Panel on remuneration considerations for value vs growth companies
11/04/2022
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Guerdon Associates and CGI Glass Lewis hosted their 16th annual Remuneration and Governance Forum, as a webinar, on the 17th of March attended by over 500 directors, investors, regulators and executives.

This article is on the first panel, focussing on executive remuneration differences between value and growth companies.

The panel established that regardless of the growth stage of a company, the key issues that need to be addressed for remuneration quantum and structure are as follows:

  • The incentives must be simple to understand for both employees and shareholders.
  • KPIs for STI and LTI need to be relevant, measurable and as un-subjective as possible.
  • KPIs need to be achievable.
  • The incentive needs to be fair for both management and shareholders.

Steady state companies are able to set traditional STI and LTI targets with narrow performance ranges. Share rights are the preferred vehicle and can account for dividends if shareholders want to prioritize dividend yield or both share price appreciation and dividends.

Companies that are in risky transitions requiring capital expenditure, higher gearing and longer investment periods to deploy capital can use annual incentives (STIs), and consider unhurdled share appreciation rights instead of LTI with hurdled share rights if there is difficulty in setting LTI KPIs yet high growth opportunities. Share appreciation rights are like share options, but are less dilutive.

Mid-stage growth companies can have STI. But they usually have difficulty setting long term targets for a traditional LTI. Frequently granted and vested equity without performance conditions could replace or partly replace a traditional LTI.

Early-stage growth companies have difficulty setting acceptable performance parameters for both STI and LTI due to how fast the company is changing. Incentives can be provided by paying salary as a mix of equity and cash.

During major cyclical sector rotations share market forces may have greater influence than management input on shareholder value. These cycles can take 3-7 years to play out. A way to incentivise management is to give them shares and to have mandatory shareholding requirements to provide long-term alignment with shareholders.

On NED remuneration the panel advised that the composition of fees can vary for companies in different stages of their lifecycle. Although not standard practice in Australia, North American companies partially pay NEDs with equity. Lower cash fees and higher equity may have an inadvertent impact on diversity. Younger directors may require cash for their lifestyle which needs to be considered when structuring fees.

The panel closed with insights on ESG metrics. Integration of ESG metrics does not differ depending on the growth stage of a company, it differs based on the individual company. Considerations need to be around the business model and how ESG metrics can be used to de-risk the company for shareholders.

© Guerdon Associates 2022
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