its
AGM, and Toll Holdings (owners of Virgin Blue and other
companies) has also seen votes disapproving its executive
compensation plan. However, these are nonbinding votes and
most large institutional shareholders don't bother to show up
at AGMs, leaving the floor to small retail investors. This
dissatisfaction (and the PM's public comments) comes despite
the fact that top executives at major Australian industries

generally receive lower total compensation than some of their
global counterparts. The biggest earners are at Macquarie
Bank (CEO Nicholas Moore received around A$27 million,
US$17.5 million at current exchange rates, in 2007) and
Babcock & Brown - Australia's two main investment banks, now
both in some difficulty, are outliers on the Australian pay
scale. Chief executives at Australia's Big Four banks -
Westpac, Commonwealth Bank, ANZ, and National Australia Bank
- for example each earn around A$8-9 million (US$5.2-5.9
million),relatively low compared to other major banks with
large international presences. Not surprisingly, The
Australian business community has strongly resisted calls for
limits on executive compensation. They argue that
compensation is subject to shareholder review and approval.
In addition, business groups insist that limits would hamper
their ability to attract and retain talent. Financial sector
contacts point out that Australian financial companies
compete with foreign jurisdictions to attract Australians as
Qcompete with foreign jurisdictions to attract Australians as
well as foreigners - a large difference in compensation can
lead talented people to move offshore.

REGULATOR PLANS


4. (SBU) Econoff met with APRA executive general manager for
policy research and statistics Charles Littrell on December
11 to discuss APRA's efforts on executive pay. (APRA is the
prudential regulator for the financial services industry,
with the goal of ensuring banks, insurance companies and
other financial institutions can meet their obligations and
provide a stable, efficient and competitive financial
system.) Littrell noted APRA already has some rules related
to executive compensation, built into its accreditation rules
- as a precondition to accreditation, there has to be some
link between pay and the risk and capital-setting system.
Also, rules governing internal accounting of business units
include links to performance.


5. (SBU) Littrell noted with a joke that in fact the Prime
Minister cannot "instruct" APRA to do anything. But APRA was
already considering, since early in 2008, making some changes
on executive pay; Rudd's comments and the global financial

CANBERRA 00001266 002 OF 002


crisis have helped develop a consensus that the time is right
for such changes. APRA already has a good handle on the
risks and incentive. Littrell said that good rules for pay
and risk management are already well-known by industry - they
just aren-t always applied.


6. (SBU) APRA's approach, Littrell said, was to develop a
principles-based framework for APRA-regulated entities,
including listed and unlisted companies, locally- and
foreign-owned companies, and branches of foreign companies.
Essentially it would extend existing corporate governance,
risk management, and capital requirements that are already in
place. Littrell noted there are two areas of focus for
executive pay: "they are paid too much" and "they are paid in
ways that are contrary to the interest of others". APRA's
focus is solely on the second complaint, not the first. As
Rudd has urged, APRA will focus on the structure of executive
pay and on the incentives built into compensation plans. It
will seek to encourage behavior by management that supports
the interests of beneficiaries - depositors, policy holders,
retirement fund members. (An APRA press release from
December 9 discusses this, and can be found at
www.apra.gov.au/media-releases/08 32.cfm)


7. (SBU) However, Littrell said APRA wasn't ready to say much
about what they are actually developing now. There are
drafts which he said satisfied APRA and the GOA. But APRA
wants to wait to see what comes up in the international arena
first before announcing any domestic steps. Australia has
been "marginally more conservative" on these issues in the
past, Littrell noted, and he suspects the international
consensus will be "less robust" than what APRA is thinking,
so they will adapt as needed. Littrell noted that management
and boards are usually unified in discussing issues with
APRA, but thought in this instance it would be interesting to
see if this remains the case. On this issue, APRA and boards
may side together against management, sharing the interest in
ensuring executive pay and risk management are done in a way
that protects beneficiaries and society from excessive risk
taking. Again APRA's main concern is that executives not be
paid to simply "roll the dice."


8. (SBU) Econoff also met with Lynne Thompson, a senior
lawyer in the Australian Securities and Investments
Commission (ASIC); ASIC has been assisting because APRA has a
tiny policy shop. Any rules coming out of this would be
applied to the non-APRA regulated arena by ASIC. She said
that once new principles are promulgated by APRA, ASIC would
be forward-looking in issuing guidance on executive pay - not
waiting to see misconduct. Thompson noted that there have
been other actors on executive remuneration, such as the
Australian Stock Exchange (ASX),with some high-level listing
rules covering executive pay.


9. (SBU) Thompson also noted that ironically, depending on
how principles are developed, there could be results that
could support pay raises. For example, if under new
principles Australia's Big Four banks decided to compare
executives to their peers at other AA-rated international
banks, they would find their compensation is lower on
average.


10. (SBU) Comment: So far, beyond the predictable bashing of
overpaid bosses in Australia's newspapers and on talk radio,
there has been little reaction to Rudd's comments or APRA's
Qthere has been little reaction to Rudd's comments or APRA's
plans. One banker told econoff that he was confident any
changes would be principles-based rather than taking the form
of direct rules on what can or cannot be done; he said APRA
and the GOA also well understood that it would do no good to
come up with overly restrictive or prescriptive rules that
could make it harder for Australian businesses to compete for
talent. ASIC's Thompson also said she did not expect much
opposition from "the big end of town" on executive pay if it
is based on principles. APRA's Littrell also emphasized that
any plan will only emerge after extensive consultations with
its regulated companies. In the end, we expect APRA will
issue principles that will try to make sure incentives and
risk management are better balanced. It should be enough for
Rudd to claim victory, but will represent more a fine-tuning
of existing risk management and prudential rules rather than
sweeping changes. End comment.

MCCALLUM