Updated December 12, 2018 17:59:04

Photo: Westpac chief executive Brian Hartzer took a $900,000 pay cut last financial year. (ABC News: John Gunn)

Westpac shareholders have sent an overwhelming message of dissatisfaction, with nearly two-thirds voting against the bank's remuneration report.

This is well over twice the 25-per-cent threshold required to trigger a first strike against Westpac's board. If next year's remuneration report receives a vote against of more than 25 per cent, it will give shareholders the option to spill the entire board.

Westpac's chairman Lindsay Maxsted foreshadowed the overwhelming no vote in his opening address to shareholders.

"The key point from those voting against the remuneration report has been that although the board took events over the year into account, many have questioned whether we went far enough, particularly in reducing short-term variable reward paid to the CEO and other executives," Mr Maxsted said.

Westpac cut the short-term variable pay of its executives by an average of 25 per cent, with the largest individual reduction of 50 per cent.

The bank's chief executive Brian Hartzer took a 30 per cent, or $900,000, pay cut last financial year.

Even though a vote on the report had not been taken when Mr Maxsted made his speech, the vast bulk of votes cast at company AGMs are done by proxy, with most results determined before shareholders gather in the room.

Westpac director, and former AMP boss, Craig Dunn was re-elected to the board, but faced a large protest vote of 35.5 per cent against.

Other banks facing investor backlash

Westpac will likely not be alone in receiving a first strike before Christmas.

The major proxy firms are intending to vote against NAB's remuneration report and the granting of deferred shares to chief executive Andrew Thorburn at its AGM in Melbourne next week.

While ANZ is understood to still be lobbying investors, the Australian Council of Superannuation Investors and Ownership Matters are both recommending a vote against at the bank's AGM in Perth.

NAB's Mr Thorburn is set to receive $2.093 million in cash and deferred shares, in addition to his $2,282,511 fixed pay, while ANZ's Shayne Elliott will get $3.15 million in variable remuneration, on top of his $2.1 million salary.

"The first question that this raises in our minds is what do you have to do not to get your bonus," ACSI chief executive Louise Davidson said.

"We are really quite taken aback that they decided to pay executive bonuses this year, after all that's transpired at the royal commission."

Ms Davidson said it would have been more appropriate for the other banks to follow the Commonwealth Bank's lead and reduce short-term incentives for executives to zero this year.

Some of Australia's top chief executives might be receiving bonuses they don't necessarily deserve.

However, it was evidence presented to the banking royal commission of the CBA board's decision to approve executive bonuses in just 10 minutes after a scandal-ridden year in 2016 that shocked Ms Davidson.

"That was a real eye-opener to me about the level of attention to detail that was being considered in the board room," she said.

"The really key thing here is, from our perspective, boards need to be able to exercise discretion not to pay bonuses when that is warranted."

Banking analyst Brett Le Mesurier thinks the investor backlash sends a clear message to the banks.

"Remuneration, reputation, profit performance — they're all part of the same picture, and you can't ignore the reputation, the complaints the customers have, and expect your profit growth to still be in the right area," he said.

Two strikes out?

The two strikes rule faced scrutiny during the final round of banking royal commission hearings, with senior counsel assisting Rowena Orr QC and Michael Hodge QC asking big bank chairmen and chief executives if it was still serving its intended purpose.

"I am concerned that shareholders today, irrespective of their size, have very few avenues for expressing their perspectives to a company," responded ANZ chief executive Shayne Elliott, at the commission's final hearings in Melbourne.

"The remuneration report is one of the few avenues given to them and, understandably, I think we've seen shareholders use that to have a voice on other issues, so I am concerned about that."

ACSI's Ms Davidson told the ABC the decision to recommend its members vote against Westpac, NAB and ANZ's remuneration reports was not about other issues.

"It's to do with the structure and the way remuneration's been handled, not to do with other issues," she said.

"In our view, the real key is that remuneration should reflect outcomes for the organisation … if things have not been done well by the company over the year, we would expect that to be reflected in the remuneration report that they put forward."

The head of banking regulator APRA told the royal commission that fear of an investor backlash was slowing down the banks' efforts to decrease the weighting of financial metrics in their remuneration structures.

There are big rewards for bankers to take risks but weak punishments when those risks don't pay off.

"Many actually recognised that they would like to move, but some have had a strike, some are in the process of moving and it's a likely prospect that they will get a strike and others are very wary that they will get a strike … there's a first-mover disadvantage, so it's a problem," APRA chairman Wayne Byres said.

It is a situation playing out this year for NAB — the bank has changed its remuneration structure, introducing a "hybrid variable reward" to combine short- and long-term incentives.

The Australian Shareholders Association, for one, agrees with the framework "in principle" but is concerned that total shareholder return is no longer considered a measure of performance, and intends to vote against NAB's remuneration report due to the board not cutting their fees and Andrew Thorburn receiving a bonus amid the royal commission.

Despite noting the conundrum, Mr Byres did not advocate for the removal of the two strikes rule at the commission — instead, he suggested APRA might legislate changes to the metrics used to determine incentives so bank boards can tell shareholders they have no choice in the matter.

"To be really blunt about it, if want change, APRA will have to do it," he said.

However, Shaw and Partners banking analyst Brett Le Mesurier thinks the banks will continue to overhaul their remuneration structures ahead of any regulatory intervention.

"I think they're very tuned in to what the community thinks about their remuneration and how it's structured now, and the royal commission has played a significant role in that," he argued.

Topics: banking, company-news, royal-commissions, australia

First posted December 12, 2018 14:00:15