Australian Companies’ Potential For Moving the Goal Posts With Executive Rewards – Directors Should Watch Out!

Option backdating in Australia has, in our experience, been more commonly been associated with administrative streamlining than moving the goal posts to game the system. That is, option grants to (typically) new recruits have exercise prices and issue dates that are backdated to the issue date provided to the bulk of employees that received them in that year.

What should be of more concern to directors is the potential for Australian companies to have their own, homegrown version of “goal post moving”. And, while it is a practice that is questionable, in most cases it is legal.

The fundamental issue with option backdating as it was practised in the US was to amend an exercise price and issue date to the market price and date when a company’s shares were at their lowest. The first criminal charges to be laid there (see here) included a charge that the CEO and HR Director offered backdated options to new recruits.

In Australia moving goal posts involves a company changing the performance period or performance measure retrospectively to a period that delivers more options to the executive. Shareholders generally grant their boards the power, as defined in option plan rules, to amend most aspects of an equity plan, such as the setting of performance requirements. In theory these can be retrospective.

With greater disclosure, this is less likely to occur for executive directors (although there has been confusion in at least one instance – see here). It is more likely to occur for executives and employees who are not directors (however, if it is a material change it should be disclosed in the remuneration report). While a questionable practice generally, there may be instances where there are good reasons for doing this. If so, directors should put the case to shareholders and seek their concurrence with a vote.

Of course, one consequence of amending an option plan’s performance period is a charge to earnings of the full, unamortised expense of the grant.

© Guerdon Associates 2024
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