AMP Capital has weighed into the debate on executive pay, saying big bonuses shouldn't be given to executives with average performance for matters that are "business as usual".
In its latest Corporate Governance Report, the investment manager also defends the use of non-financial measures arguing that calling them as "soft" has devalued their importance.
Soft bonuses paid to CEOs for meeting non-financial targets for diversity and culture had come under criticism for being too "flaky", after a backlash over big pay packets earned last year by executives including Commonwealth Bank of Australia boss Ian Narev and AGL chief executive Andrew Vesey.
"Pay is a notoriously touchy subject, not only because salaries and bonuses can be high but [also] because it often rewards behaviour that can be hard to measure," said Karin Halliday, senior manager, corporate governance at AMP Capital.
Ms Halliday said boards that granted overly generous bonus payments were likely to come under increased scrutiny. "Bonus plans shouldn't reward executives of companies with average performance for 'business as usual'," she said.
Bonuses more common
A recent study commissioned by the Australian Council of Superannuation Investors (ACSI) found that while the median fixed pay for chief executives of ASX200 companies was back to pre-2008 levels at $1.7 million in 2015, bonuses were more common.
In 2015, 93 per cent of chief executives in the ASX100 received a bonus equivalent to 76 per cent of their maximum entitlement, implying that the vast majority of chief executives met and exceeded their bonus hurdles. This was the highest proportion of CEOs to receive a bonus since 2008.
Ms Halliday said shareholder support "can only be guaranteed when there is a clear link to long-term value creation and companies can be trusted to judge performance fairly".
It was important that performance measures were "objective and not easily game-able".
"This is particularly the case where executives persistently receive their full bonus potential on top of their already considerable amounts of fixed pay, or when executives get bonuses to correct problems they created in the first place," she said.
The 2016 proxy season saw a high number of strikes against remuneration reports. AMP Capital had a lower strike rate - it either voted against or specifically abstained from voting on 7 per cent of 1156 resolutions.
Soft targets needed
Ms Halliday said management should still be rewarded using financial and non-financial measures. But that greater trust needed to be built with shareholders.
"Companies need to get better at describing why particular focus areas are important relative to others and how they will generate future shareholder value," she said.
"The clearer the explanation of the purpose of the incentive and the measures used, the more likely this explanation will mitigate any expectation gap.
"Total reliance on financial performance measures can be harmful ... For example, profit growth attained at the expense of customer satisfaction is not sustainable, nor is profit growth achieved by underpaying workers or neglecting legal responsibilities."
Risks for investors
The report also identified other trends investors should watch.
Recent corporate scandals such as CommInsure have fuelled debate about whether some financial services companies are abusing their right to operate and have seen repeated calls for a royal commission into the sector.
"Key in 2017 will be the remuneration structures financial services firms have in place for front-line sales staff," the report said.
"If there are sales incentives for those who sell to customers, the structure of these incentives will be scrutinised as well as the presence of safeguards to ensure that customers are sold products that are in their best interests, irrespective of internal sales targets."
The report said increased technological disruption - including the rise of driverless cars, online retailers like Amazon moving offline into bricks and mortar businesses, and blockchain technology - would continue to be an investment threat.
Concerns about climate change and a focus on renewable energy would grow irrespective of any likely legislative or policy change by US President Donald Trump.
Another issue potentially posing a risk to earnings is sugar and obesity. The Greens have suggested a soda tax, and the party has said it will introduce a private senator's bill by the end of 2017 if the federal government does not move to introduce one of its own.
The report says: "The public discussion generated by the possibility of a soda tax has the potential to reduce consumption, given that it shines a spotlight on the issue and accelerates consumer education about the health impacts of sugar. We believe these discussions will step up a notch during 2017."
The issue of food and agriculture and human resistance to antibiotics in global food chains would also be a top concern.
Recent studies suggest that about 70 per cent of bacteria globally have already developed resistance to antibiotics, leaving large sections of the population exposed to potentially fatal diseases including pneumonia.
"As consumers become more educated about the potential health risks, they are likely to demand antibiotic-free meat," the report said.
