Promoting governance and accountability: The two-strikes rule elevates executive remuneration governance in Australia

Since its introduction in 2011, Australia’s two-strikes rule has played a material role in reshaping the governance of executive remuneration. Far from being a blunt regulatory constraint, the rule functions as a targeted market mechanism designed to address a longstanding coordination failure between Boards and shareholders. By attaching consequences to sustained shareholder dissent, it reinforces accountability while preserving Boards’ ability to design remuneration frameworks suited to their specific strategy and circumstances.

The evidence suggests the rule has had a tangible impact. Since its introduction, ASX 100 CEO fixed pay has declined by more than 20% in real terms, according to the Australian Council of Superannuation Investors (Fig. 1). In a market where executive pay growth had previously outpaced broader wage growth and, at times, company performance, this represents a meaningful recalibration rather than regulatory overreach.

The two-strikes rule emerged from the Productivity Commission’s 2009 inquiry into executive remuneration, which identified a clear imbalance of influence. While shareholders ultimately bear the economic cost of poorly structured or excessive remuneration outcomes, they historically lacked an effective mechanism to influence those outcomes in a coordinated and consequential way. Individual protest votes were easily absorbed, and dissatisfaction rarely translated into change.

The two-strikes framework directly addresses this failure. If 25% or more of shareholders vote against a company’s remuneration report at two consecutive Annual General Meetings, a spill vote is triggered. Should a majority support the spill, directors face re-election. The policy intent was explicit: to “improve alignment between the interests of executives, shareholders and the boards that represent them, thereby achieving better remuneration (and other) outcomes over time”¹. By lowering the threshold for collective action while stopping short of prescribing outcomes, the rule strengthens market discipline rather than distorting it.

A defining strength of the two-strikes rule is that it enhances accountability without dictating remuneration design. Boards retain discretion to structure executive pay in ways that reflect their organisation’s strategy, risk profile, and operating environment. The rule simply requires that those decisions withstand scrutiny and are clearly articulated to shareholders.

This distinction is critical. The two-strikes rule does not mandate uniformity, nor does it prevent companies from adopting innovative or non-standard remuneration frameworks. Rather, it places the onus on Boards to explain why their approach is appropriate and how it aligns executive incentives with long-term value creation. Where that explanation is credible, shareholder support has generally followed.

The experience of Macquarie Group illustrates this dynamic. Despite maintaining lucrative remuneration practices that differ materially from many ASX-listed peers, Macquarie has historically received strong shareholder backing. Where dissent has arisen, such as following its first strike in 2025 amid heightened scrutiny, it has been contextual rather than structural. This underscores that the rule does not punish difference; it challenges poor disclosure, weak alignment, or insufficient justification.

One of the most enduring outcomes of the two-strikes rule has been the uplift in transparency across remuneration disclosures. To secure shareholder support, Boards are incentivised to clearly explain not only how executive pay outcomes are determined, but why particular structures, measures, and judgement calls have been adopted.

This enhanced disclosure reduces information asymmetry between Boards and investors, enabling more informed voting decisions. Over time, it has also lifted remuneration literacy across the market, improved benchmarking discipline, and sharpened expectations around what constitutes defensible, performance-linked pay. In this way, the rule protects shareholder value not only at the company level, but also systemically, by reinforcing norms that constrain rent seeking and reward credible alignment.

The two-strikes rule also embeds a mechanism for continuous improvement. When a strike occurs, companies are required to respond explicitly in the subsequent remuneration report, outlining how shareholder concerns have been addressed. This requirement does not compel Boards to capitulate to every objection, but it does ensure that shareholder feedback is acknowledged and considered.

Over time, this iterative process has encouraged more constructive engagement between Boards, management, shareholders, and proxy advisors. Once an appropriate equilibrium is reached, recognising that business strategies and external conditions continue to evolve, remuneration debates tend to become more focused and less adversarial, freeing Boards to concentrate on broader strategic priorities.

As highlighted in PwC’s first debate series, a defining feature of Australia’s corporate and social landscape is a strong commitment to fairness and accountability. The two-strikes rule reflects these values in practice. It does not elevate shareholder preferences above Board judgement, but it ensures that executive remuneration decisions are subject to meaningful challenge where alignment breaks down.

Footnote

¹ Productivity Commission Inquiry Report 2009: Executive Remuneration in Australia (p. 392)