The document discusses proposed changes to Australian legislation regarding executive pay. It summarizes the government's response to a 2011 report by CAMAC, which recommended reducing complexity in executive pay reports. While the government supported most recommendations, it did not support removing requirements for linking pay to company performance or disclosing commercially sensitive information. The effectiveness of the changes will depend on proper implementation.

1. While it is true that other jurisdictions
are looking to emulate Australian
governance, it should be remembered
that both the Productivity Commission
and CAMAC found Australia’s corporate
governance and remuneration frameworks
rated highly internationally in 2009 and
recommended non-legislative and non-
prescriptive change.
36 | March 1, 2012 www.wabusinessnews.com.au WA Business News
■ OPINION |
The government
says new legislation
will put the onus on
listed companies to
make sure they have
provisions to clawback
bonuses and other pay
from executives.
IN February, Parliamentary
Secretary to the Treasurer, David
Bradbury, announced a new raft of
changes to executive remuneration
legislation.
Included among the changes are:
• formalisation of clawback pro-
visions that were announced last
year in the event of a material mis-
statement of financial statements;
• the Gillard government’s response
to the Corporations and Markets
Advisory Committee (CAMAC)
2011 report on executive remu-
neration reporting;
• the removal of the requirement
for some unlisted companies to
prepare a remuneration report; and
• inclusion of related parties’
disclosure in the Corporations
Act, as these requirements will
be removed from the accounting
standards from July 1 2013.
These changes are the fourth
major change to executive remuner-
ation legislation we have seen since
2009, which began with changes to
the taxation of equity received as
remuneration, a reduction in the cap
placed upon termination payments,
and the raft of changes in response
to the Productivity Commission’s
2010 report that took effect from
July 1 2011.
The clawback provisions follow
what Mr Bradbury described as an
extensive consultation process that
will “put the onus on listed compa-
nies to make sure they have provi-
sions to clawback bonuses and other
pay from executives”.
He also stated that: “clawback
provisions in executive contracts
are already being adopted by many
listed companies and these reforms
will ensure shareholders have a say
in the efficacy of these provisions.”
It is true that there is an emerg-
ing trend of companies deferring
a portion of short-term incentive
payments, however Mr Bradbury
seems to be a bit confused about
the definition of ‘clawback’. The
definition put forward in 2010 pro-
vides not only for the cancellation
of unvested performance pay (a
uniquely Australian viewpoint) but
also for the repayment of remunera-
tion already vested (as it is widely
understood to be internationally).
It remains to be seen which defi-
nition sees its way to draft legisla-
tion and whether the emerging trend
is on the right track.
In May 2010, CAMAC was
charged with providing advice on
the “possibility of reducing the
complexity of executive remunera-
tion reports”.
In 2011, it concluded that remu-
neration reporting was a dynamic
process.
Implementation test for exec pay reform
Pamela-Jayne
Kinder
Summary of the Government response to CAMAC's
2011 Report on Executive Remuneration
CAMAC Recommendation Response Reason for response
1. Companies should set
out a general description
of their remuneration
governance framework in the
remuneration report.
Supported Disclosure of this information will
benefit shareholders provided it
avoids duplication and overlap with
existing disclosure requirements.
2. Details of the relationship
between remuneration policy
and corporate performance
should be repealed as it is
unduly prescriptive.
Not supported The details are fundamental to
assessing company performance,
and should not be removed.
3. A company should be
permitted to exclude from
its remuneration report
commercially pricesensitive
information, contingent upon
the satisfaction of certain
criteria.
Not supported The current framework provides
sufficient flexibility for companies to
withhold any commercially sensitive
information.
4. Remove the requirement
for key items, such as
options granted to KMP, to be
calculated in accordance with
accounting standards.
Not supported Remuneration reports prepared
in accordance with accounting
standards allows for meaningful
comparison between remuneration
reports by using standard valuations.
5. The external auditor is
to give an opinion on the
accuracy of calculations in a
remuneration report.
Not supported If recommendation 4 is not
implemented, this point is
redundant.
6. Disclose, in the financial
year in which future-vesting
equitybased remuneration
was granted, (i) the
methodology used to value
that remuneration, and (ii) the
number of securities granted
as a result of the application
of that valuation methodology.
Not supported If recommendation 4 is not
implemented, this point is
redundant.
7. Disclose any options that
have lapsed in the current
financial year and indicate
the year(s) in which they were
granted. There should be no
obligation to include a value
for the lapsed options.
Disclosure of the percentage
of the value of remuneration
that consists of options
should be repealed.
Supported
Supported
The value of lapsed options is of
limited use to shareholders.
This proposal will simplify the
legislative framework without
substantially diluting the information
available to shareholders.
8. Disclosure of all payments
for KMP upon their retirement
from the company.
Supported These disclosures will provide
greater transparency on the amount
and composition of termination
payments.
9. Disclose, for each KMP,
crystallised past pay, present
pay and future pay.
Supported This will assist shareholders to
clearly distinguish between present
pay, and pay that has been received
due to past pay having crystallised.
Edited version of table provided in the Parliamentary Secretary to the Treasurer’s press release 21/02/2012.
“Companies should be allowed to
develop their response to a chang-
ing environment without simulta-
neously having to come to grips
with wide-ranging new report-
ing requirements”, it said, and
that a non-prescriptive legislative
approach to remuneration report-
ing should be taken.
The government supported all
but the recommendations that
called for the removal of the pre-
scriptive, accounting standard
measures for reporting the link
between company performance and
remuneration and commercially,
price-sensitive information.
Providing shareholders with an
upfront description of the compa-
ny’s remuneration philosophy, and
reason for it, is something I have
advocated to clients for a long time.
It sets a scene and allows for
meaningful discussion around why
pay is what it is. It also allows for
an easier annual review in that all
that is needed is a quick test of
overall market movements in fixed
remuneration and a recasting of the
annual targets for the short-term
incentive scheme.
Shareholders are able to make
their voting decision based on a
framework and measure changes
against general market movements
rather than blindly on the quantum
alone.
Providing information on crys-
tallised past pay, present pay and
future pay allows for a more mean-
ingful discussion around pay and
company performance.
The inclusion of the value of
equity grants that vest upon attain-
ment of future, long-term per-
formance potentially artificially
inflates an individual’s remunera-
tion in the current year.
By providing information on
past, present and future pay along
with an explanation of the perfor-
mance criteria that led to vesting
will greatly improve shareholders’
ability to assess whether the execu-
tive has been rewarded appropri-
ately. As with the trend towards the
deferral of short-term incentives,
companies are already beginning
to provide this type of information
in their reports.
The removal of the requirement
to express equity as a percentage
of remuneration is at best a minor
improvement in reducing the length
of the remuneration report. Such
information is usually expressed
within the remuneration table itself
and only represents a few lines.
The recommendation to dis-
close only the number of options
that lapsed is a curious one. The
value of the lapsed options is also
of importance as shareholders
typically focus on the total dollars
in a remuneration package and
the value of equity varies greatly
between companies.
It is also curious that only
options are specified, surely the
same should apply to all unvested
equity such as performance rights?
For example it is quite feasible that
an issue of 1,000,000 options in a
junior explorer equates to a value
less than $50,000 whereas the same
value in a large producer is the
equivalent of 2,000 options. After
all, the tax office is interested in the
value, why shouldn’t it be provided
to the shareholders in an audited
report?
With respect to recommenda-
tions 4-6, I tend to side with the
government’s response. Given the
remuneration report is providing
information on the immediate past
year, I see no reason for excluding
information that deals with past
company performance. Indeed,
many companies are voluntarily
providing future dated information
in relation to incentive payments
including board set return on equi-
ty targets, project milestones and
financial targets.
By clearly stating what the targets
are, you remove the grey area of
incentive pay and again meaning-
ful discussion can take place, rather
than an abstract statement of ‘it’s
too much’.
The absence of a consistently
applied valuation alternative makes
the recommendation to remove the
necessity for accounting standard
valuation of pay unwieldy and results
in further explanation (and therefore
length) in the remuneration report.
While accountants are on the
record as saying the use of the
accounting standards to value pay
leads to misleading figures being
reported by the media that appear
out of step with company perfor-
mance, at least the common method
allows for a degree of comparability
between companies.
For the most part the changes do
have the capacity to improve the
understanding of how companies
remunerate their key management
personnel. The true test will be in
the implementation and whether
the result is more transparent and
concise reporting rather than further
increasing the length and complex-
ity of the remuneration report.
Mr Bradbury takes credit for
the Gillard government’s reforms
providing “a balanced and sensible
template for other jurisdictions who
want to improve governance in their
executive remuneration frameworks
and give shareholders more power
to have a say”.
While it is true that other juris-
dictions are looking to emulate
Australian governance, it should
be remembered that both the
Productivity Commission and
CAMAC found Australia’s corpo-
rate governance and remuneration
frameworks rated highly interna-
tionally in 2009 and recommended
non-legislative and non-prescrip-
tive change.
Credit should be given to those
boards that have voluntarily lis-
tened to their shareholders and
remained ahead of the cumulative
heavy handed and prescriptive leg-
islative game.
Draft legislation is due to be
released for public consideration
in the latter half of 2012.
• Pamela-Jayne Kinder is prin-
cipal of PJ Kinder Consulting,
which provides advice on board
and executive remuneration gov-
ernance.