The end of the financial year is here for most companies, and boards need to create a cohesive message in the remuneration report as they gear up for the upcoming proxy season. With economic headwinds on the minds of many, incentive outcomes that do not match the economic climate, company performance and shareholder experience will be a trigger for stakeholders.

Upcoming remuneration reports and notices of meeting will reflect the continuing impacts, or lack thereof, of COVID-19 and geopolitical instability on the performance of these companies. Proxy advisers and institutional investors, as well as the business media, will be paying close attention to how remuneration committees respond and the ways in which discretion is exercised.

As remuneration committees reflect on how to judge the past year and plan for the future, we offer the following checklist priorities.

1. Be proactive on policy changes

Changing economic environment: Recognise and address economic headwinds, the changed political environment, continuing impacts of COVID-19, domestic inflation and wages pressure, and stress test the remuneration and incentive frameworks to assess whether they remain fit-for-purpose – see HERE.

The potentially contentious issues that may become controversial for proxy advisers and institutional investors include reframing incentive plans to make performance measures less onerous on the basis that target setting is unpredictable.  A higher weighting of non-financial measures could for example be viewed as working in management’s favour at a time while ESG performance is increasing in focus – see HERE.

Restricted share plans only for those companies where it has a specific application. While restricted share plans can make sense for some companies, they are not necessarily appropriate for many companies. Just reducing the value of incentives in lieu of the removal of performance requirements will not be readily accepted by proxy advisers and institutional investors. Such changes need to be fit for purpose for the company and be clearly explained – see HERE.

Be prepared with the clear rationale for any policy initiatives. Does the policy meet external stakeholder guidelines and, if not, what is the rationale that will get them over the line?

Institutional investors and proxy advisers will appreciate the advance consultation and discussion on any change in remuneration structure or incentives. However, plan this carefully, execute it well, do not waste your time and theirs, and make sure the change will likely be fully supported before it gets to a formal vote.

2. Be proactive on incentive outcomes

Companies with June financial year-ends will know what company performance is for the year and executive incentive outcomes.

Notwithstanding that management may have performed extremely well in FY22, proxy advisers and institutional investors are likely to react adversely to the payment of incentives:

• when dividends have been reduced or cut
• if the total shareholder return (TSR) for the year is negative – see HERE
• if financial results are less than consensus forecasts at the beginning of the year when the targets were set. How will the incentives be viewed in the context of forecasts, guidance and shareholder experience?

There may be an expectation gap on the part of investors, or management, that needs to be managed.

The Remuneration committee will be well served to stress test potential outcomes well before the results are finalised.

3. Finalise the remuneration report

Remuneration committees can be in a good position by having the draft remuneration report already prepared that clearly describes the years’ experience.

Comparing results with the shareholder experience may assist in identifying issues and areas where there may be an expectation gap that needs to be rationalised or better communicated.

Here is a good checklist for the remuneration committee chair (see HERE).

4. Be prepared to deviate from the usual remuneration practices

Any unusual FY23 remuneration policy changes will likely be tested when seeking shareholder approval for executive director equity grants.

While it could be considered risky to deviate from the plain vanilla remuneration framework when proxy advisers and institutional investors sometimes have a tick the box mentality, there may well be good reasons for the company to consider a range of alternative practices that may better fit its purposes – see HERE.

While having regard for the practices of other companies may seem like good practice or a sensible defence against challenge, each company will be facing different economic and market challenges. The real prospect of inflation, wages pressure and volatile equity markets have been telegraphed for FY23.

Therefore, what problems need a solution that the traditional remuneration framework and incentive structures do not address or solve?  Some thoughts can be found HERE  and HERE.

Now can be the right time to engage with key investors and proxy advisers on the alternatives that challenge the prevailing wisdom.

5. Review ASIC’s Information Sheet 245

ASIC updated its Information Sheet on Board Oversight of Executive Variable Pay Decisions in March 2021. It is the result of ASIC’s review of remuneration governance practices across 21 ASX 100 companies and provides a good basis for remuneration committee chairs heading into the end of the year to consider and satisfy themselves that their board is following what ASIC considers to be robust governance – see HERE.

6. Clear communication on board discretion and force majeure

Investors and proxy advisers expect the board to have the capacity to exercise discretion on incentive outcomes as and when required. The discretion should be exercisable for both positive and negative adjustments to ensure the outcome is the right one having regard for the prevailing circumstances.

So, in the event of a situation out of everyone’s control such as geopolitical disruption this does not mean the board remuneration committee cannot exercise discretion at the end of the performance period. Providing outcomes are just and fair, and the reasons for it are adequately communicated, the exercise of discretion should be supported. See HERE for our detailed review into the exercise of discretion which remains current.

A clear theme running through these factors for consideration is the need for transparent, early and concise communication. A remuneration committee can be making the ‘best’ decisions that are acceptable to all parties as the ‘fair’ outcome. However, if it is not communicated early and clearly, no one is the wiser and could lead to backlash. Hence, it is crucial that the rationale, justification and acknowledgement of issues be clear in the remuneration report messaging, investor and proxy adviser engagement, notice of meeting and other disclosures.

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