While investors might be more focussed on financial outcomes this year, workplace safety is still one non-financial metric most institutional investors believe should move the executive pay dial. Given that there have been at least 17 instances of fatalities among ASX 300 companies, boards are well advised to consider pay consequences, and probably more to the point, the role of incentives to minimise the risk of fatalities.
Chair speeches from at least two AGMs this season have laid the blame for remuneration report strikes at the door of shareholder perceptions that companies did not reduce executive pay sufficiently to account for workplace fatalities during the year. Even though, as one chair called out, the company’s response was actually “at or near market leading”.
In contrast to the company referred to above, it is true that other companies with fatalities and effectively no incentive pay reductions have not received significant no votes.
So what are investor expectations? And what is market practice?
We searched for the word “fatality” in the most recent ASX 300 FY23 company annual reports, finding 17 instances (some of them dual fatalities) that were disclosed. The majority of the disclosed fatalities were employees, although some were contractor employees and one was a community death from a company vehicle.
Figure 1: fatalities and executive pay consequences
Of the fatalities disclosed, three companies stated they were not accountable for the fatality. One was a death on a commercial airplane that crashed, another involved the death of an employee in a not-at-fault traffic accident, and another involved an incident at the company site where the management of the site was fully under contractor control. (We expect the latter may experience some investors’ displeasure.)
For the other 14, 10 of the companies reduced STI, with the reduction ranging from 5% to 32.5%, with the most common reductions equalling 10% or lower. No companies forfeited the entire STI.
For 3 of those that reduced STI, the reduction was determined by the performance conditions of the safety component of the STI (i.e. a fatality gateway determined a 0% outcome for this component, but not the whole STI).
Five of the companies reducing STI did so via discretion, either by zeroing out the safety component, or reducing overall outcomes.
Two companies increased the safety component’s formulaic fatality gateway outcome with an additional discretionary reduction.
Three companies did not reduce STI.
One did not have an STI to reduce since executives were not eligible for an STI on financial performance grounds.
Votes against the remuneration report for those companies that have so far had votes have varied from 2% to 33%, with no clear link between STI reduction due to a fatality and the vote.
Given this, it is hard for Boards to draw a conclusion on how much is enough. Some may suggest that this should be expected, as a formulaic response to a loss of human life is to price a human life, so each situation should be considered separately.
A checklist of considerations that a board might ask itself when making a decision:
- Most boards and management would expect due process to be followed to judge the extent of culpability, despite what some investors may think. Therefore, has an investigation been completed and has accountability been assigned? If not, should payment of some or all of the STI for employees who might be held accountable be postponed until the investigation is complete? This would be APRA’s expectation of CPS511 impacted companies, and regulatory expectations tend to extend to other industries over time as good governance practice.
- If there has been difficulty identifying which executives are accountable for the fatality/fatalities, again, some inspiration can be gained from financial services regulation in the form of accountability statements for FAR. It is good governance to be clear on what the accountabilities of each executive in the team are. In certain industries accountability mapping and accountability statements should reserve a specific place for safety.
- Rather than imposing a small (10% – 20%) reduction in a scattergun approach across the team or the organisation, it might be more effective to make a more significant reduction for those more directly accountable (Potentially 20% – 50% if reasonable steps were taken to avoid the fatality or up to 100% if the fatality could have been foreseen and prevented). The rationale for the reduction can then be described. Regardless of the area of the business involved, the CEO will likely need to be exposed to a reduction as the ultimately accountable party for any fatalities. Some companies already have “consequence management” frameworks that provide guides as to the proportion of pay to be sacrificed depending on materiality (frequency and extent of safety incidents), accountability (how many steps removed from direct supervision), and culpability (the action of inaction that contributed to the outcome). These can be readily adapted to safety incidents.
- In a world where intimate knowledge of supply chain risk, carbon emissions and modern slavery history is becoming normal, whether the workplace death is an employee of a company or an employee of a contractor, ultimately the company needs to go through the same investigations and decisions.
- Transparency on fatalities is an explicit expectation in many investor and some proxy adviser guidelines.