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12-34MR Attachment: ASIC calls for better executive remuneration disclosure
On 30 June 2011 ASIC released the results of its review of 60 remuneration reports of ASX 300 companies for the year ended 30 June 2010. That review identified the following areas where disclosure about remuneration arrangements could be more effective:
- the board's policy on the nature and amount of remuneration of the key management personnel
- the non-financial performance conditions in short-term incentive plans
- why performance conditions have been chosen, and
- the terms and conditions of incentive plans.
The review of 50 remuneration reports of ASX 300 companies for the year ended 30 June 2011 showed that companies could still report more effectively on these areas. ASIC observed that some companies, particularly those with more advanced reporting practices already, had improved their disclosures following ASIC's release last year. However, there are still some companies that need to provide more effective disclosures in compliance with section 300A.
ASIC is also aware that there has been increased engagement between companies and their shareholders about the content of the remuneration report.
To assist directors in the preparation of future remuneration reports we have included some of the better examples of disclosure we observed during our review in the four areas mentioned above. These examples are for illustrative purposes only and ASIC is not mandating the form of words in the examples. The form of words will depend on the particular circumstances of each company. ASIC is also not endorsing the remuneration report of any of the companies from which the examples have been drawn, nor endorsing or requiring the remuneration strategy or arrangements of those companies.
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.
In its previous review of remuneration reports ASIC provided examples of the amount of remuneration being set by reference to a benchmark, with the report describing the benchmark used. In this year's review ASIC observed that a number of reports provided information on the benchmark used to reference remuneration.
Remuneration reports that addressed the requirements of section 300A(1)(a) more effectively also provided information on why the remuneration mix was appropriate in the company's circumstances and the factors that directors considered in determining the amount of remuneration to be paid.
Examples
Fixed annual remuneration is determined by individual performance and by referencing market movements. Generally, fixed remuneration is set at the market median, with a total remuneration opportunity, including the variable short- and long-term ('at risk') components, at around the 75th percentile of the market…In reviewing remuneration, the Committee references available market data for comparable roles within industry generally and within the [relevant company] sector both domestically and globally. The predominant focus is on market rates of pay in the executive's country of location. Identifying appropriate matches is challenging and is further complicated by the fact that not all of our competitors are listed and therefore market data is not readily available.
The Group aims to ensure that the split of fixed and variable remuneration for executives is appropriate for the type of business that the Group operates, namely a cyclical, mature business which seeks to provide stable income earnings with a high level of distribution to shareholders. This has generally resulted in higher proportion of fixed remuneration for executives compared to other AREITs and a lower proportion of variable remuneration.
2. Non-financial performance conditions in short-term incentive plans
Where an element of remuneration is subject to the satisfaction of a performance condition companies must disclose a detailed summary of the performance conditions.
Remuneration reports that provided more effective disclosures described the particular non-financial performance conditions, the weight to be given to that performance condition if only one of many conditions, and how performance against those conditions would be measured. As the reports are reporting on past performance, other companies provided information on how management performed against each non-financial performance condition.
Examples
Customer Service is measured against Net Promoter Score (NPS) targets. This is a survey based measure of the willingness of customers to promote services of the company….in preference to its direct competitors. The target involves a 10-point improvement on [subsidiary] and [subsidiary] NPS result compared to the 2009/2010 result.
[Company]'s safety performance, measured by MTIFR was 36.1 for the financial year, which did not meet the target set by the Board. Accordingly, the 10% of the STI measured against this target was forfeited.
Typically, the weightings for KMP might be: Financial 40%, Customers and Strategic 40% People Management 20% …
|
Common objectives |
What |
Result |
|---|---|---|
|
Employee engagement |
Specific initiatives are developed each year to build employee engagement and [Company] invites all employees to take part in an engagement survey. Senior Executives had targets with respect to employee engagement. |
Numerous initiatives to promote engagement were successfully implemented across the business. The overall 2011 survey result for employment engagement at [Company] was 54% compared to a result of 62% for 2010. |
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.
More effective reports gave particular reasons for choosing each performance condition in both short- and long-term incentive plans and linked it to the company's circumstances, strategy or priorities.
Examples
In addition, due to the significant turnaround effort required, the Group MD has a separate performance measure which is dependent on the improvement in the annual performance of the [relevant] division.
[Company] has embarked on a journey to significantly improve the satisfaction levels of all our customers … To assist with attaining our customer satisfaction goals and reinforcing their importance, we have amended our incentive plans. All participants in the fiscal 2011 Short Term Incentive (STI) plan, including the CEO and Senior Executives, have a significant proportion of their target STI tied to customer satisfaction objectives.
The safety component is in support of a program for company-wide improvement in safety performance in particular injury frequency rate reduction and risk management.
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.
More effective reports considered not just the terms and conditions prescribed in the regulations, but other key terms and condition relevant to the shareholder's assessment of the operation of the incentive plan. The examples provided in ASIC's previous review of remuneration reports also remain relevant.
It would also be relevant, in discussing the terms and condition, to disclose whether the terms of any share plan provide for dividends to be paid to executives on unvested shares.
Examples
If a Plan participant ceases employment at any time by reason of death, disability, total and permanent disablement, bona fide redundancy or other reason with the approval of the Board, all performance rights and options for which the applicable performance conditions have not been satisfied will remain 'on foot', subject to the original performance and vesting conditions.
In the case of the CEO and CFO, it is an overriding condition of their employment agreements that, if they cease employment at any time by reason of death, disability, total and permanent disablement, bona fide redundancy, termination by the Company without cause, resignation in good faith or other reason with the approval of the Board, all performance rights and options for which the applicable performance conditions have not been satisfied will vest and become exercisable.
If any Plan participant ceases employment for any other reason:
- prior to the expiry of the two year minimum service period (from the date of the grant), unless the Board determines otherwise, all performance rights and options will immediately lapse, regardless of whether the applicable performance conditions are satisfied or not; or
- after the expiry of the minimum two year service period, but before the satisfaction of one or more of the performance conditions, such rights will remain 'on foot', subject to the original performance and vesting conditions.
In the event of a change of control, unvested performance rights and options will vest automatically.
For FY2011 the Board exercised its discretion to use the underlying the FY2011 Group NPAT instead of reported NPAT for the purposes of assessing STI … (in relation to the EPS performance hurdle in the long term incentive plan) The Group's net profit may be adjusted by the Board, where appropriate, to eliminate abnormal items which in the Board's opinion don't reflect operating performance.