1. 32 | June 30, 2011 www.wabusinessnews.com.au WA Business News
■ OPINION |
Companies face new rules on executive pay
A NEW era in Australian executive
remuneration kicks off on July 1.
Since I wrote about the amend-
ment to the Corporations Act 2001
in January, a revised Bill has been
passed by both houses of parliament.
Royal assent was due this week.
It is the third major change to
executive remuneration since the
global financial crisis (the first
two being changes to the taxation
of equity received as remuneration
and a reduction in the cap placed on
termination payments).
In short, the new law:
• Gives shareholders the opportu-
nity to spill the board should the
remuneration report receive ‘no’
votes representing 25 per cent or
more of all votes cast at annual
general meetings two years running
(‘two strikes’).
• Introduces strict rules for the
engagement and disclosure of
remuneration consultants by report-
ing entities.
• Prohibits key management per-
sonnel (and closely related parties)
from voting on the remuneration
report or any two strikes board spill
motion.
• Prohibits key management per-
sonnel from hedging incentive
remuneration received in any form
of equity.
• Requires shareholders’ approval
before any ‘no vacancy’ declara-
tions are made by a board.
• Introduces measures designed to
prevent proxy holders from ‘cherry
picking’ the proxies they exercise.
• Limits remuneration disclosures
in the remuneration report to key
management personnel.
The laws, which come into effect
on July 1, mean companies will face
their first two-strikes vote at this
year’s annual meeting for the 2010
financial year.
The exceptions are the changes
relating to proxy voting, which
Changes to the law
give shareholders more
say on executive pay
and tighten the rules
on how boards decide.
come into effect on August 1 to
allow those companies that needed
to issue meeting notices before the
Bill was passed to still comply with
the new laws.
Where the new law differs most
from the one that was first proposed
is that it further clarifies new rules
around the engagement of independ-
ent advisers when considering the
remuneration of key management
personnel.
To a certain extent, it is a more
workable method of operation than
that put forward originally by the
Labor government.
Where a disclosing entity chooses
to use an independent remuneration
consultant (there is nothing in the
new laws that state that an inde-
pendent consultant is required),
the following must be done to give
shareholders confidence there is
greater transparency in remunera-
tion advice given and that it is free
from undue influence.
• The engagement of a remunera-
tion consultant must be approved
by the board or remuneration com-
mittee before engaging the consult-
ant. This differs from the original
proposal that saw the remuneration
consultant only being able to engage
with a non-executive director.
• The remuneration consultant must
report to non-executive directors or
the remuneration committee, rath-
er than company executives (with
the exception being entities with
a board comprising of executive
directors only).
This means the recommendation
typically cannot be presented to the
managing director/chief executive
officer and chief financial officer/
company secretary. As per the
initial draft, it remains a criminal
offence for a remuneration consult-
ant to present the recommendation to
someone other than a non-executive
director, however, once presented to
non-executive directors, the board
may forward the report to the com-
pany’s key management personnel.
• The remuneration consultant
and the board must make separate
declarations that the recommenda-
tions on remuneration are free from
undue influence by the key man-
agement personnel to which the
recommendation relates.
• Companies that are disclosing
entities will be required to disclose
details relating to the use of remu-
neration consultants.
The new laws also provide a
clearer definition of what a remu-
neration consultant is. The original
draft implied that consultants that
advised on the legal or accounting
side of remuneration were covered
by the changes to the law, however,
this has been refined to cover only
those recommendations that relate to
how much the remuneration should
be and the elements the remunera-
tion should have for key manage-
ment personnel.
Understandably, the focus for
boards will be to minimise the like-
lihood they will face a first strike
under the ‘two-strikes’ rule.
The key is for boards to ensure
the remuneration report can be
clearly understood by sharehold-
ers and that particularly variable
remuneration is visibly linked to
company performance.
The good news is that both the
Productivity Commission (January
2010), the Corporations and Markets
Advisory Committee (April 2011)
have plainly stated the board to
determine the appropriate quantum
and components for its executive
remuneration and this has been
effectively upheld by the changes
to the Corporations Act.
How then should boards proceed
when determining the remuneration
of their executive team?
Don’t be afraid to be different.
Spend time in working out the com-
position of remuneration and the
proportions of fixed versus vari-
able pay.
When it comes to identifying
the performance measures used to
determine the variable pay com-
ponent, do not just rely on broad
measures such as relative total
shareholder return.
Consider where your company
is in its life cycle, look for meas-
ures that are clearly within your
executive’s control that contribute
to shareholders’ returns rather than
relying on your competitors and
peers to not do as well as you do.
When choosing a remuneration
consultant, look for someone who is
clearly independent, specialises in
executive remuneration and works
with the board to create a remu-
neration package and structure that
reflects the specific circumstances
of your company rather than provid-
ing a one size fits all approach.
A “we are doing what everyone
else is doing” argument will no
longer satisfy shareholders who
from this annual meeting, while not
having a binding vote, will have a
greater say on pay.
Be aware that the legislative
changes are not the last we are like-
ly to see in the post-GFC world.
The government is still to release
it response to its discussion paper
on the claw back of executive pay
where financial statements are mate-
rially misstated. The crackdown on
executive remuneration is not quite
over yet.
• Pamela-Jayne Kinder is principal
of PJ Kinder Consulting – board
and executive remuneration gov-
ernance and advice.
SCRUTINY: Changes to the Corporations Act, the third since the GFC, empower shareholders
to spill the board and apply strict rules on hiring pay consultants. Photo: Grant Currall
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