Disclosures and Compliance – What Compliance?

The law may be an ass, but it is still the law.  This applies to Australia’s disclosure laws and regulations, as it does for other laws.  Why is it then that there is still such a poor level of compliance?  Just ten percent of the ASX 50 complied with one element of the law.

In this article we examine compliance in reporting on performance pay, identify companies with good disclosure, summarise exclusive Guerdon Associates compliance research, and conclude with some startling facts on the level of compliance.

The disclosure requirements relating to the remuneration of company directors and executives are specified in the Corporations Act 2001 Section 300A.  The act requires (among other things) a detailed discussion of all remuneration that “is dependent on the satisfaction of a performance condition”.

We have reviewed the 2006 disclosures in great detail in relation to performance based remuneration. Fortunately, most listed companies comply with most aspects of the disclosure regulations.  A typical Directors’ Report will include page upon page of grants of share options and/or performance right or shares.  The detailed disclosure lists every possible aspect of the equity instruments used commonly by companies today along with lengthy discussions relating to how the plans are enhancing shareholder value.

But, while equity based remuneration was usually fully disclosed, there was less compliance relating to Short Term Incentives (STIs) or bonus payments.

We have analysed the most recent disclosures for the largest 50 companies on the ASX.  The Australian market capitalisation of these companies ranged from $6.4 billion to $102 billion, with an average of $19.3 billion.   All fifty companies have an STI arrangement for all or most of their disclosed executives.  We would generally anticipate that the largest companies would be best resourced to comply with disclosure requirements.

Based on Section 300A of the act and the associated regulations, we have summarised the disclosure requirements that are of particular relevance in relation to STIs.  The disclosure must include:

1. Discussion of board policy for determining, or in relation to, the nature and amount (or value) of the STI
2. The relationship between STI policy and company performance (specifically company earnings and shareholder wealth)
3. A detailed summary of performance conditions
4. An explanation of why the performance condition was chosen
5. The methods used to assess the performance condition and an explanation of why the methods were chosen
6. For external performance conditions (eg TSR) a summary of factors used in making the comparison and the identity of each company or index used in the comparison
7. The percentage of the STI that was paid or vested
8. The percentage of the STI that was forfeited (due to service or performance criteria)
9. Any deferral or vesting arrangements for future financial years if service and performance criteria are met, including minimum and maximum possible value

The crux of the disclosure seems to be that shareholders have a right to know more than simply how much executives are paid.  They have a right to understand how performance based payments are calculated and how that relates to company performance.

For ease of analysis we chose to examine the disclosure as it related to the Managing Director (MD)/Chief Executive Officer (CEO) position, as this role is generally disclosed in more detail than other executives.  The one exception was Wesfarmers whose MD/CEO is ineligible for STI awards, so the STI details relate to senior executives.

Some of the disclosure requirements are a matter of subjective assessment as to whether or not they have been satisfied.  We focused on the most straightforward requirements that apply to all companies and that could be assessed objectively.  These were:
• Performance conditions (2 above)
• Link between STI and company performance (3 above)
• Amounts paid and forfeited (7 and 8 above)

Performance Conditions (or criteria)

There was a significant variation in the amount of detail disclosed relating to performance criteria.  It ranged from a vague description of measures to a detailed explanation of what had to occur before an STI was paid or a pool established.  For example:

“Typically the performance objectives comprise elements relating to individual performance, the performance of the relevant business division or function . . . and in some cases the . . . group.”

The description continues, but doesn’t shed any more light on how the STI was determined.  In contrast to this, the LTI performance measures and the hurdles attached are defined very clearly in the same report.  A shareholder would have no difficulty understanding exactly what has to happen, before an LTI can be awarded.  They are, however, going to have no understanding of how the STI award was calculated.

At the other extreme some companies provide a very detailed explanation of the measures and the actual targets used for the 2006 financial year.  We identified five companies (i.e. just 10% of the sample) with clear STI performance measurement disclosures.  IAG is a good example with five broad categories (financial, customer, people, risk and community/environment).  For each of these, one or more assessable goals has been identified, along with the reason it was chosen, the method of assessment and the outcome for the current financial year.

The vast bulk of the sample provided a description of the plan in general terms (eg financial and non-financial KPIs and a list of likely measures), but did not provide specific targets.  Most companies claim that specific targets are set and agreed at the beginning of the performance period.  It may be cumbersome to include these in detail for all executives, but there is no reason why these could not be summarised and included in the remuneration report, particularly for the MD/CEO.  It would still be possible to retain a degree of discretion regarding STI payments in exceptional circumstances.

Why are companies reluctant to put financial and other targets on paper?  The performance period has ended so there may be little if any advantage to competitors. Shareholder can be excused for being sceptical about the assessment process when it is shrouded in mystery.

Link Between STI and Company Performance

The most common method of illustrating the link between remuneration and company performance is the ubiquitous graph of company returns (TSR) against an ASX index and/or a customised industry index.  The outcome is largely dependent on the date that the comparison started and hence can be manipulated by careful selection of this date.

The real issue for STI plans is that TSR is not typically selected as a performance measure.  Some companies show share price, NPAT and/or EPS over current and past years, but unless these measures have been identified as STI hurdles, the relationship between STI policy and company performance has not been established.

It appears that virtually all the sampled companies are attempting to establish a clear relationship between their LTI performance criteria and company performance, but most are neglecting the STI component of this relationship.

Bluescope Steel Limited provided a useful table in their 2006 report, which identifies the average change in STI payments alongside the average change in NPAT for the past three years.  The NPAT reduced by 65.6% in 2006 and the STI payments reduced by 70.1%.  This provides a very clear indication that STI payments are genuinely at risk and linked to company performance.

Amounts Paid and Forfeited

We expected this to be the most straightforward disclosure and therefore to have the highest rate of adequate disclosure.  We found, however, that more than a quarter of the sample (26%) failed to disclose the forfeiture rate for STIs.  A further 8% did not disclose the forfeiture rate because the STI was based on a pool and was uncapped and therefore incalculable.


Of the 33 companies that provided forfeiture rates, one clearly had no relation to the maximum STI payable or any other disclosed number, such as target.  That is the disclosure of a zero forfeiture rate would suggest that the maximum STI had been awarded, however the actual STI disclosed is significantly less than the maximum.

There were two instances of forfeiture rates applied to target STI amounts, rather than maximum rates.

More than 90% of the MD/CEOs in the group that disclosed forfeiture rates, forfeited less than half of their STI award.  The average forfeiture rate was 23%.


The maximum STI payment is generally described as a percentage of fixed pay.  For the MD/CEO position this percentage varied from 44% to 200% of fixed pay.  The average was 108% of fixed pay.  Of the group that disclosed forfeiture rates, 18% did not disclose the maximum STI award.



• At least one quarter of the sample failed to comply with the simplest aspects of the disclosure requirements – forfeiture rate
• Fewer than 10% of the largest companies in the ASX complied with all the aspects examined in our research
• Compliance with the disclosure requirements should be a straightforward for most companies because they disclose that they have systematic ways of assessing performance, yet they do not actually disclose these specifics

© Guerdon Associates 2021
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