CAMAC report on derivatives does not make it easier to pay for performance

Most would agree that it is better from a governance perspective to vest performance pay at the end of the performance period, when pay can be properly assessed.

This becomes problematic when executives retire. You would want departing executives to do the right thing by their successor, and leave things in good shape. You would not want them just to focus on maximising their last bonus and to run the business into the ground in the process.

But unintended consequences of legislation and regulation make it difficult to align pay and performance. A good example is the inter-action between the taxation of employee share schemes and the Corporations Act disclosure and licensing provisions in relation to derivatives, which impacts equity-based incentive plans and complicates executive remuneration. The government insists on taxing unvested equity at termination of employment. This means that LTI plans that continue performance periods past termination to encourage sustainability need to pay rewards in cash rather than equity. But rights that provide rewards alternatively in shares or cash are derivatives, and do not qualify for the relief from the disclosure and licensing provisions provided for employee shares schemes under ASIC Class Order 03/184. So they requires special application to ASIC, with the attendant complexity, delays and cost.

CAMAC’s report on its inquiry into the definition of a derivative has concluded that:

  • The current definition suitably aligns with market and regulatory perceptions of what constitutes a derivative
  • The definition is meant to be broad, to allow for its application to new derivative products without disruption to the regulatory structure of derivatives markets
  • The section 761D definition of derivative is not unduly complex
  • It is a broad, principles-based definition, modified by specific exclusions and the ability, if necessary, to enact regulations that make further adjustments in response to developments in the market.

CAMAC was responding to a request from the government for advice on the suitability of the legislative definition of derivative for derivatives markets, and whether it may be possible to reduce complexity in this area of the law.

The CAMAC report is available HERE

© Guerdon Associates 2024
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