The document discusses executive remuneration practices in Australia following the global financial crisis. It notes that short-term incentives made up a large portion of executive pay in the mid-2000s but have since decreased, while fixed pay has increased. Companies have also moved to deferring short-term incentive payments and paying them partially in equity rather than fully in cash. Western Australian companies traditionally relied more heavily on stock options for executive pay than national companies due to operating in mining and energy sectors with little income generation.

1. 40 | December 2, 2010 www.wabusinessnews.com.au WA Business News
■ OPINION |
Pamela-Jayne
Kinder
Pressure remains on short-term incentives
The dust is still
settling on the
issue of executive
remuneration after the
post-GFC outpouring of
shareholder anger.
WE are now two years on from the
onset of the GFC; the Productivity
Commission has presented its
report into ‘executive remuneration
in Australia’ and the government
has responded. Ten months later,
listed companies are still in relative
no-man’s land.
The Corporations and Markets
Advisory Committee was appointed
to recommend changes to improve
the information content and
accessibility of remuneration reports.
CAMAC was also instructed to make
recommendations on how the incentive
components of executive pay could be
simplified. The information paper was
released in July, but the final report is
still ‘some time away’.
The discussion paper relating to
a clawback proposal designed to
provide shareholders with the ability
to recover overpaid bonuses that have
occurred as a result of materially
misstated financial statements has
yet to materialise.
The rejection of recommendation
13 to remove the cessation of
employment as the taxation point for
deferred equity to risk of forfeiture
remains a key lobbying point, with
remuneration experts believing
taxation at termination encourages
an over-reliance on short-term
incentives.
What has this meant for executive
remuneration in 2010 and how do
Western Australian companies
compare to their listed counterparts
on the east coast?
National perspective
At the peak of the boom in 2006-
07 and 2007-08, cash short-term
incentives (STI) were around 12 per
cent of MDs’-CEOs’and 20 per cent
of executives’ actual remuneration.
STIs were typically paid if the
company met its annual targets.
Amounts of more than 100 per cent
of fixed remuneration were awarded
when the targets were exceeded.
The award of cash incentives
for reaching target was a response
to shareholder pressure to keep
fixed remuneration down and have
performance rewarded. Larger
companies began to spell out the
kinds of performance measures used
when determining the STI payment.
Often this was a dashboard approach
taking in financial and non-financial
indicators.
Cash long-term incentives (LTI)
represented 4 per cent and 3 per cent,
options 16 per cent and 9 per cent, and
shares 3 per cent and 6 per cent for
MDs-CEOs and executives respec-
tively. It was during this time, larger
companies began attaching relatively
long-term performance measures to
the vesting of fully paid and partially
paid equity.
Again, this was in response to
shareholders’questions about absolute
growth in a market that was continu-
ally rising. How did the shareholder
know that their company was really
doing better than the next?
Then came the GFC and the land-
scape changed.At first it was the bank-
ers’remuneration that was under scru-
tiny; this then filtered through to other
sectors as shareholders began to see
the value of their investments fall.
Governments and regulators
announced inquiries, and in some
countries legislated very prescriptive
rules for executive remuneration.
In response to an uncertain regula-
tory environment, listed companies
scaled back incentive payments and
suspended equity based schemes.
This has led to an increase in the
proportion of fixed remuneration in
2008-09 and is likely to continue when
full 2009-10 data is available.
Shareholders are putting pressure
on companies not to reward ‘on tar-
get’ performance with short-term
incentives, resulting in higher fixed
remuneration as boards negotiate the
trade-off between fixed and variable
pay with executives.
In addition, companies have also
moved to deferring payment of a por-
tion of all STIs, which in some cases
instead of being paid in cash is paid
in equity. Again this is in response to
shareholders’concerns that risky deci-
sions are not made to benefit an STI
payment at the expense of long-term
performance.
The introduction of new taxation
laws in respect to issuing equity has
brought a mixed response from listed
companies. The meaning of ‘reason-
able expectation of forfeiture’ has yet
to be tested and companies have either
not reinstated their schemes or are tak-
ing a conservative approach in setting
the performance hurdles for vesting,
adding more than one measure of
performance to the common measures
of earnings per share and total share-
holder return.
There is also a move away from
options to performance rights over
fully paid shares as it seems this is bet-
ter understood and therefore accepted
by shareholders.
WA comparison
WA companies represent 30 per
cent ofASX-listed companies and, not
surprisingly, 70 per cent of those are
in the energy, metals and mining sec-
tors; the majority of these are juniors.
Unlike listed companies on the east
coast, there is no income being gener-
ated and capital raised is earmarked
for exploration and development.
With little cash to remunerate execu-
tives, equity in the form of options has
been the traditional way of attracting
key talent. At the height of the boom,
MDs and CEOs in WA were receiv-
ing 40 per cent of their remuneration
package in options compared with 15
per cent nationally.
This figure has dropped back since
then, however options remain the vehi-
cle of choice for boards as opposed to
performance rights.
The biggest change has been in the
conditions surrounding vesting, with
length of service, key project mile-
stones and increases in share price now
being attached compared with uncon-
ditional grants of the mid 2000s.
The delay in the government pro-
viding certainty over its expectations
of executive remuneration has meant
that, while the furore that arose as a
result of the GFC has died down, the
dust is still settling.
Instead of making executive remu-
neration simpler, it has made it more
complex.
Companies have responded by alter-
ing the mix of remuneration.
There is a shift towards fixed remu-
neration (at higher levels). While now
a smaller portion of overall remunera-
tion, payment of short-term incentives
is now being deferred and is no long-
er paid only in cash, and long-term
incentives take the form of perform-
ance rights over fully paid shares, with
more company specific performance
hurdles for vesting.
It doesn’t make for simple reading
when the annual report arrives.
• Pamela-Jayne Kinder is principal
of PJ Kinder Consulting, an inde-
pendent consultancy that advises on
board and executive remuneration.
Source: Thompson Reuters Connect 4 | Note: *2010 data not complete
Actual remuneration mix – managing director/chief executive officer WA
100% –
80% –
60% –
40% –
20% –
0% –
100% –
80% –
60% –
40% –
20% –
0% –
2005 2006 2007 2008 2009 2010*
Shares
Options
LTI
STI
Fixed
Actual remuneration mix – managing director/chief executive officer Australia
Chartered Luxury – for those who deserve the best
The most Luxurious charter boat to grace Perth waters.
• Impress VIP guests with a tailed charter down the Swan River,
• Spend time with friends and family at Rottnest Island,
• Celebrate your special occasions in style,
• Make your company function a memorablel one.
For further information or to book your charter, call us or visit our website.
Phone: +61 8 9331 2566 Email: info@oceanmagiccharters.com.au
www.oceanmagiccharters.com.au