Two-strike remuneration rule remains effective: ACSI

The two-strike remuneration rule remains effective and continues to strengthen alignment between pay and performance of the board, the Australian Council of Superannuation Investors (ACSI) said.

Latest research by ACSI found the rule has become a foundation in Australia to good governance, creating a clear mechanism through which investors can raise concerns about executive remuneration.

In contrast to being misused, or spill mechanisms causing board instability, the report found evidence of commitment to engagement between investors and companies to resolve problems, making a second strike less likely.

"The two strikes rule is doing exactly what it was designed to do: it gives shareholders a meaningful voice on executive pay, encourages boards to respond to legitimate concerns and strengthens accountability," ACSI chief executive Louise Davidson said.

"Strikes can attract significant attention, particularly when they involve high-profile companies or controversial pay decisions.

"But the evidence shows they are the exception, not the norm.  Investors care about executive remuneration because incentives can shape behaviour. They expect to see executive remuneration that rewards performance, reflects the experience of shareholders and supports the long-term success of the company."

The two strikes rule came into force in 2011. Under it, a remuneration report with an 'against' vote of 25% or higher receives a 'strike', after which investors can raise concerns about executive remuneration. If the report receives a 'second strike' the next year, boards can face a spill motion if investors choose to enforce it.

Davidson said the rule has acted as a moderating force, and Australia has not experienced the significant increases in remuneration packages seen in some other markets.

"It has proven to be an effective form of market discipline, with strikes a powerful signal and accountability mechanism," she said.

"The rule's strengths include encouraging boards to respond to investor concerns, improving disclosure and supporting boards to consider whether remuneration structures are aligned with long-term company performance.

"The rule has not eliminated excessive pay or poor remuneration design, but it has proved to be a highly useful mechanism for increasing accountability on remuneration."

Davidson added the rule is an important part of this broader picture and investors view a vote on remuneration implementation as a foundational right and responsibility.

"By strengthening the link between executive pay and long-term performance, the rule has supported better governance outcomes and delivered benefits for Australian superannuation fund members," she said.