Picture the scene – you are Chair of the Remuneration Committee and you’ve just been given the timetable for the drafting of the remuneration report. The schedule shows that RemCo does not get first draft until 6 weeks after year end and the annual report is scheduled to go to the printers 4 weeks later.
You would be justified if you are not comfortable with the timetable given the focus, scrutiny and sensitivity of the remuneration report. Unless you are in the ASX 50, this scenario may be close to home. The larger companies have the resources to focus on the drafting at the same time as budgets and business planning are proceeding. However, the management team in less well-resourced companies who are responsible for the monthly accounts, the budget and business plans also, typically, have responsibility for the remuneration report drafting.
If your company is a 30 June year end, you may find the following approach to be useful.
|Who is responsible for the remuneration report?||The Corporations Act 2001 requires directors to prepare a directors’ report that must include the specific details required under section 300A of the Act. These are captured in the remuneration report. This means the finance team, legal team, HR team, the executive team and any others who are involved in the preparation of the remuneration report all do a great job – but it is the directors who own it.
The board chairman and fellow directors will expect the RemCo Chair to be responsible for the remuneration report, ensure its timely preparation, that it meets statutory and regulatory requirements, and, most importantly, succinctly and clearly communicate the board’s philosophy and approach on remuneration.
|What’s a good timetable for preparation of the remuneration report?||It’s worth remembering that all the matters for disclosure in this year’s report, except one, are already known. The remuneration policy is known, fixed remuneration is known, the LTI grants and performance requirements are known, the STI targets and maximums are known, the KPIs are known, the accounting data is all known. The unknown is the current year’s KPI and STI outcomes.
So, the rem report can effectively be drafted in a near-to-final format well before the end of the year. This will enable a clearer identification and focus on the critical issues at the time of final drafting.
Subject to your company’s circumstances, an effective timetable may look like:
|Who in Management should be responsible for preparation of the remuneration report?||This will depend on the company’s resources and the particular skillset of available personnel.
It is, however, worth remembering that there are two fundamental characteristics of the report:
· It tells your narrative
· It is a compliance statement
Many commentators have said “keep the lawyers away from it”; others have said “you don’t need the finance guys” and others will tell you the HR, company secretary or investor relations team should do it. There is no right or wrong team for the role as all need to provide some input.
Since the communication aspect is most critical, you are probably looking for a competent project manager (to pull together the compliance requirements) who is a skilled written communicator.
When all is said and done, it remains that the RemCo Chair should know everything about the company’s remuneration framework, what you want to tell stakeholders and how you want to tell it. So the teaming of the project manager and RemCo Chair is important.
|What is ‘best practice’ for the remuneration report structure?||Guerdon Associates suggests there is no such thing as best practice. It is your story, your narrative that you want to tell stakeholders – so it will often vary.
Importantly, don’t follow the same format as in prior years if it is not structured to get the message across as clearly and as simply as possible. While it is often easy to follow the same format, it can lead onto lengthy and confusing reports as things keep changing each year.
It can be useful to package up the compliance requirements and have them tightly grouped together in the second half of the report. This will be the statutory details of amounts paid for fixed remuneration and Short Term Incentive (STI), accounting expense for equity grants and details of equity holdings and grants along with contract data and other details.
The first half of the report should tell the company’s ‘story’, in plain English:
· What you want to tell them about this year – the critical things your investors should hear from you
· Your description of the remuneration framework – and when doing this, it’s worth remembering what Albert Einstein said: “If you can’t explain it simply, you don’t understand it well enough”.
It is not uncommon to see remuneration reports with a written discussion of the framework and how it operates followed by tables setting out the terms and conditions of the STI and the LTI. The same thing may be said three times in similar ways leading to both lengthy and confusing remuneration reports. “Less is more” is often worth remembering.
· This description should help the investor understand why the company has this remuneration structure, why it is better than other structures for the company in its particular circumstances, and should answer the questions that most obviously come to mind.
· A summary realisable remuneration for the key personnel this year. This could be set out in a table and, importantly, it is worth showing how much of what is realisable is attributable to share price appreciation – the difference in value at the time of grant and the time of vesting shows the alignment of executives’ outcomes with shareholder experience.
· Clear graphs and tables that are easy to follow and interpret will always be better than another page of words.
|Should an actual or ‘realisable’ table of pay outcomes be included?||A table of what has actually been received or realisable during the year is not statutorily required.
It can, however, be good practice provided the company’s disclosure each year is consistent, transparent and explained well.
State the principles on which you are calculating the amount that is ‘actual’ or ‘realisable’ and apply the same principles each year.
It is a good idea to show the total value of what has vested in the executive on the day of vesting and show the proportion of value that was granted and what has grown since the grant date.
|What are the red flags?||The board should not be expecting any surprises at the time of the voting on the remuneration report.
Many boards, therefore, find it useful to require their remuneration adviser to review the report from the perspective of investors and proxy advisers and identify the red flag issues – what is in the report that will create issues for investors and proxies and how should it be handled?