ASIC provides guidance on exercising discretion on incentive pay arising from COVID-19
15/06/2020
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On 12 June the Australian Securities and Investments Commission (ASIC) released an information sheet for boards considering the application of discretion on variable reward plans and payments.

The release of the information sheet is at least partly in response to requests from companies for guidance given that ASIC’s report on remuneration governance has been delayed due to a change in market regulation priorities because of COVID-19.  The report stems from the 2019 ASIC investigation of board variable remuneration scheme oversight, covering 21 ASX-listed companies across seven industry sectors.

The review was intended to identify good and bad practices in making decisions about remuneration, raise governance and reduce the risk of failures, reputational harm and loss resulting from poorly overseen variable remuneration outcomes.

This report’s release has been shunted to later in 2020 (although we note it does not appear on ASIC’s revised schedule released the same week – see HERE).

The information sheet fills a gap that draws on the review’s findings to help boards and remuneration committees with their decisions in the context of COVID-19, happening now.

The information sheet is intended as “practical guidance” to support board oversight and the exercise of discretion on the variable pay outcomes of large listed companies’ most senior executives.

A summary is below.

Companies must exercise robust governance during decisions to ensure decision making is effective and informed and does not send the wrong signals to executives. In ASIC’s view, a robust governance framework is characterised by four key elements.

1. It is guided by frameworks and processes that result in the “active, timely and consistent exercise of discretion”

The Hayne Royal Commission (see HERE) and previous APRA reviews into the financial sector (see HERE) have shown that discretion is not often exercised when it should be, or of an appropriate standard.

One way of assisting boards with making sure discretion is at least regularly considered (if not exercised) is to outline scenarios that would trigger board consideration of discretion.

Essentially, this is what ASIC is suggesting. It suggests scenario analysis and decision trees be created to guide decisions, and that the board be provided with standard information at set points of the remuneration process so that a consistent decision-making process can be followed.

It notes that such frameworks might help now in the years following COVID-19 to ensure that decisions made now regarding pay in response to COVID-19 do not have unintended consequences and are consistent with the objectives of the framework. (Disclosure of such frameworks may also help decisions cross the line with external stakeholders.)

2. Makes decisions with the benefit of structured and contextual information from unbiased sources.

To ensure the exercise of discretion is objective and informed, a broader range of information may be required. For example, in evaluating balanced scorecard outcomes, this could be information on impacts on stakeholders (customers, investors and employees).

Information provided by the CEO can be supplemented by information from control functions within the company such as finance, risk, compliance, internal audit and human resources or information from third party advisers.

ASIC acknowledges that while cross-committee membership is helpful (e.g. a member of risk and audit on the remuneration committee), it would also be helpful to include:

  • joint committee meetings
  • agenda time within remuneration committees for a cross-committee member to contribute or present documented input from other committees.
  • input of independent third-party advisers or other external information sources to help with decision making during this period.

3. Employs arrangements to manage conflicts of interest

Having an executive compile information on company performance that will decide their performance is a conflict of interest, although ASIC acknowledges that this may be necessary. This can be supplemented with information from independent sources as mentioned above. Other mechanisms ASIC suggests include ensuring that the CEO does not have input into setting her own pay, for example, if she would have input into a bonus pool for herself and the executive team, that a separate pool for the CEO be created over which the board has sole discretion.

Planning sufficient time in agendas for debate can also help or planning preliminary meetings to ensure the remuneration committee has enough information for key decisions.

 4. Transparently records and communicates decisions

Communication in corporate disclosures on rationale is recommended by ASIC. This record would be useful to ensure consistency. Disclosures might reveal:

  • Rationale for exercise of discretion, or decision not to
  • The governance process and principles adopted in making the variable pay decisions
  • How the company’s specific circumstances and issues it faces with the COVID-19 pandemic were taken into account in the decision-making process

The ASIC information sheet can be found HERE.

© Guerdon Associates 2020
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