This report recommends that corporate governance should be strengthened through the introduction of independent remuneration committees, measures to promote board accountability and shareholder engagement, enhanced pay disclosure and increased pressure on those boards that are unresponsive to shareholder concerns.

Strong growth in executive remuneration from the 1990s to 2007, and instances of large payments despite poor company performance, have fuelled community concerns that executive remuneration is out of control. Pay for CEOs of the top 100 companies appears to have grown most strongly, at 13 per cent real a year, from the mid-90s to 2000, and then increased by around 6 per cent annually in real terms to 2007. Since 2007 average remuneration has fallen by around 16 per cent a year, returning it to 2004-05 levels.

Liberalisation of the Australian economy and global competition, increased company size, and the shift to incentive pay structures, have been major drivers of executive remuneration - companies compete to hire the best person for the job, and try to structure pay to maximise the executive's contribution to company performance. Nonetheless, some past trend and specific pay outcomes appear inconsistent with an efficient executive labour market, and possibly weakened company performance.

Incentive pay 'imported' from the United States and introduced without appropriate hurdles spurred pay rises in the 1990s partly for 'good luck'. More recently, complex incentive pay may have delivered unanticipated 'upside'. Some termination payments look excessive and could indicate compliant boards. Instances of 'excessive' payments and perceived inappropriate behaviour could also reduce investor and community trust in the corporate sector more broadly, with adverse ramifications for equity markets.

But the way forward is not to by-pass the central role of boards, accortding to this report. Capping pay or introducing a binding shareholder vote on it would be impractical and costly.

Allan Fels, a member of the inquiry, discusses its recommendations (26)

Image: 'Office Politics: A Rise to the Top', Alex E. Proimos / flickr