Chief Executive Officer Remuneration and the ‘Two-Strikes’ Rule of Australia

Abstract

Over the past two decades, executive remuneration has been a topic of considerable controversy. The perceived inability of boards of directors to set optimal executive pay, together with the revelation of corporate scandals and subsequent collapse of high-profile companies, has fuelled intense public debates about executive pay. Regulators here and abroad have been forced to address these growing concerns. With the view to improving the accountability of executive pay and to restraining ‘excessive’ executive pay, Australia introduced the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, with effect from 1 July 2011. Unlike previous legislation, under which shareholders’ votes on remuneration reports were non-binding, this new ‘say on pay’ (SOP) legislation, widely known as the ‘two-strikes’ rule in Australia, has specific and predictable consequences. Under this new rule, the board of directors (except the chief executive officer) of a firm listed on the Australian Securities Exchange may potentially face re-election if the remuneration report receives 25% or more ‘no’ votes at the Annual General Meeting in two consecutive years.