High Executive Pay “no” Votes: A 10 point post AGM checklist
04/10/2024
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End of financial year results and remuneration reports are out, AGM notices of meeting are being scrutinised, proxy advisors have prepared their template reports populated with your data, and judgement on your company’s remuneration policies and practices are about to be lodged. For many there is a sinking feeling that all is not well. A proxy advisor or major investor has asked a probing question. You are alert to an issue not previously considered, or at least not considered enough. You scramble to engage with key stakeholders at the last minute, but realise it may be to no avail.

What is a remuneration committee chair to do?

You may be lucky, and the judgement relates to an error of fact. If you are quick enough you can avert ‘no’ votes being lodged by a market release and/or direct engagement with your key investors.

You may be unlucky. The objection has substance. Or worse, it lacks substance, and is based on a proxy firm guideline or practice that defies critical thinking or is an opinion not grounded in behavioural economics. Either way, your company cannot win out.

This checklist deals with what to do on day 2 after the AGM (we allow day 1 for some NEDs for a day of reflection, perhaps a cup of tea, Bex and a good lie down, perhaps a stiff drink, or maybe a combination of the above).

1. Get help.

Executive remuneration is complex. Getting it right integrates business strategy, financial measures, investment market positioning, accounting, finance, behavioural economics, legal compliance, taxation, communications, measurement, and coordination. Few Remco chairs can do it all. Get help. Many companies are well equipped with internal resources. Others less so. Consider an independent advisor with the expertise. Some Remco chairs prefer an advisor not employed by management to avoid conflicts of interest or an alternative POV.

2. Take action.

Dealing with it starts from the time you become aware of the issue.

3. Confirm if the issue has substance.

It is surprising that the most common objections take so long to be validated. Here are some:

  • Performance hurdles are too soft – easy to confirm by comparing to consensus or guidance at the time they were set, peer hurdles and prior year performance.
  • Pay is too high – easy to confirm by reference to your benchmarking. Make sure it is independent.
  • Pay is not aligned with performance – easy to confirm. Reference your vesting and payout percentages and performance with your closest competitors.
  • STIs are high when TSR is negative – easy to confirm. This is not to say it is valid. It is a favourite of ISS and many investors, conflating forward looking annual TSR with lagging financial indicators such as earnings. Nevertheless, after confirmation, there are ways to deal with it – see below.
  • Underlying measures miss some biggies – easy to confirm. Typically underling earnings measures leave out depreciation & amortisation expense, there is a significant write-down, and no negative discretion is applied. It can go the other way too. For example, a statutory measure can impinge on the base earnings in the start year because of a non-operational expense, such as a loss on an asset disposal or M&A costs. The artificially low base provides a free kick. Once confirmed the next issue is what to do about it – see below.
  • An undesirable non-financial outcome has been revealed and not considered. This can range from poor safety outcomes, reputation damage, cyber security incident, an undeclared office affair, conduct unbecoming, among many other things. Some of these may be readily apparent, some may require sleuthing. Once confirmed the next issue is what to do about it – see below.
  • You are in the wrong country – easy to confirm whether you are in the right country for investors and wrong country for paying management, or vice versa. Once confirmed the next issue is what to do about it – see below.
  • You do not conform – easy to confirm. You pay people differently. Hence the problem is that you do not tick any boxes. Once confirmed the next issue is what to do about it – see below.

4. Admit the facts – you are right!

If what has been said about your remuneration was not confirmed:

Admit the facts. You may not have clearly articulated these before. So some may have the wrong end of the stick. It would have been desirable to ensure disclosures were clear prior to the AGM. Still, post AGM set them straight. Nevertheless, the fact that your company did all the right things does not mean you let show any disdain for the investors or proxy advisors that mis-read your disclosures. Go the other way. Be charitable, and understand that some investors and all proxy advisors have thousands or resolutions to consider at proxy season. Show some humility and apologise that the company failed to explain in plain language how it rewards people. See to it that someone else prepares the disclosures, taking the feedback on board for next time.

5. Admit the facts – they are right!

If what has been said about your remuneration is confirmed: Same story, admit the facts. This time say the investor or proxy advisor was correct. It takes some humility, but it is the right thing to do, and you get some credit for the admission.

6. Make a judgement.

Judge if what your company has done is right, wrong, a bit each way or just different.

7. Decide if you need to change.

Decide if you need to change it, whether it is right, wrong, a bit each way or just different. Sometimes a decision to change something that is right and/or different is less grief than sticking with it next time. For example, consider the 75% of ASX 300 companies with relative TSR. Many investors, directors and executives believe it is ineffective as a means to focus executives on the levers that add value. But companies do it because they get less grief ticking an external stakeholder’s box.

8. Change it.

Careful, as changing part of executive pay means you have to measure something differently, pay for it differently, vest it differently, tax it differently, account for it differently, disclose it differently and seek support for it differently. It can be a lot of work. And there is risk that you may mess up one of these things on the journey.

9. Or do not change it.

Apart from some lipstick, it may be right. If right, then some change may still be required. This most likely will be in how it will be disclosed, explained, and supported. Get a fresh pair of eyes to look at what was done and how it was done last time.

10. Communicate it better.

Engage with stakeholders. Carefully explain the what, why and how. Directly respond to their issues with what you have. Disclose clearly. Time it well, when stakeholders are not distracted with hundreds of other resolutions.

© Guerdon Associates 2024
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