The 7^th annual Remuneration Forum, sponsored by Guerdon Associates and proxy adviser CGI Glass Lewis, was held in Melbourne on Monday 4 March 2013.  The Remuneration Forum brought together participants from all sides of the executive remuneration debate – including directors, institutional investors, regulators and management. 

 

This year’s Forum addressed the still evolving remuneration disclosure regime and the operation of the remuneration governance system, with particular attention paid to shareholder activism against ‘unjustified’ incentive payments and managing engagement after a big vote against the remuneration report.

 

The keynote address was delivered by The Hon. Bernie Ripoll, MP, Parliamentary Secretary to the Treasurer.  Mr Ripoll outlined the government’s policy approach for achieving a system that is internationally competitive, and that rewards executives appropriately but with shareholder input.  The two-strikes process is the centrepiece of the government’s approach, which aims to align executive pay with company performance and to drive cultural change in Australian boardrooms.  According to Mr Ripoll, the success of two-strikes is to be measured by the number of companies without strikes, because the process impacts all companies, which suggests company remuneration policy/practice is already changing. Mr Ripoll’s speech is available HERE.

 

 

One of the challenges presented to Mr Ripoll was to consider limiting the two-strikes regime to ASX300 companies, on the basis that more than three-quarters of first-strikes have been at companies outside the ASX300 that do not have the resources required for engagement.

 

Shareholder activism, the two-strikes regime and the non-binding remuneration report vote, have contributed to increased engagement between companies and investors.  It is notable that views differ between institutional investors on when remuneration is ‘unjustified’ or ‘unreasonable’, and on the acceptability or otherwise of incentive plan performance measures.  Relative TSR (RTSR) as a long-term incentive (LTI) performance measure, in particular, galvanises polarised views, with some institutional investors wanting RTSR used in all LTI plans and others rejecting it.

 

There was less divergence of view among directors, who tended to be more pragmatic and less prescriptive on the pay models to be applied across companies.

 

It was, however, widely recognised that different remuneration arrangements are appropriate according to the circumstances of different companies and different sectors (e.g. pay structures in small exploratory resources companies cannot be the same as in large, mature companies).  And there was support for the view that annual short-term incentive (STI) should be paid for superior performance rather than just for target performance. STI awards need to be properly explained after the event, but there is acceptance that commercial-in-confidence details of performance measures do not need to be disclosed in advance.

 

There was recognition, too, that deferral changes the nature of STI and its acceptance/effectiveness, so that companies need to ensure the STI plan is closely integrated with the LTI plan.  As complex as this may be, it was also acknowledged that simplification of remuneration is a desirable, if elusive, objective.

 

All of which makes it difficult for directors and companies to please all investors all of the time, and emphasises the importance of effective communication between companies and their various stakeholders.

 

The inherent lags/delays between implementing remuneration, reporting it and shareholders voting on it necessarily mean the process of responding to a significant negative vote on the remuneration report is also a lengthy one.  For example, the next year’s STI and LTI offers will have been made and the plans will be well under way by the time the report on the prior year’s remuneration arrangements is considered by shareholders.  In addition, it takes time to change employment contracts that have built in the previous remuneration regime. Institutional investors and proxy advisers indicated they are generally willing to give companies credit where they have explained the changes they are planning to make, as long as they feel able to trust the directors/companies involved. However, evidence was presented to the Forum that this was not always the experience of directors engaging with investors.

 

Getting the disclosure message right the first time is critical – there have been cases where a first-strike vote on the remuneration report has been turned into a positive vote with no change to the actual remuneration practices, but simply better explanation of those practices.

 

There was general recognition that remuneration is difficult and time-consuming, and that all sides have learned a lot from increased engagement.  Underlying everything, it is helpful if the people assessing remuneration reports understand how remuneration is used to attract and retain staff.

 

A reality check came from observations that CEOs and senior executives are of their nature highly committed workers who want to do the right thing by their companies, and do not work harder because of incentives.  To the extent that people do what they are incentivised to do, however, incentives encourage executives to focus on the critical issues as identified by the board, and help to ensure that pay genuinely varies with company performance.

 

Our observations of Forum outcomes on this occasion are that directors continue to have a difficult time with investors on remuneration issues because investors themselves have divergent views on what is appropriate. This means it may not be possible for a board to receive unanimous support from investors on executive remuneration. Nevertheless, it was evident that enhanced engagement is having a beneficial effect on mutual understanding and remuneration policy communication and refinement.

 

The 8^th annual Remuneration Forum will be held in Sydney in March 2014.

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