ASA position and guidelines on executive remuneration
02/05/2009
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The Australian Shareholders’ Association (ASA) represents retail shareholders. As such, it can be a significant force in directing proxies on behalf of its members for companies with a large retail shareholder base.

The ASA released its updated policy statement on executive remuneration ‘for the guidance of listed companies’ on 23 March 2009.

The ASA is concerned about:

  • The rate at which executive remuneration has increased in the last 10 years;
  • The gap between remuneration for senior executives and other employees;
  • Whether Australian executive remuneration really needs to meet US and UK standards;
  • Large termination payments;
  • High levels of short-term incentive payments and the potential for these to encourage executives to adopt a short-term rather than a longer-term focus.

The ASA is also concerned that incentive payments are too often made for less than superior performance and are not well aligned with returns generated for shareholders.

Key points of the ASA’s position on executive remuneration are:

  • Executive remuneration base salaries should be sufficient to provide full and appropriate compensation where performance is adequate but not superior
  • Incentives should only be paid for superior performance
  • As a broad indicator, incentive awards equal to the amount of base salary would be acceptable for a CEO who achieves significantly superior performance
  • CEO and possibly other senior executive incentives should be provided through long-term incentives (LTI)
  • Short-term incentives (STI) are questionable for CEOs and should be used only where the performance targets support and are entirely consistent with the company’s long-term goals
  • Golden parachutes “are totally unacceptable to shareholders”. Other lump sum payments such as executive retention payments and compensation for “benefits foregone at previous employers” are also in-principle unacceptable to shareholders – any exceptions need to be clearly described and fully justified in the remuneration report

The ASA intends to vote undirected proxies against the re-election of directors at the next company AGM where there has been a significant (e.g. 20%) vote against the remuneration report by independent shareholders and the board fails to take appropriate corrective action

The ASA’s guidelines for LTI plans advocate that:

  1. LTIs should reward executives for creating shareholder value and provide incentives to create further value
  2. LTIs should be based on two components – one using relative TSR against an appropriate comparator group, with vesting at a maximum of 10% at 51st percentile performance increasing to 100% no earlier than 75th percentile performance (subject to the requirement that TSR must be positive); the second providing an incentive to achieve long-term improvement in company performance, typically using a hurdle based on a pre-set and superior level of increase in company earnings that the board considers best reflects long-term progress across business cycles (e.g. growth in earnings per share, return on funds employed)
  3. LTIs should be made in equity, with performance assessed at the end of a fixed period of no less than 4 consecutive years and with no re-testing 
  4. A “meaningful” portion of CEO equity awards should be subject to a holding period of at least 2 years after vesting, “to promote and support management succession and other strategic long-term objectives”

On STIs, the ASA says:

  1. Around 50% of STI awards should be based on verifiable financial performance metrics at the company level and/or of the area of responsibility of the individual executive, with the remainder based on quantifiable performance indicators set at the start of the period
  2. STI performance indicators should be disclosed to shareholders (retrospectively if necessary to avoid disclosing commercially sensitive information) and should be supported by details of the maximum and minimum amounts available to be earned under the plan 
  3. At least 50% of STI awards should be in the form of equity deferred for at least 2 years from the end of the relevant performance period, irrespective of whether the executive remains in the position.

Copies of the ASA policy are available HERE.

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