ASIC beefs up listed company executive remuneration requirements

In June 2020 the Australian Securities and Investments Commission (ASIC) released an information sheet for boards considering the application of discretion on variable reward plans and payments during the COVID-19 pandemic (see our summary HERE).

Last month ASIC released an update of the information sheet that expands on expectations of how boards should govern executive remuneration. The additional “meatiness” incorporates learnings from observing 21 of the largest ASX-listed company board remuneration committees in action. This enabled ASIC to compare and contrast, primarily between APRA-regulated entities and others.

While the prior version was released to assist boards govern remuneration during COVID-19 in terms of exercising discretion, this version goes further. If anything, it is likely to further accelerate the need for boards to consider adopting frameworks for consequence management and structured discretion. But as the refreshed version was not accompanied by a media release, it may catch companies by surprise.

Below is a summary of the key elements ASIC considers necessary for robust remuneration governance:

1. It is guided by frameworks and processes that result in the active, timely and consistent exercise of discretion

ASIC wants boards to consider adopting discretion frameworks to prompt the use of discretion for a consistent approach. The application of the discretion framework should be made prior to variable pay decisions. Past precedents also need to be considered in order to ensure consistency with previous decisions.

In other words, the ASIC encourages boards to step back, pause, and determine if any discretionary adjustments to pay is warranted prior to the actual decision being made.

In adopting the discretion framework, ASIC encourages the framework to encompass deferred equity for awards already earned in prior performance periods. Prior to vesting of deferred equity, boards are encouraged to consider making adjustments to avoid unintended windfall gains and address significant risk or conduct issues that have occurred subsequent to performance period. Essentially, this commits boards to the application of malus. However, it also permits positive discretion too.

2. Makes decisions with the benefit of structured and contextual information from unbiased sources

The board need to ensure that the information is unbiased and independent of any executive insight.

Cross-committee membership is helpful to facilitate information sharing but limits the information flow. Instead, ASIC encourages joint committee meetings. This is already required for APRA-regulated entities. Specific agenda time during committee meetings to hear contributions from cross-committee members and/or documents input tabled at the meeting from other committees is also recommended to ensure that the topics are covered.

More preparation for directors is also suggested prior to and during meetings. For example, receiving written material prior to a meeting and having a member from the control function present at the meeting is beneficial.

3. Employs arrangements to manage conflicts of interest

Conflict of interests must be appropriately managed and avoided to maintain good governance for remuneration committees. ASIC does not pull any punches. In effect, they say that management should not advise the board on factors impacting their own variable pay outcomes, such as group performance.

Although it is often unavoidable for executives to be involved in compiling key information to be presented to the board about variable pay outcomes, there is no need for executives to be present for, or to participate in, decisions that impact their own variable pay. After interested executives have had the opportunity to provide input and advice to the board, they should leave the room during the decision-making process.

Information from independent sources can be used, if available, as supplementary information.

It is important for boards to have sufficient information and time to critically and independently analyse and debate outcomes. Forward planning of board and committee agendas are necessary to ensure thorough scrutiny of executive pay outcomes. ASIC suggests including at least one preliminary meeting to ensure the committee has necessary information about the executives’ accountabilities and performance prior to making a final decision on variable pay outcomes.

4. Transparently record and communicate decisions

Transparency to stakeholder groups on the rationale and board decision making will help with investor and stakeholder confidence, taking heat off the committee during proxy season. This can be achieved by including the following in remuneration reports:

  • Explanation of rationale for exercise of discretion, or reasons why discretion was not exercised, in determining variable pay outcome
  • Governance process and principles adopted in making the executive variable decisions
  • How company specific circumstances and material risks were taken into account in its decision-making process and whether it was consistent with principles adopted.

An accurate record of key discussion points and reasons behind determining an executive’s variable pay outcome should be kept available.

The updated information sheet can be found HERE.

© Guerdon Associates 2024
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