Australia's Say-on-Pay Rule: Pay-Performance Link and Auditors' Response

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Thesis (PhD Doctorate)
Doctor of Philosophy (PhD)
Dept Account,Finance & Econ
Griffith Business School
Over the last three decades, executive compensation has attracted considerable media attention worldwide and has become a significant issue in corporate governance debates among academic and business communities. Specifically, due to corporate collapses and scandals in the early 2000s as well as the global financial crisis of 2008, managerial remuneration has been subjected to much criticism in recent years. Regulators and activist shareholders around the world have advocated that shareholders have a greater say (vote) on executive pay and greater influence in the boardroom to restrain managerial power and rent extraction. Therefore, Say-on-Pay (SoP) legislation has been enacted in several countries including the United Kingdom, the United States, France, Germany, Japan, Canada, Brazil, China, Russia, India, Belgium, Spain, Sweden, Switzerland, the Netherlands, Finland, Denmark, Norway, Italy, South Africa, Israel, and Slovenia. Australia also has introduced SoP regulation, namely the ‘two-strikes’ rule in 2011 after a decade of growing concerns with the ‘fat cat’ pay and rewards for failure. Australia’s ‘two-strikes’ rule is viewed as a unique and innovative governance tool in that it empowers minority shareholders to remove a board of directors if a listed company receives a ‘strike’ against its remuneration report in two consecutive years. However, giving shareholders more power to have a greater direct say over the executive pay have been heavily debated. Proponents of SoP laws argued that allowing shareholders votes on executive compensation would increase accountability and transparency and incentivize boards to fulfil their fiduciary duty and ensure that CEOs are paid for performance, and thereby maximise shareholder value. In contrast, opponents argued that SoP rules would empower shareholders who lack the required expertise and sophistication, and therefore are likely to abuse their voting rights and put unnecessary pressure on the board of directors to ado