Trends for discretionary incentive adjustments to be smaller, more frequent

The FY21 and FY20 reporting rounds have tested the ability of boards to be nimble and responsive to changing market and shareholder expectations.  In a step-up from prior seasons, shareholders and proxy advisers are demanding that boards exercise discretion, but, alas, only downwards.  Boards are also expected to be more transparent about the ‘why’ as well as the ‘how much’.

Boards know when to zero out an incentive, often as a result of an issue that, through engagement, chairmen become aware of before the media get to it.  More challenging is determining and defending a partial malus adjustment when it comes to disclosures and broad shareholder support.

In Guerdon Associates’ most recent roundtable of directors from across industries the challenges and approaches which have proven effective were discussed.  Our guest was Phillip Foo of Glass Lewis (VP, APAC research & Engagement and ANZ Lead Analyst) who also shared the proxy adviser perspective.

The key themes which emerged from the discussion are:

  • The importance of determining accountability for incidents throughout the company – vertically and horizontally.
  • Discipline around incident reporting (numbers not names) as being a key pathway for a board’s understanding of the company culture, values, ethics and the management of risks.
  • Communication with management so that the CEO and ExCo understand board decisions – the CEO and Remuneration Committee chair need to jointly own the decisions
  • Go gently to begin with and establish a shared understanding and consistency over time
  • Do not wait until the year end when there are competing priorities. Address incidents and any resulting malus adjustments at regular intervals throughout the year
  • Be transparent when adjustments impact the CEO or ExCo, though our directors agreed that if it was not as a result of a front page issue – do not raise it
  • Disclosure in the remuneration report of the number of discretionary adjustments (including terminations) across the business top to bottom of the company is seen as a signal of a company’s culture and organisational accountability.
  • Some decisions will be difficult for example where historical issues emerge (sometimes up to 10 years old). Current management though have the responsibility of understanding issues which may be buried in the business.

Financial services companies are leading the way in the development of processes, documentation and reporting in response to APRA and Treasury regulation.

The tools that have been developed provide a sound process for all boards regardless of the industry.

Do not forget that ASIC has also had a say – did anything happen that required discretion and what was the board’s response? Read more about ASIC’s information sheet (INFO245) HERE.

© Guerdon Associates 2024
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