As we reported in December 2012 (see HERE) the Australian federal government is proposing new disclosure laws in relation to pay levels and clawback. Directors and shareholders would likely all agree that the current disclosure requirements are overdue for simplification and refinement. Unfortunately, this is not what we are going to get.
If enacted in their proposed form, the proposed laws will result in:
· Current disclosure requirements being retained, including the misleading and complex accounting method for categorising, calculating and stating executive pay levels and components
· Additional 3 tables showing each executive’s pay, calculated in three different ways, as past, present and future pay
· Added pages to remuneration reports to explain that the remuneration figures provided double-count pay, relate to different time periods, relate to different performance periods, relate to differing valuation methods, and relate to different service periods
· More pages added to remuneration reports trying to explain how these disclosures relate to how the board sets pay or, alternatively, to explain a 5th additional set of numbers that better reflects how the board sets pay
· Additional disclosure regarding clawback policies.
But there is hope.
Unofficially, government sources have indicated that they understand that the laws will impose additional complexity. They have also indicated that they have listened to companies and investors proposing alternatives based on the new laws now being finalised in the UK parliament (see our next newsletter when we expect we will be able to report on the final laws there).
So, the government is listening.
As a company director, or institutional investor, you care about governance, efficiency, effectiveness and the sheer time you spend on executive pay matters. Here is your chance to do something about all of these things, for your own benefit and that of your fellow directors, and also for the benefit of shareholders who have to read remuneration reports. And the probabilities of the government responding improve the more everyone appears to be moving towards a consensus on what to do. So, while we all may have niggles at the edges around what the prime alternative is, swallow the temptation to over qualify your response, and focus on the things that most of us can agree on.
Here is what we suggest you may want to consider submitting to the government:
1. Existing remuneration disclosure requirements are too complex
2. The complexity derives in part from the need to disclose pay in an accounting format that fails to adequately distinguish performance pay from other pay, and is inconsistent and confusing in the valuation and reporting of equity-based pay
3. Therefore, drop all current requirements to report pay in the accounting based format
4. Amend the draft legislation requiring past, present, and future pay to require disclosure of two total numbers: 1) “remuneration granted”, consisting of fixed pay, STI awarded and the fair value of equity grants subject to future performance conditions; and 2) “remuneration receivable in relation to the current performance year”, consisting of fixed pay, STI awarded and the value of awards as a result of the achievement of performance conditions that end in the year being reported
5. Adopt the “remuneration granted” table and method described by Guerdon Associates with Allens, Regnan and CGI Glass Lewis in our submission to the Productivity Commission in 2009 (see HERE),
6. Adopt the new UK derived format that requires disclosure of “remuneration receivable in relation to current performance” described in the UK Financial Reporting Council’s publication HERE.
In effect, our two suggested numbers meet the government’s ambition:
- “Remuneration granted” is a simple way to present “present” and “future” pay in one set of numbers. It reflects how boards set the pay of an executive in the year being reported on. It allows a direct link with the reasons provided by directors when they set pay.
- “Remuneration receivable in relation to current performance” is a transparent way to present “present” and “past” pay. It is the outcome of pay in the year from meeting performance requirements.
This approach will allow executive pay to be comparable, transparent and linked to the outcomes from a company’s executive pay policies.
Address written submissions to:
General Manager Corporations and Capital Markets Division, The Treasury, Langton Crescent PARKES ACT 2600
If in doubt, call Scott Rogers at Treasury on (02) 6263 3076.© Guerdon Associates 2021 Back to all articles