The Australian Treasury is conducting a post implementation review of the 2009 termination payments reforms that lowered the threshold at which termination payments must be approved by shareholders to one year’s average base salary. A post-implementation review examines the issue that the regulation was intended to address, the objectives of government action, the impacts of the regulation and whether the government’s objectives have been achieved.
As part of that review, it has sought comment from the organisations that made a submission on the original exposure draft of the legislation, including Guerdon Associates. Comments received will be used as inputs into the review, which will be publicly released by the Office of Best Practice Regulation.
Key points made in our submission include:
· The legislation has reduced the frequency of termination payments greater than 12 months base pay
· However, some companies have structured resolutions to receive blanket approval for payments exceeding 12 months base pay, with no upper limit, and shareholders have supported these resolutions. These companies need not seek shareholder approval for termination payments again.
· Executive fixed pay increases since the legislation have been higher than would otherwise have been expected in an uncertain economy.
· The extent to which executives are sent on “gardening leave” prior to termination instead of being paid in lieu of notice has increased. If this practice continues to grow, and cascade to lower levels, economic efficiency and labour mobility for higher value adding labour would be impacted.
· Large companies with offshore operations and subsidiaries have found it more difficult to structure their operations efficiently because employees appointed as directors to even minor subsidiaries are encompassed in the legislation.
· The legislation has made it more difficult to recruit foreign executives who would be eligible to receive higher termination payments in their home country.
· More companies now ensure that executive long term incentives remain “on foot”, so that executives are more committed to ensuring a sustainable legacy.
Suggestions for improving the current provisions include:
· Restrict the requirement to key management personnel only. These individuals have the most direct influence on pay policy.
· Change the definition of average base salary for executives who have been in office for less than 12 months so that it is consistent with the treatment for executives who have been in office for 12 months i.e. the base salary that would have been received had the person remained in employment for 12 months. This would provide appropriate protection for executives who move from a secure position to take up a challenging role.
Our submission is available HERE.
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