VZCZCXRO4343
RR RUEHPT
DE RUEHBY #1266/01 3470416
ZNR UUUUU ZZH
R 120416Z DEC 08
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC 0672
INFO RUEHWL/AMEMBASSY WELLINGTON 5555
RUEHDN/AMCONSUL SYDNEY 4041
RUEHBN/AMCONSUL MELBOURNE 5833
RUEHPT/AMCONSUL PERTH 4103
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 CANBERRA 001266 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON AS
SUBJECT: AUSTRALIA TACKLES EXECUTIVE PAY - DON'T EXPECT TOO 
GREAT A CHANGE 
 
¶1. (SBU) Summary.  Prime Minister Rudd has been outspoken on 
the need for reform of executive pay to better balance 
compensation with risk management.  Australian regulators are 
working on high-level general principles on executive pay 
with an eye on what emerges as the international consensus. 
This would extend existing rules on corporate governance, 
risk management, and capital requirements, focused on the 
structure of executive pay and on the incentives built into 
compensation plans.  The principles will seek to encourage 
behavior by management that supports the interests of 
beneficiaries.  This will not include specific dollar figure 
caps on salaries.  We expect any changes will be moderate and 
principles-based.  End summary. 
 
PRIME MINISTER OUTSPOKEN ON EXECUTIVE PAY 
 
¶2. (U) As the global financial crisis has intensified, the 
issue of executive remuneration has received great attention 
in Australia.  Prime Minister Kevin Rudd has been very 
active, saying in speeches and media interviews over the past 
three months that people are "fed up and angry" with 
"outrageous packages paid to financial company executives". 
He has stated that what is needed is a set of principles for 
executive remuneration that balances pay levels with risk 
management, and has stressed the importance on doing this in 
the international context as well; Australia is taking an 
active role in the Financial Stability Forum (FSF) and G20. 
Rudd has, however, refused to be drawn into making any 
judgments on actual dollar figures.  He has said that the 
GOA, through the Australian Prudential Regulatory Authority 
(APRA), would work through details for changes in rules to 
discourage excessive risk taking. 
 
¶3. (U) There have been some shareholder challenges at annual 
general meetings (AGM) against planned executive 
compensation; Telstra's executive compensation plan last year 
failed to gather a majority of votes of those present at its 
AGM, and Toll Holdings (owners of Virgin Blue and other 
companies) has also seen votes disapproving its executive 
compensation plan.  However, these are nonbinding votes and 
most large institutional shareholders don't bother to show up 
at AGMs, leaving the floor to small retail investors.  This 
dissatisfaction (and the PM's public comments) comes despite 
the fact that top executives at major Australian industries 
generally receive lower total compensation than some of their 
global counterparts.  The biggest earners are at Macquarie 
Bank (CEO Nicholas Moore received around A$27 million, 
US$17.5 million at current exchange rates, in 2007) and 
Babcock & Brown - Australia's two main investment banks, now 
both in some difficulty, are outliers on the Australian pay 
scale.  Chief executives at Australia's Big Four banks - 
Westpac, Commonwealth Bank, ANZ, and National Australia Bank 
- for example each earn around A$8-9 million (US$5.2-5.9 
million), relatively low compared to other major banks with 
large international presences.  Not surprisingly, The 
Australian business community has strongly resisted calls for 
limits on executive compensation.  They argue that 
compensation is subject to shareholder review and approval. 
In addition, business groups insist that limits would  hamper 
their ability to attract and retain talent.  Financial sector 
contacts point out that Australian financial companies 
compete with foreign jurisdictions to attract Australians as 
Qcompete with foreign jurisdictions to attract Australians as 
well as foreigners - a large difference in compensation can 
lead talented people to move offshore. 
 
REGULATOR PLANS 
 
¶4. (SBU) Econoff met with APRA executive general manager for 
policy research and statistics Charles Littrell on December 
11 to discuss APRA's efforts on executive pay.  (APRA is the 
prudential regulator for the financial services industry, 
with the goal of ensuring banks, insurance companies and 
other financial institutions can meet their obligations and 
provide a stable, efficient and competitive financial 
system.)  Littrell noted APRA already has some rules related 
to executive compensation, built into its accreditation rules 
- as a precondition to accreditation, there has to be some 
link between pay and the risk and capital-setting system. 
Also, rules governing internal accounting of business units 
include links to performance. 
 
¶5. (SBU) Littrell noted with a joke that in fact the Prime 
Minister cannot "instruct" APRA to do anything.  But APRA was 
already considering, since early in 2008, making some changes 
on executive pay; Rudd's comments and the global financial 
 
CANBERRA 00001266  002 OF 002 
 
 
crisis have helped develop a consensus that the time is right 
for such changes.  APRA already has a good handle on the 
risks and incentive.  Littrell said that good rules for pay 
and risk management are already well-known by industry - they 
just aren-t always applied. 
 
¶6. (SBU) APRA's approach, Littrell said, was to develop a 
principles-based framework for APRA-regulated entities, 
including listed and unlisted companies, locally- and 
foreign-owned companies, and branches of foreign companies. 
Essentially it would extend existing corporate governance, 
risk management, and capital requirements that are already in 
place.  Littrell noted there are two areas of focus for 
executive pay: "they are paid too much" and "they are paid in 
ways that are contrary to the interest of others".  APRA's 
focus is solely on the second complaint, not the first.  As 
Rudd has urged, APRA will focus on the structure of executive 
pay and on the incentives built into compensation plans.  It 
will seek to encourage behavior by management that supports 
the interests of beneficiaries - depositors, policy holders, 
retirement fund members.  (An APRA press release from 
December 9 discusses this, and can be found at 
www.apra.gov.au/media-releases/08 32.cfm) 
 
¶7. (SBU) However, Littrell said APRA wasn't ready to say much 
about what they are actually developing now.  There are 
drafts which he said satisfied APRA and the GOA.  But APRA 
wants to wait to see what comes up in the international arena 
first before announcing any domestic steps.  Australia has 
been "marginally more conservative" on these issues in the 
past, Littrell noted, and he suspects the international 
consensus will be "less robust" than what APRA is thinking, 
so they will adapt as needed.  Littrell noted that management 
and boards are usually unified in discussing issues with 
APRA, but thought in this instance it would be interesting to 
see if this remains the case.  On this issue, APRA and boards 
may side together against management, sharing the interest in 
ensuring executive pay and risk management are done in a way 
that protects beneficiaries and society from excessive risk 
taking.  Again APRA's main concern is that executives not be 
paid to simply "roll the dice." 
 
¶8. (SBU) Econoff also met with Lynne Thompson, a senior 
lawyer in the Australian Securities and Investments 
Commission (ASIC); ASIC has been assisting because APRA has a 
tiny policy shop.  Any rules coming out of this would be 
applied to the non-APRA regulated arena by ASIC.  She said 
that once new principles are promulgated by APRA, ASIC would 
be forward-looking in issuing guidance on executive pay - not 
waiting to see misconduct.   Thompson noted that there have 
been other actors on executive remuneration, such as the 
Australian Stock Exchange (ASX), with some high-level listing 
rules covering executive pay. 
 
¶9. (SBU) Thompson also noted that ironically, depending on 
how principles are developed, there could be results that 
could support pay raises.  For example, if under new 
principles Australia's Big Four banks decided to compare 
executives to their peers at other AA-rated international 
banks, they would find their compensation is lower on 
average. 
 
¶10. (SBU) Comment:  So far, beyond the predictable bashing of 
overpaid bosses in Australia's newspapers and on talk radio, 
there has been little reaction to Rudd's comments or APRA's 
Qthere has been little reaction to Rudd's comments or APRA's 
plans.  One banker told econoff that he was confident any 
changes would be principles-based rather than taking the form 
of direct rules on what can or cannot be done; he said APRA 
and the GOA also well understood that it would do no good to 
come up with overly restrictive or prescriptive rules that 
could make it harder for Australian businesses to compete for 
talent.  ASIC's Thompson also said she did not expect much 
opposition from "the big end of town" on executive pay if it 
is based on principles.  APRA's Littrell also emphasized that 
any plan will only emerge after extensive consultations with 
its regulated companies.  In the end, we expect APRA will 
issue principles that will try to make sure incentives and 
risk management are better balanced.  It should be enough for 
Rudd to claim victory, but will represent more a fine-tuning 
of existing risk management and prudential rules rather than 
sweeping changes.  End comment. 
 
MCCALLUM