The opportunity to make a submission to the Australian Treasury on the latest draft pay disclosure laws closed on Friday 15 March 2013.

 

It would have been nice if our submission had been able to fully commend the government for introducing sensible governance laws. Truly, we hope one day there will be an opportunity we can write to the government that “these laws are great, and we support every part of them. Good on you.”

 

Alas, not this time.

 

Should not a remuneration report state the total pay an executive received? And how much was paid for performance?

 

Neither the current nor the proposed disclosures require this basic information. There is no requirement to report individual KMP total pay. There is no requirement to report pay received for performance.

 

Instead, the government proposal is to retain the current accounting-based format for reporting pay on the minimum seven required component parts, with some amounts amortised over multiple years. On top they are proposing that companies report “past”, “present” and “future” remuneration, which are not defined.

 

To give meaning to the numbers, a company may want to break down “past pay” and explain what’s what. So, let’s say that “past pay” includes vested long term incentives (LTI) in 2 tranches, and two years of deferred short term incentives (STIs) with partial vesting from each year. That is four bits of data.

 

“Current pay” should be one number. Let us hope that companies do not want to be too helpful and break this down for us.

 

“Future pay” may include the STI paid on the financial year’s results, the financial year’s LTI grants (2 grants with different measures), and the deferred STI grant from the prior year not yet vested. And let’s not forget the prior 2 years’ LTI grants at 2 grants per year (a total of 8 bits of data for this paragraph).

 

Add the seven numbers required under current regulations (by section 300A of Corporations Act), and we have 20 pieces of information per executive, per year, reported for the financial year and the prior financial year. So that’s 40 numbers, per executive at, say, six executives per company. That comes to 240 unique pieces of information, either required by the law or required to understand how the required disclosures are made up (given that there are no definitions in the proposed new legislation).

 

And still we do not have a meaningful single total annual pay figure for an executive. And no obligation to show the amount paid for performance.

 

We enjoy our work as remuneration consultants.  There are plenty of challenges to make life interesting.  But we do not need the extra challenge of interpreting confusing remuneration disclosures. We have therefore suggested that the government cut back a bit on requirements and give investors what they want – a disclosure format that allows directors to explain how they set policy.  That is, a single total pay figure for an executive and the amount of this paid for performance.

 

And what else? Definitions are essential. Disclosure of executive pay needs to be logical and consistent across companies. Consistency facilitates comprehension, comparability, evaluation, compliance, good governance and efficiency. Definitions will do that for you.

 

While improvements in disclosure can be achieved with standardisation and simplification, there will remain some complexity in explaining executive pay. Big companies are complex, and to an extent so is the pay that facilitates executive focus on the right things for shareholder alignment. So our submission is, we believe, constructive and practical.

 

We submitted that total pay can be calculated in two ways:

 

1.    The way that most investors want to see – the value of pay receivable in relation to the current performance year (“pay value for achieved performance”).

2.    The way most boards set executive pay so that they can reference the numbers to explain how it was set – the value of pay the company grants an executive in the year (“granted remuneration”).

 

Alternative 1 (“pay value for achieved performance”) represents fixed pay plus the value of variable remuneration determined on the basis of performance for periods ending in the year. This is the method being adopted in the UK, and reflects a consensus of view among investors, with support from many companies.

 

Alternative 2 (“granted remuneration”) best reflects how most listed companies set pay policy. It represents fixed pay plus short-term incentives paid and the fair value of long-term incentives.  Disclosing this number will allow directors to refer to it when explaining pay policy. It will also allow investors to make a judgement on the pay governance practices of the current board when exercising their vote, because the current directors set the policy. This would be a big improvement over the current situation, and also the proposed approach for reporting “past”, “present” and “future” pay, where the reported pay numbers can be affected by the outcome of pay decisions made by a previous group of directors.

 

As it stands now, and in future with the proposed changes, current directors may be held accountable for the sins of directors who are no longer on the board. Alternative 2 (“granted remuneration”) allows directors to explain the circumstances relevant to the decision to grant the reported total remuneration.

 

Recognising that it is unlikely the government will be prepared to scrap the current proposals and start again, we have also suggested standard definitions for “past”, “present” and “future” pay. While not ideal, the sum of “past” and “present” pay should provide investors with what pay has been realised by executives in the year. The sum of “present” and “future” pay should provide the basis on which directors can explain how they arrived at the pay granted to an executive in the year.

 

See our submission HERE.

© Guerdon Associates 2024 Back to all articles