Guerdon News Volume 1 Number 1

August 2005

Dear [FIRSTNAME],

Welcome to Guerdon Associates’ August newsletter. This month's highlights include a review of the reform Australian executive and director pay has undertaken over the past decade, and what more is required; the latest companies to have their data updated on the GuerdonData™ executive and director remuneration database; a summary of uses for various long term incentive plans; the misplaced reporting of leave accruals in executive remuneration disclosure as a likely compliance error missed by some auditors; and an opportunity to get free on-line access to executive and director remuneration disclosures for ASX 300 companies.

In the News - Australian Financial Review OpEd Article

Australia Must Continue Executive Pay Reform

Over the past 15 years Australian director and executive pay practices have evolved for the better. In fact, compared to other western countries, Australian executive and director pay practices should please investors. Director pay is, in the main, structured to ensure directors focus on their fiduciary duty without being overly distracted by the consequences of board decisions on their personal annual reward or retirement income. Executive long-term performance pay is, generally, reliant on truer shareholder value measures than their counterparts in the USA, Canada and the UK. Australia was the first western country to adopt international accounting measures requiring share plan reward to be more validly accounted for and disclosed. Regulatory and compliance burdens on Australian executive and director remuneration are relatively light, allowing more flexibility and lower compliance costs. And to top it all, our directors and executives are, relative to other western country counter parts, cheap!

So, you might think, Australia does not rate too badly. On balance it does not. But that does not mean that executive pay practices should stop evolving. If anything, executive pay reform must accelerate. Why? It is a competitive world, and others are also improving their pay and disclosure practices. US companies are rapidly replacing all stock option programs with cash and performance share alternatives tied to well considered LTI goals; large German companies, which are already probably the world’s best in setting rigorous short term incentive measures, are now required to disclose top executive remuneration; UK companies are now required to seek shareholder approval of executive remuneration; and the US, Canada and EU are adopting international accounting standards requiring more rigorous valuation of employee equity plans this year.

Click below for the full article.

Latest GuerdonData™ Update

Do you recognise any of these ASX codes: AVJ, CSR, JHX, PRG, MBL, RIN?

Six ASX 300 companies had financial years ending March 31. Guerdon Associates updated their data on our GuerdonData™ executive and director remuneration database within hours of their results being published. Companies included in these updates are AVJennings Homes Limited, CSR Limited, James Hardie Industries NV, Programmed Maintenance Services Ltd., Macquarie Bank Limited, and Rinker Group Limited.

Executive and director remuneration data from all ASX 300 companies on GuerdonData™ is available to any Guerdon Associates client. Click on the link below for more information on GuerdonData™.

A Single LTI or Equity Plan Can Not Do Everything, Although Some May Claim Otherwise…..

Surprising is not quite the word we had in mind when we started to analyse Australian executive pay. But by the time we had finished reviewing the executive pay of the ASX 300 for GuerdonData™, we could not think of a more apt term.

One source of our surprise was the disparity between the directors’ report pay rationale (required under section 300A of Corporations Law) and the likely impact their actual pay structure would have on executive behaviour. Over 85% of ASX 300 companies used the terms “attract, retain and motivate”. Yet fewer than 30% had equity or LTI elements in place that could support all three.

A basic summary of LTI/equity plan objectives is provided below.

Direct achievement of specified business objectives
• Performance shares
• Performance rights
• Long term cash

Share price appreciation
• Traditional share options
• Premium priced share options
• Performance vested options
• Share Appreciation Rights (SARs)

Relative share price appreciation
• Indexed options
• Performance vested options

Align executives with shareholder interests
• Time based restricted shares

Minimise dilution
• Long term cash
• Share Appreciation Rights
• Performance shares
• Performance rights
• Time based restricted shares

Reduce financial accounting impact
• Long term cash
• Performance shares
• Time based restricted shares

Attraction
• Share options

Retention
• Time based restricted shares

Note that many other variations are possible depending on specific company history, competitive circumstances and other objectives.

It seems as if many Australian companies are trying to shoe horn all their pay objectives for the CEO and other key executives into one or two LTI or equity vehicles. Simply put, this is not likely to work.

Executive and Director Remuneration Disclosure: Common Compliance Errors – Leave Accruals

Should leave accruals be shown in executive remuneration table disclosures?

If companies follow the letter of AASB 1046 director and executive disclosure requirements, the answer will probably be no. Yet our GuerdonData™ database indicates that five ASX 300 companies have shown accrued leave in one of the defined AASB 1046 categories of their remuneration disclosure tables since June 30 last year. So, if you are a director on either the remuneration or audit committees of the board, and you see leave accruals in the draft document’s AASB categories, ask your auditors, or remuneration consultants, why this is appearing, and why your company’s practices should vary from the vast majority of ASX companies.

On-line Version of GuerdonData™ Available Soon

Early Subscribers Can Get Free Access to Beta Version Now!

Australia’s most comprehensive director and executive remuneration database will be available on-line in September. However early subscribers can get access to all data and reports for free until the official launch of the service. The beta version allows users to search for any sample of companies by ASX code, name, industry group, location, size, financial performance and even telephone number. Positions can be sampled by role (that is, as a specified executive, non executive director or executive director) and, if applicable, position title. Individuals can even be selected by name.

Twenty-seven standard reports will be available to users in the beta version, based on either the AASB 1046 standard, or more traditional fixed and at risk remuneration formats. Each report will include summary standard statistics for the sample selected.

Contact us or click below for more details.

Disclaimer

The information, analysis and opinion in this e-mail and attachments are intended to be for informational purposes only. Analyses are based on information taken from public documents or private surveys, and we do not represent to its accuracy. Guerdon Associates assumes no liability for the use or interpretation of information contained herein. This publication is provided "as is" without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranties of marketability, fitness for a particular purpose, or non-infringement of third party rights.

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