Imposing constraints and limitations: The two-strikes rule is a handbrake that curtails Australian productivity

It is time for an honest assessment of Australia’s burdensome two-strikes rule. This is a policy that, in aiming to safeguard shareholder interests, ultimately undermines them, and now operates as a drag on productivity, innovation, and talent retention in Australia’s listed companies. Below, we outline the reasons why the two-strikes rule is, on balance, doing more harm than good for our market and economy.

The two-strikes rule was introduced in 2011 to empower shareholders and drive accountability in executive pay. In practice, however, it has evolved to become a significant handbrake on value creation at a time when Australia can least afford it economically, given recent growth figures.

While GDP and productivity outcomes are influenced by many factors, remuneration rigidity compounds these pressures by diverting senior executives, directors, and HR professionals from business priorities, forcing them to spend excessive time and resources on predicting the market’s reaction and balancing this sentiment with their remuneration frameworks. This not only imposes direct costs on the business but also opportunity cost, with time spent on shareholder engagement and revising remuneration reports that should be spent on driving business performance and innovation.

Not only does it impose a material burden on the organisation, but there are also clear arguments (presented below) that the rule does more harm than good.

The pressure to avoid strikes has fostered an environment of short-term decision-making. Boards, wary of dissent, might prioritise decisions that appease shareholders quickly rather than those that would ensure sustainable growth in the long run. It turns the Board’s underlying problem statement from: “what is the best remuneration strategy for this business?” to “what is the best remuneration strategy for this business that will also avoid a strike?”

This lengthy process pushes companies to adopt risk-averse, cookie-cutter remuneration frameworks that are ultimately inefficient in terms of incentivising leadership.

Each organisation is unique and nuanced in its operations, business models, value chains, and risk exposure. So, is a balanced scorecard STI and a three-year LTI of performance rights tested with relative TSR really the optimal strategy for so many? If this model were so effective, why is it that in the private sector, away from proxy advisors and where pay-for-performance culture can be cutthroat, there is so much more creativity in remuneration frameworks?

From participants’ perspectives, an all-too-common occurrence is the following: “LTI is a lottery and therefore STI needs to pay out more consistently”. This is the exact opposite of what shareholders should seek, dulling the link between pay and performance and being left paying the bill for their executives’ very expensive raffle ticket that has no influence on decision making, effort, or behaviour.

A fundamental structural weakness of the two-strikes rule is that a “strike” is assessed against 25% of votes cast on the remuneration report, rather than 25% of a company’s total share capital. In practice, this means a relatively small and highly mobilised subset of shareholders can trigger a strike even where a clear majority of the share registry is passive or broadly supportive. Abstentions are excluded from the calculation, amplifying the effect of low AGM turnout and lowering the effective threshold for dissent. This design feature can result in remuneration outcomes being shaped by a vocal minority rather than the economic interests of the shareholder base as a whole, creating a governance mechanism that is procedurally compliant yet misaligned with true majority sentiment.

The rigidity and inefficiencies of the two-strikes rule have a further, more insidious effect: if listed Australian organisations are left in a suboptimal state due to their remuneration frameworks, it follows that senior talent seeking reward for strong performance will move to the private space or overseas, where organisations are less constrained. Maybe such talent has already moved, and change is required to bring them back.

This is hardly an outcome in the best interests of Australian investors or the long-term health of our superannuation system.

In reality, a strike against a remuneration report is not always a strike against remuneration. The vote can be usurped and used as a signal of dissatisfaction with matters wholly unrelated to executive pay, including strategic direction, operational performance, or controversial corporate actions. Because the remuneration report is an annual, high-profile resolution with tangible consequences, it has evolved into a de facto protest mechanism. This dynamic undermines the conceptual integrity of the two-strikes rule, exposing Boards to remuneration sanctions for non-remuneration issues and blurring the line between pay accountability and general governance dissent.

The one-size-fits-all approach that the two-strikes rule inadvertently encourages ignores the unique context of each organisation, dulls the link between pay and performance, and leaves shareholders footing the bill for incentive plans that do little to drive executive behaviour or align interests.

There are alternatives, however. Firstly, we should lower the 25% threshold to 50% (i.e., representing a shareholder majority). This greater threshold for action would allow us to make the rule tougher. For example:

• Impose more immediate and meaningful penalties for consecutive strikes, such as triggering automatic Board spills without an additional vote; or
• Make the remuneration report vote binding so remuneration reports must be amended and resubmitted if rejected, while this may not change the pay outcomes in the initial report, it would prompt Boards to respond sooner as to how they will change the pay framework in the coming year to take account of the stakeholder feedback (as opposed to shareholders awaiting a response in the following year’s report).

In lieu of such changes, the rule should be discarded altogether (or transformed into an advisory vote as is the practice in the US or at least allow for some form of policy approval that is allowed to operate over three years to enable greater flexibility as in the UK). At least then we free Boards and executives to focus on building effective remuneration mechanisms that genuinely reflect organisational performance and align executive incentives with long-term shareholder value. And remembering, shareholders have other options to signal their dissatisfaction with Board decisions including opposing re-election of Directors, or more poignantly, moving with their feet and selling down their shareholding and investing elsewhere.