Get the remuneration report right
ASIC has provided guidance based on its review of remuneration reports, identifying the following areas where disclosure could be improved:
- distinguishing between the nature and the amount of remuneration, when describing the board's policy on remuneration and explaining how that policy and the remuneration arrangements aim to influence Key Management Personnel to achieve the company's objectives;
- where part of remuneration is subject to a performance condition, a detailed summary of the condition must be included. Information about any non-financial performance conditions should be provided in the same way in which information about financial performance conditions is provided;
- information about why particular financial and non-financial targets were chosen should be disclosed, to assist shareholders to assess whether the conditions are appropriate, to achieve the desired outcome and to align management's interests with shareholders' interests; and
- as well as satisfying the disclosure requirements in the Corporations Act and Regulations, companies should consider disclosing any other material terms and conditions for payment of a bonus, performance related bonus or share based payment, as well as details of any discretion which the board retains under an incentive plan.
Identify and address other concerns of shareholders
Apart from the remuneration report, there may be other areas of shareholder concern which need to be addressed, ideally well in advance of the AGM.
For example, a payment of a significant bonus amount when the share price is low is likely to be criticised by shareholders who are not fully informed of the circumstances surrounding the payment of the bonus. Directors can contribute to greater shareholder understanding about such payments by:
- providing detailed disclosure and a fulsome explanation of the company's previous achievements, the value that executives have brought to the company and how this relates to its remuneration policy;
- explaining any payments tied to preparing the company for improved future performance. If it is intended that payment will be made before the targets have been achieved, the company should explain why this is appropriate; and
- disclosing the actual amount received by executives, compared to the total remuneration, as often a significant proportion of total remuneration is an estimated amount attributable to equity, and so payment of that amount is uncertain.
In a volatile economic climate, executive remuneration is an issue that will remain firmly in the spotlight. Moving forward, companies will need to be prepared to engage with shareholders and their advisers, take on board their feedback, and respond positively to the valid concerns of shareholders.