As the end of the financial year looms for most companies, boards need to create a cohesive message in the remuneration report as they gear up for the upcoming proxy season. With recovery on the minds of many, risk appetites should be examined to avoid incentive outcomes that do not match the economic climate, company performance and shareholder experience.
Upcoming remuneration reports and notices of meeting will reflect the continuing impacts, or lack thereof, of COVID-19 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
COVID-19: Recognise and address the issues that COVID-19 and the increased focus on ESG has had on the company. This will mean a further review of the direction and strategy and determining whether the remuneration strategy is fit to support them. (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 COVID-19 is unpredictable.
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 the most appropriate structure for all companies. 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 their 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 all are happy with the change before it gets to a formal vote.
2. Be proactive on incentive outcomes
Companies with June financial year-ends will now have a good understanding of what company performance is looking like for the year and potential incentive outcomes.
Notwithstanding that management may have performed extremely well in this difficult COVID-19-impacted FY21, proxy advisers and institutional investors are likely to react adversely to the payment of incentives:
- while in receipt of JobKeeper
- when dividends have been reduced or cut
- if the total shareholder return (TSR) for the year is negative
- if there have been redundancies and job losses
- 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. Prepare the remuneration report
Remuneration committees can be in a good position by having a good draft of the remuneration report already prepared that clearly describes the years’ experience. Only the financials for the year and incentive outcomes will be missing.
Preparing the remuneration report now will greatly 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
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 have been impacted by COVID differently. FY22 is likely to continue to be somewhat unlike the normal experience. Therefore, what problems need a solution that the traditional remuneration framework and incentive structures do not address or solve?
Now can be the right time to engage with key investors and proxy advisers on the potential alternatives that challenge the prevailing wisdom.
5. Review ASIC’s Information Sheet 245
ASIC released its Information Sheet on Board Oversight of Executive Variable Pay Decisions in March this year. 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, like a pandemic, 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 accepted. See HERE for our detailed review into the exercise of discretion.
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.© Guerdon Associates 2022 Back to all articles