Speaker 1:    Welcome to the Guerdon Associates podcast. We will review research on the standardisation of executive remuneration frameworks and the associated changes to firm valuation. We will also examine regulatory adjustments across 29 jurisdictions alongside capital allocation metrics across the ASX 100. Our discussion will conclude with global governance adjustments involving proxy voting and realised pay.

Speaker 2:    Right. So, the structural design of executive compensation dictates capital distribution and organisational risk management.

Speaker 1:    Yeah.

Speaker 2:    Evaluating these frameworks reveals the mechanisms guiding corporate governance. When you analyse the reporting, it becomes clear how regulatory mandates and investor preferences directly modify board behaviour.

Speaker 1:    Well, let’s get into it. According to the research published by Guerdon Associates in August 2024, variation in US listed company CEO pay components decreased by 24% since 2006.

Speaker 2:    Yes.

Speaker 1:    The distribution of these pay components is converging. Base salaries, short-term cash bonuses, and long-term equity awards are moving towards standardised ratios across the market.

Speaker 2:    Right. And this convergence is consistent across multiple variables. The trend applies across firm size, firm age, profitability, and industry.

Speaker 1:    So, the structural alignment remains consistent regardless of operational differences or market positioning.

Speaker 2:    It does. A manufacturing firm and a technology firm exhibit converging remuneration designs. The secures despite them operating with differing capital expenditure cycles and revenue timelines.

Speaker 1:    The reporting identifies institutional ownership as a driver of this alignment. Firms with higher institutional ownership have more uniform pay structures and the standardisation effect strengthens when these investors engage directly with a firm’s management to influence corporate policies.

Speaker 2:    Yes. Institutional investors use their voting power and engagement channels to push for uniform remuneration structures that align with their specific preferences. As institutional ownership increases, the variation in pay design decreases.

Speaker 1:    Because they manage portfolios containing thousands of equities, right?

Speaker 2:    Exactly. Standardised compensation frameworks lower their internal monitoring costs. This allows them to apply uniform voting guidelines across their entire portfolio rather than evaluating customised packages for each individual company.

Speaker 1:    I need to ask how expanded disclosure requirements lead to this standardisation? I mean, if operational requirements differ broadly between industries…

Speaker 2:    Expanded requirements facilitate mimicry.

Speaker 1:    Okay.

Speaker 2:    Increased transparency provides granular metrics regarding competitor pay structures. When a firm has a high proportion of institutional investors, those investors utilise the expanded disclosures to benchmark and enforce uniform structures.

Speaker 1:    So, the availability of comparative metrics directly fuels the homogenisation of executive compensation?

Speaker 2:    Yes. Remuneration committees review peer group disclosures to determine baseline pay practises. Once the median is established through these disclosures, boards design their frameworks to align with that median.

Speaker 1:    Which eliminates structural variation.

Speaker 2:    Right.

Speaker 1:    The research also outlines the role of proxy advisory firms. Firms receiving negative recommendations from proxy advisory firms standardise their packages in subsequent years.

Speaker 2:    A negative recommendation serves as an enforcement mechanism. To avoid recurring friction with shareholders, boards modify their subsequent remuneration frameworks to match accepted market norms.

Speaker 1:    Thereby eliminating variation.

Speaker 2:    Right. When a proxy advisor issues a negative recommendation, it frequently triggers an automatic vote against the compensation package by institutional investors using predetermined voting algorithms.

Speaker 1:    And then the board replaces customised incentive structures with standardised models to secure shareholder approval in the following proxy season.

Speaker 2:    Yes. And the analysis establishes that uniformity is associated with lower firm valuation and shareholder returns.

Speaker 1:    Well, standardisation prevents tailoring to specific company needs, doesn’t it?

Speaker 2:    It does. If boards lack the flexibility to design optimal remuneration plans that address specific operational requirements, the firm’s valuation decreases. Market-wide uniformity prevents the implementation of customised incentive structures designed to maximise shareholder value.

Speaker 1:    So an organisation undergoing a restructuring requires a different incentive mechanism than a mature entity focused on dividend distribution.

Speaker 2:    Yes. When boards apply standardised models to satisfy external proxy guidelines, they misalign executive incentives with the operational realities of the business.

Speaker 1:    To summarise the segment, CEO pay variation decreased by 24% since 2006, driven by investors, proxy advisors, and expanded disclosure rules.

Speaker 2:    And the key takeaway for the board director is that standardised remuneration frameworks correspond to lower firm valuation. Frameworks require evaluation based on specific company needs rather than market norms.

Speaker 1:    Moving on to our next story. Looking at the article published by Guerdon Associates in December 2024, the Financial Stability Board assessed 29 participating jurisdictions.

Speaker 2:    Right.

Speaker 1:    The assessment measured the implementation of compensation guidelines following previous evaluations in 2021. This provides a geographical overview of how regulators manage executive accountability.

Speaker 2:    Within those 29 jurisdictions, 14 jurisdictions made legal and regulatory changes to compensation requirements since 2021.

Speaker 1:    And the remaining 15 jurisdictions did not alter their regulatory requirements to the same extent.

Speaker 2:    Correct. The focus within the active jurisdictions centres on mechanisms that reclaim or withhold executive compensation following organisational risk failures.

Speaker 1:    Australia, the UK, and Hong Kong made regulatory changes. The US, Canada, and Japan did not. The implemented changes across the 14 active jurisdictions focus on risk alignment and consequence management. The divergence in regulatory activity demonstrates differing regional approaches to executive accountability.

Speaker 2:    Right. And the adjustments target five core mechanisms. These are in-year adjustments, severance payments, malus provisions, deferral periods, and clawback.

Speaker 1:    Let’s go through those. Regarding in-year adjustments, five jurisdictions made changes.

Speaker 2:    Yes. These adjustments require companies to impose immediate consequences for risk or conduct issues before the compensation is granted or vests.

Speaker 1:    Australia defined the trigger events for downward adjustments.

Speaker 2:    Right. Establishing explicit triggers removes ambiguity when applying immediate financial consequences. By detailing the specific conditions that warrant an adjustment, regulators provide boards with a framework to reduce executive pay during the performance year.

Speaker 1:    The second mechanism involves severance payments. Modifying severance requires balancing regulatory requirements, contract terms and fairness.

Speaker 2:    The UK requires deferral, malus and clawback for non – SNI companies.

Speaker 1:    SNI refers to small and non-interconnected firms, right?

Speaker 2:    Yes. For the larger interconnected institutions, the UK mandates that severance packages remain subject to performance and conduct evaluations over an extended period.

Speaker 1:    In contrast, Australia prohibits accelerated vesting for exiting executives and accountable persons.

Speaker 2:    Right. This ensures that deferred compensation remains subject to ongoing risk assessments even after the individual leaves the organisation. The executive cannot bypass risk evaluations by terminating their employment early.

Speaker 1:    The third mechanism is malus. Five jurisdictions strengthened malus provisions.

Speaker 2:    Malus allows a company to reduce or cancel deferred unvested compensation before it is paid to the executive.

Speaker 1:    And Australia applies malus across ADIs, insurers, and superannuation.

Speaker 2:    Yes. ADIs are Authorised Deposit-taking Institutions.

Speaker 1:    APRA regulated companies must apply malus to individual variable remuneration arrangements.

Speaker 2:    The fourth mechanism involves deferral periods.

Speaker 1:    Nine jurisdictions implemented changes.

Speaker 2:    Extending the deferral period ensures that executive compensation remains linked to the long-term risk profile of the decisions made during the performance year.

Speaker 1:    Australia’s APRA minimum deferral is six years for CEOs, five years for senior managers, and four years for highly paid material risk takers.

Speaker 2:    The duration of the deferral aligns with seniority of the position. The CEO directs overall corporate strategy requiring a six-year deferral to assess the long-term viability of those strategic decisions.

Speaker 1:    While senior managers execute operational directives requiring a five-year deferral.

Speaker 2:    Right. And material risk takers operate within specific business units requiring a four-year deferral.

Speaker 1:    The final mechanism is clawback. Six jurisdictions implemented clawback provisions. Clawback involves the recovery of compensation that has already vested or been paid to the executive. Australia requires two years from the date of payment or vesting across superannuation banks and insurers. Outline the specific challenges associated with clawback mechanisms as outlined in the research.

Speaker 2:    Well, the challenges involve strong labour laws preventing reclamation of previously paid compensation. They involve retrospective proof of misconduct, which requires extensive investigation.

Speaker 1:    Right.

Speaker 2:    They also involve the enforceability of contracts, particularly when recovering funds from former employees. These structural barriers complicate the practical execution of clawback policies.

Speaker 1:    Because reclaiming funds already deposited in a former executive’s bank account requires navigating intersecting employment laws and corporate governance codes frequently resulting in litigation.

Speaker 2:    Yes. In addition to these five mechanisms, non-financial measurements related to sustainability and ESG goals were implemented in Australia and seven other jurisdictions.

Speaker 1:    Which introduce further complexity into the evaluation of risk and conduct. Boards are incorporating environmental risk factors alongside traditional financial metrics.

Speaker 2:    The introduction of sustainability risks, misconduct risk, and conflict of interest management into compensation frameworks adds layers of non-financial criteria that boards must quantify and monitor.

Speaker 1:    I mean, measuring a reduction in operational risk or the implementation of compliance protocols requires qualitative evaluation models distinct from standard financial auditing.

Speaker 2:    It does.

Speaker 1:    To summarise the segment, 14 of 29 jurisdictions implemented regulatory changes to compensation with variations in malus, deferral, and clawback rules.

Speaker 2:    And the key takeaway for the board director is that board directors must ensure their policies adhere to the specific deferral periods and clawback rules mandated by their local regulators such as APRA.

Speaker 1:    Shifting gears to our next topic. According to the analysis published by Guerdon Associates in July 2026, the scope of the assessment covers 100 companies in the ASX 100.

Speaker 2:    Right.

Speaker 1:    The research evaluates the relationship between capital distribution strategies and executive incentive design.

Speaker 2:    Across the ASX 100, 47% of companies adopt at least one growth metric in their LTI.

Speaker 1:    LTI refers to long-term incentive plans.

Speaker 2:    Yes. The presence of a growth metric indicates an active prioritisation of organisational expansion within the compensation framework. These metrics frequently measure earnings per share growth or comparative revenue expansion over a multi-year performance period.

Speaker 1:    Of the companies that grant an LTI, 27% have a dividend yield above the ASX 100 index. Paying a high dividend physically removes capital from the balance sheet, distributing cash directly to shareholders instead of retaining it for internal reinvestment.

Speaker 2:    And within that subset of companies with a dividend yield above the ASX 100 index, 10% of those companies include a growth measure as a performance hurdle.

Speaker 1:    So the inverse relationship indicates that companies heavily distributing capital through dividends are less likely to incentivise growth within their executive ranks.

Speaker 2:    Right. If you remove capital from the firm, you limit the financial resources available to fund acquisitions or fund research and development. Therefore, establishing a growth target in the LTI becomes structurally misaligned with the capital distribution reality.

Speaker 1:    The adoption of growth measures varies strictly by industry sector. Industrials recorded at 83.3% for utilising growth measures.

Speaker 2:    Healthcare recorded at 80%. These sectors utilise retained earnings to fund ongoing operational expansion, product development, and geographic scaling.

Speaker 1:    Conversely, utilities and energy implement zero growth measures in their LTI plans.

Speaker 2:    The sector variations reflect the different capital needs and operational dynamics inherent to each industry classification. Utilities operate within regulated return environments characterised by high initial capital expenditure and stable mature cash flows.

Speaker 1:    So their strategic mandate centres on returning yield to shareholders rendering executive growth metrics incompatible with their operational models. Specify the differences in median dividend yield for the real estate sector.

Speaker 2:    In the real estate sector, companies without a growth measure have a 2.36% higher median dividend yield compared to those that include a growth measure. Real estate investment trusts frequently operate under structures that require the distribution of taxable income to shareholders.

Speaker 1:    And this pattern of higher dividend yields in the absence of growth metrics repeats across the financials, consumer staples, consumer discretionary communication services and material sectors.

Speaker 2:    It does. The analysis also categorises the 100 companies in the ASX 100 by 3-month market capitalisation quartiles.

Speaker 1:    We are examining the largest companies in the index against the smallest companies in the index.

Speaker 2:    Right. The inverse relationship between dividend yields and growth measures persists regardless of company size. In the highest quartile, companies without a growth measure have a median dividend yield 3.19% higher than those with one.

Speaker 1:    So, the largest organisations maintain this structural division between yield distribution and growth incentivisation?

Speaker 2:    Yes. In the lowest quartile, it is 1.47% higher.

Speaker 1:    The gap demonstrates that boards consistently face a structural choice between prioritising immediate shareholder payouts and investing in long-term organisational growth, irrespective of their market capitalisation.

Speaker 2:    Exactly. Remuneration committees evaluate these performance hurdles to ensure they reflect the firm’s capital strategy. Misalignment occurs when high dividend payouts operate alongside growth oriented LTI measures.

Speaker 1:    I mean, if you sit on a board operating a high yield model, implementing a revenue growth hurdle forces management into a conflict, they must achieve growth targets while lacking the retained capital necessary to finance that growth.

Speaker 2:    Right.

Speaker 1:    To summarise this segment, across the ASX 100, 27% maintain a dividend yield above the index and 10% of those incorporate a growth measure.

Speaker 2:    The key takeaway for the board director is that remuneration committees must evaluate whether performance hurdles align with capital distribution strategies and dividend policies.

Speaker 1:    Turning our attention to our final topic. Based on the report published by Guerdon Associates in October 2026, global executive pay governance trends indicate shifting expectations regarding disclosure reporting and shareholder engagement.

Speaker 2:    Right. Corporate governance practises are adjusting to technological implementations and altering investor priorities. Disclosure reporting is changing as jurisdictions adjust their regulatory frameworks.

Speaker 1:    For example, the US is considering reductions in disclosure burdens.

Speaker 2:    And the UK is moving away from prescriptive formulaic disclosure. Regulatory bodies are evaluating whether the continuous addition of mandated reporting requirements provides actionable metrics for investors or simply increases compliance costs.

Speaker 1:    While the volume of prescriptive disclosure decreases, shareholders are relying more on direct engagement and less on proxy advisor recommendations. I want to clarify the mechanics here. If shareholders are reviewing less formulaic disclosure, how are they processing governance decisions without relying on centralised proxy advisory firms?

Speaker 2:    Well, proxy advisors historically held uniform influence over voting outcomes. Currently, institutional investors develop internal analytics and utilise pass-through voting.

Speaker 1:    Pass-through voting allows institutional fund managers to delegate proxy voting decisions to their underlying investors or to apply customised funds specific voting policies.

Speaker 2:    Yes. This transition moves the focus toward market-specific scrutiny and customised engagement between shareholders and issuers. Instead of relying on a centralised proxy firm’s uniform guideline, shareholders assess this specific operational context of the firm.

Speaker 1:    The research tracks the trajectory of environmental, social, and governance themes. ESG influence in executive compensation softened or reversed since 2024 and 2025 in Australia, Brazil, and the US.

Speaker 2:    Following a period of integration between 2020 and 2023, the application of ESG metrics within executive compensation frameworks reversed in these specific markets.

Speaker 1:    So, boards are recalibrating their LTI frameworks, removing qualitative environmental and social metrics and replacing them with quantifiable financial returns.

Speaker 2:    Right. This addresses shareholder demands for direct alignment between executive payout and operational profitability.

Speaker 1:    Technological advancements are altering the mechanics of shareholder stewardship. Stewardship teams will use AI to identify compensation outliers, governance concerns, and related party risks.

Speaker 2:    The processing speed of artificial intelligence changes the timeline of governance evaluations. The integration of AI-enabled analytics allows stewardship teams to assess director independence issues and compensation anomalies earlier in the proxy season.

Speaker 1:    This technological capability necessitates preemptive shareholder engagement from corporate boards. Previously, stewardship teams required weeks to manually analyse hundreds of proxy filings.

Speaker 2:    Now, artificial intelligence processes these filings instantly, identifying structural deviations from market norms immediately upon publication.

Speaker 1:    The metrics evaluated by investors are also changing. Realisable pay will become more common in disclosure. We need to distinguish this from the grant date value that is traditionally reported.

Speaker 2:    Yes. Investors focus on what executives actually earn or can realistically earn rather than relying solely on the grant date value. The grant date value represents the accounting cost of the equity at the time it is awarded.

Speaker 1:    And realisable pay calculates the current value of that equity based on the prevailing share price and performance outcomes.

Speaker 2:    Right. Evaluating realisable pay provides a measurable indicator of effective pay design and performance alignment. If the share price drops over the performance period, the realisable pay accurately reflects the reduced value delivered to the executive.

Speaker 1:    How are risk management measures like clawback provisions enforced in Australia and the US? With regulations expanding in 14 jurisdictions, the mechanics of enforcement determine the efficacy of the provisions.

Speaker 2:    Most markets adopt these measures voluntarily, leaving enforcement to board discretion. While clawback provisions are becoming standard components of pay design, the actual execution of these risk control measures relies on the independent judgement of the board rather than prescriptive regulatory mandates in many jurisdictions.

Speaker 1:    So, regulators mandate the inclusion of the provision in the corporate policy, but when an incident occurs, the board must initiate the legal proceedings to reclaim the funds.

Speaker 2:    Exactly. This creates a divergence between the documented policy and the practical execution of consequence management.

Speaker 1:    To summarise this segment, governance practises are adapting with ESG influence reversing in some regions and AI being used for stewardship analytics.

Speaker 2:    The key takeaway for the board director is that boards must provide explanations for pay design to address preemptive shareholder engagement and AI enabled stewardship analytics.

Speaker 1:    What happens when the push for transparent disclosures ultimately conflicts with the firm’s need for customised non-standardised incentive structures? Thank you for joining the Guerdon Associates podcast.