ACSI Paper on CEO Pay in the Top 100 Companies: 2011

The Australia Council of Superannuation Investors (ACSI) released in September 2012, a research paper (the Paper) which appears to have been prepared for ACSI by Ownership Matters Pty Limited.  The Paper was titled “CEO Pay in the Top 100 Companies: 2011”.

GRG is undertaking a detailed analysis of the material in the Paper as on a preliminary reading it appears to be based on approaches that are not consistent with sound statistical principles.  Thus, any conclusions that appear in the paper should be viewed with scepticism.  Further, there appears to be no attempt to explain the composition of the sample group of companies which is based on companies in the S&P/ASX200 or how that group of companies has changed over the 10 years for which comparative figures are presented and analysed.  It covers a wide range of companies in terms of industries covered and sizes as measured by either market capitalisation or revenue.  GRG research evidences that there is a strong correlation between company size as measured by market capitalisation or revenue and the amount of pay received by executives including CEOs.  The research appears to ignore this significant variable in the analysis.

We are also checking some of the data as it appears that some bias or cherry-picking may be present which has contributed to the headlines which have been picked up by the news media. 

We urge readers to exercise caution in drawing conclusions from this paper which may be being used to fuel an undisclosed agenda.

Update: Taxation of Premium Exercise Price Options (PEPOs)

PEPOs are used by some companies by applying a sufficient premium to produce a nil value for employee share scheme (ESS) taxing purposes when the taxation valuation approach available under the Regulations is applied.  When such PEPOs are not at risk of forfeiture they are taxable at grant under the ESS taxing provisions on a nil value. 

In a new release by the Australian Taxation Office (ATO) – ATO ID 2012/68 - it accepts nil taxable value for the employee under the ESS taxing provisions but finds that the market value of the PEPOs is taxable for fringe benefits tax (FBT) purposes to the company.  This arises because the ESS option valuation method in the Regulation does not apply for FBT purposes and therefore another method needs to be used.  Other valuation methods would attribute a market value to the PEPOs and therefore the company would be liable for FBT on the grant in the year of the grant.

PEPOs which have a taxable value for ESS taxing purposes are not liable for FBT no matter how small the ESS taxable value.

Companies using PEPOs need to be aware of their potential FBT liability and should review the premium attached to future grants of PEPOs.