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Thursday 30 June 2011

Attachment to 11-130AD: ASIC calls for better disclosure in remuneration reports

1. Policy on the nature and amount of remuneration of key management personnel

A company’s remuneration report must discuss the board’s policy for determining the nature and amount of remuneration of the key management personnel. The board policy provides the basis for remuneration outcomes and can provide shareholders with an understanding of the objectives or corporate goals sought to be achieved by the remuneration arrangements.

From our review, many companies outlined the board’s policy in very broad terms and did not distinguish between the nature of remuneration and the amount of remuneration. More informative reports disclosed the policy for determining each of these matters and, where applicable, also included information on the following matters:

  • factors considered by the board in setting the amount and/or nature of remuneration

  • the level, relative to the market or a comparator group, at which remuneration is set

  • if a comparator group is used to determine the amount of remuneration, information on that comparator group and why it had been chosen.

Companies must also explain how that policy and the resulting remuneration arrangements aim to influence key management personnel in achieving the company's objectives.

Some examples we saw in our review of reports which did address in a more fulsome manner aspects of this statutory requirement are provided below.

Examples

Fixed remuneration is determined by reference to appropriate benchmark information, taking into account an individual's responsibilities, performance, qualifications and experience. The broad objective is to pitch fixed remuneration at market median levels. The benchmark used in relation to the year ended on 30 June 2010 was a sub-group of companies with market capitalisations and revenues that were between 50% to 200% of [the Company's] market capitalisation and run rate revenue, as of May 2009.

Following a review of the Company's LTI program during the 2010 financial year, with advice being obtained from external remuneration consultants, the Board determined that the comparator group for the 2009 grant should be broadened to the ASX 200 excluding financial services and resources companies. The main reasons for this change were the relatively low correlation of the Company's TSR with the historical comparator groups of companies and the relative small size of the comparator group, which may create significant volatility in the Company's TSR ranking and the vesting outcomes for senior executives, potentially reducing the effectiveness of the LTI as a genuine performance incentive. Financial services and resource companies are excluded from the comparator group due to their very different business activities, operating risk profiles and leverage.

2. Non-financial performance conditions in short term incentive plans

Companies often pay executives ‘at risk’ remuneration that is subject to one or more performance conditions. Where an element of remuneration is subject to the satisfaction of a performance condition, companies must disclose a detailed summary of the performance condition.

Information on performance conditions assists shareholders to understand how the board is motivating executives to achieve certain corporate objectives and assess whether the remuneration being granted is appropriate to those achievements. Accordingly, providing a detailed summary of performance conditions as required under the Corporations Act should enable shareholders to understand the outcomes the board is seeking to achieve and whether the performance conditions are sufficiently testing. This does not necessarily require every detail to be discussed.

Our review found that short-term performance conditions were commonly a mix of financial and non-financial conditions. Where non-financial performance conditions were used by a company, less information was often given relative to the information provided on financial performance conditions.

Some companies identified non-financial performance conditions in broad terms, with insufficient specificity to understand what outcomes or behavior the board was seeking to achieve. Similarly, information about targets for non-financial, as well as financial, performance conditions was not always disclosed. Companies should disclose information about targets or the setting of targets that is sufficient to enable the shareholder to assess whether performance conditions have been appropriately set.

Some examples we saw in our review of reports which did address in a more fulsome manner aspects of this statutory requirement are provided below.

Examples

Goals for each participant are drawn from the following categories:

  • Financial measures – performance measures include Net Profit After tax, Cash Flow, Return on Invested Capital, and Earnings Before Interest and Tax

  • Zero Harm – safety and environment performance measures, including Lost Time Injury Frequency Rates, Medically Treated Injury Frequency Rates and environment measures

  • Business Excellence – performance measures for the year ended 30 June 2010 included operational targets such as long-term structural reductions to the cost base of the Company, balance sheet and liquidity initiatives and improvements to the performance of business units; and

  • Strategy – implementation of specific longer-term strategic initiatives .

The objective of the People/Safety target is to reduce Lost Time Injury and Serious Injury rates of our employees. The targets at a Group level involve reducing the Lost Time Injury Frequency Rate by 24% on the 2008/2009 result and reducing the Serious Injury Frequency Rate by 19%.

3. Why performance conditions are chosen

If an element of remuneration is dependent on the satisfaction of a performance condition, the remuneration report must explain why the performance condition was chosen. This information allows shareholders to understand and assess the board’s rationale for motivating executives towards achieving a certain outcome or behavior. It also allows shareholders to assess whether the condition employed is appropriate for producing that outcome or behavior.

From the remuneration reports we reviewed, companies generally disclosed why financial performance conditions had been chosen. However, the explanation of why non-financial performance conditions had been chosen was sometimes missing. An example of a company which did disclose the reason for a performance condition is set out below.

Example

[The Company] regards the safety of its people as a major priority and the [Executive Team] has Group-wide oversight of the Zero Harm Charter. This means that all [Executive Team] members will lose any STI entitlement under their safety objective if a fatality occurs anywhere in the [Group].

4. Terms of incentive plans

For each grant of a cash bonus, performance-related bonus or share-based payment compensation benefit made to a member of the key management personnel, the company must include in the remuneration report the terms and conditions of each grant.

While the regulations prescribe certain terms and conditions that must be disclosed, it is not an exhaustive list. Companies should consider whether there are any other terms and conditions material to a shareholder's understanding of remuneration arrangements that should also be included in the remuneration report.

Our review indicated that some companies also disclosed discretions granted to the board under the terms of incentive plans. Such discretions could include:

  • the variation of performance conditions

  • the early vesting of unvested grants; and

  • in the case of equity grants, whether to purchase shares on market or to issue further shares.

When disclosing any discretion that the Board may have under an incentive plan, companies should also consider disclosing the conditions and circumstances under which such discretion may be exercised. For example, on a change of control, upon termination or in the event of serious illness etc.

Some examples from remuneration reports that we reviewed that did disclose information on the discretions granted to companies follow.

Examples

Early vesting may occur in certain circumstances, subject to the performance hurdle being achieved:

  • On a person/entity acquiring more than 20% of the voting shares in the Company pursuant to a takeover bid that has become unconditional; or

  • On the termination of employment due to death or permanent disability; and

  • In other circumstances where the Board determines appropriate. (note: such discretion has never been exercised by the Board and would require exceptional circumstances).

The Board reserves the right to make changes to the peer group to allow for changing circumstances (e.g. takeover) for peer group companies.

Upon exercise of performance rights, shares will be allocated to [the Managing Director]. The Board has the discretion to either purchase shares on market or to issue new shares.

Last updated: 30/03/2021 09:34