Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
Executive remuneration commonly has a substantial component of performance-related compensation. Generally, this is structured in the form of short-term and long-term incentive plans. The balance between these components will depend on the particular financial and commercial circumstances of the company, as well as its short-term and long-term goals.Restrictions
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?
Generally, the amount or structure of incentive compensation payable to an executive is regarded as a matter for each company to determine. There is, however, capacity for shareholders to express their views on remuneration at the annual general meeting (AGM). Under the Corporations Act a listed company must put to a vote at its AGM a resolution that the remuneration report be adopted. The vote on the resolution is only advisory, but can trigger the ‘two strikes’ procedure where 25 per cent of the votes cast oppose adopting the report. Restrictions apply to the capacity of key management personnel whose remuneration is included in the remuneration report, or persons closely related to them, in voting on such a resolution.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Deferral and vesting of incentive awards is permissible, with staggered vesting conditional on achieving certain performance conditions a common practice. We are not aware of any minimum or maximum vesting periods.
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
We are not aware of any limitations on the groups of employees eligible to receive incentive-based compensation.Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
Where an incentive payment, such as a bonus, is purely discretionary, the employer is subject to an implied contractual obligation not to exercise that discretion capriciously or irrationally. In order for a discretionary incentive to become a mandatory contractual entitlement, the circumstances in which this would occur would need to be clearly specified in the contract of employment or be established by some form of undertakings or assurances given.Effect on other employees
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
The type or amount of incentive compensation awarded for a particular incentive does not directly affect the compensation payable to other executives or employees. The requirement for disclosure through the remuneration report, however, imposes a level of transparency and comparability that may have an indirect impact.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
Repayment of incentive compensation may be permissible if appropriately provided for by an executive’s employment contract. The ASX Corporate Governance Council publishes best practice recommendations regarding corporate governance in the form of its Corporate Governance Principles and Recommendations. These state that disclosures regarding the remuneration of executive directors and other senior executives should include a summary of the entity’s policies and practices regarding the deferral of performance-based remuneration and the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity’s financial statements.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
Yes. Arrangements can also expressly provide that an executive is entitled to be paid the incentive payment, regardless of whether he or she is still employed by the company on the payment date. This will depend on the terms of the arrangement.