Regulatory developments and trends in executive remuneration will result in a busy agenda for remuneration committees in 2010. The checklist below may help remuneration committee members to determine the focus of their activities and priorities over the ensuing year.
1. Review performance measures: Despite the need to prepare for an avalanche of regulatory change, board remuneration committees should not be diverted from the main game – ensuring executive remuneration is aligned with the needs of the business. The key consideration here is performance hurdles. While the worst of the GFC may be over, the business environment is still uncertain. Sources of capital remain limited, while greater variation in the corporate health of competitors creates opportunities and vulnerabilities. Are the performance measures applicable to the company’s STI and LTI programs appropriate? Do they reflect the real needs and circumstances of the company? Do they incorporate a healthy dose of risk management suitable for today’s economy?
2. Review remuneration committee membership: APRA regulations require from 1 April that all remco members be non executive directors and that a majority are independent. The chair is also required to be independent. The Productivity Commission (PC) has recommended that this be disclosed by all companies on an “if not, why not basis”. The PC recommended that a new listing rule should specify that ASX 300 companies must have a remuneration committee and that the committee comprise solely non-executive directors. Hence remuneration committees may need to consider re-constituting their membership.
3. Amend the remuneration committee charter: Most remuneration committee charters do not set out a procedure for attendance of non-committee members. The PC recommended this be changed because it was concerned at the influence executives could have on their pay by attending these meetings. Charters are required to be disclosed. Not incorporating and enforcing such an amendment will invite unwanted scrutiny.
4. Review the viability of equity payment vehicles: With greater clarity of the tax treatment of employee equity (see HERE), and hopefully more to come once the Board of Taxation completes its review of option valuation methods in late February, companies will be in a better position to decide on the payment vehicles best suited to the nature of their business and business strategy. For example, should a high growth or transforming company reconsider the application of options or viable option replacements (such as share settled share appreciation rights)? Should high yield companies consider shares instead of share rights? Are the company’s current equity-based incentive arrangements still viable in the wake of changes to tax legislation? What other alternatives are available?
5. Prohibit executives hedging unvested equity, or vested equity subject to holding locks: This is required for compliance in APRA regulated entities from 1 April, and is a PC recommendation. Careful consideration needs to be given to how this can be enforced.
6. Review disclosures: The PC recommended a plain English summary. This is going to be harder than most boards think it will be. As it stands, work we have undertaken for several ASX 50 companies using a highly regarded analytical tool reveals that current remuneration reports require a post graduate education to understand them on the first reading. These reports can be improved so that only a high school education is required to understand them but it is hard work. So if it is your remco’s aim to achieve this, some additional hours will be required this year for “plain English” to happen.
In addition, the PC recommended that “actual” remuneration of key management personnel (KMP) be reported. While we have assisted several companies in this we caution companies that the regulation defining this has not been written (although we and others have had a go – see HERE). So, unless the accounting standards totally misrepresent how you pay your executives, you may want to defer this challenge to next year. Also, the PC suggested a remuneration disclosure checklist. Take care, as this checklist still misses a few items that we know some key investment community stakeholders look for.
7. Review sources of advice and take action to ensure it is not “conflicted”: There is a strong probability that the government will act on the Productivity Commission recommendations regarding remuneration committee advisers and conflicts of interest. At the very least, directors will have to disclose who their advisers are, who appointed them, who they reported to and the nature of other work undertaken for the company. Boards that only receive advice from “conflicted” sources (i.e. management, or consultants who also work for management) are not likely to fare well in seeking shareholder support for their remuneration resolutions. The new APRA prudential standards effective from 1 April 2010 require remuneration committees to take action to ensure their advisers are independent.
8. Prepare for taxation changes: The PC, among many others, has recommended that the government remove cessation of employment as a tax trigger for deferred equity pay. If this happens, remuneration committees may want to review their policies for “good leavers” to ensure that executives have “skin in the game” commensurate with the time impact of their decisions and actions on capital investment, choice of successor, etc..
9. Engage with shareholders and other stakeholder groups: Has the company taken steps to improve the level of engagement with shareholders? Has the company’s remuneration policy – and particularly any proposed changes to it – been adequately communicated? Is there a plan to meet with proxy advisers and institutional investors to convey the rationale for your company’s remuneration policy and practices, in order to ensure a strong positive vote on the remuneration report? While these questions were with us last year, they must now take an even higher priority with the likelihood that the government will act on the PC’s “two strikes” recommendation. Assuming other companies will respond similarly, it is important that your remco plan its engagement process to be towards the front of the queue. The proxy advisory firms, ACSI, the ASA, Regnan, superannuation funds and fund managers all have limited resourcing and will not be able to accommodate remco engagement aspirations near to and during the proxy season. Hence our advice – get in early!
10. Review NED pay and fee headroom: The need for elevated levels of expertise, the inevitable increase in board workload, and the potential impact of revisions to the “no vacancy” rule implies a requirement for additional NED remuneration. Is there sufficient headroom under the currently approved fee pool to accommodate this need?
11. Consider remco training: Implicit in both the APRA and Productivity Commission reports is an expectation of higher standards of director expertise in remuneration matters. Boards and their committees will need to consider how the education on remuneration issues will be effected and take steps to implement the necessary initiatives.
12. Review gender mix: While this is strictly a nominations committee consideration, the PC report emphasised the absence of diversity. This is a warning shot and indicates that the government appears to be taking the issue very seriously. Hence boards need to start acting if more regulation is to be avoided. Is the composition of the current board optimal? Is the current gender mix appropriate or defensible?© Guerdon Associates 2022 Back to all articles