Executive remuneration, financial crisis and 'say on pay' rule

Among the alternatives to reduce agency conflict, executive remuneration has commonly been perceived as the best possible solution. Financial meltdown is commonly attributed to the large portion of remuneration rewarded to the executives. As a response, ‘say on pay' rule, introduced in 2011which provides shareholders right to vote for or against executives remuneration package. Proponents of this new rule argue that reforms will fortify the association between the shareholders and the executives of the board, will ensure that board members execute fiduciary duty placed upon them. However, the critics think this new rule will be unsuccessful in monitor directors' remuneration, and contemplate it to be backward-looking rather than forward-looking. Despite the importance of these issues, contextual analyses of executives' remuneration and company performance in the Australian context are still limited. This paper, using sample from top 200 Australian listed companies, aims to study the relationship between executive remuneration and companies' performance during the financial crisis in 2006- 2009. Methodology of this research is based on two approaches: firstly, we investigate the pay-for-performance relationship during the global financial crisis; secondly, identify cause and effects relationships through lead and lag analysis. Overall, this research concludes that Australia's reward system is quite effective and reflects market based performance, specially in respect to Earnings per Share and Dividend Yield. Therefore, the introduction of ‘say on pay' rule is appropriate in Australian context.