2012 AGM Season in Review

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2012 has shaped up to be a more moderate AGM season than 2011 for top 300 companies. In 2011, just over 8% of AGMs for Australia’s top 300 companies resulted in a strike, while so far in 2012, the percentage has been just under 7%.

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The vast majority of organisations that received their first strike in the 2011 financial year have reviewed the remuneration structure for their leadership team and have addressed concerns raised by shareholders. Concerns primarily related to incentive payments being awarded despite companies’ performance leading either to diminished share value or diminished dividends, although in some instances there have been views expressed in relation to the level of fixed remuneration.

This pattern has continued with the 2012 Annual General Meetings: those expressing concern about remuneration are primarily reflecting an observation that incentive payments or fixed remuneration increases have not reflected sensitivity to the circumstances of shareholders.

There is some evidence that key shareholders in certain entities have concerns other than remuneration and have used the legislative framework to bring about a Board spill. It is, however, interesting in this context that many negative votes in relation to the Remuneration Report were not equally supported for a spill motion.

The following tables provide a summary of the 2012 AGMs to 30 November.

Companies who had a first strike in 2011, but not 2012 included:

Company Problem Action
Bluescope Bonuses received despite $1 billion loss, no dividends and a dramatic fall in share price. Lack of disclosure of STI hurdles and targets. LTI not sufficiently aligned to performance. CEO not awarded a STI or LTI in 2012. Fixed pay frozen. Other execs receive 50% of STI in deferred equity. LTI updated: no retesting, two year trading lock on vested award, smaller payout at 51st percentile.
Crown Lack of disclosure on LTI hurdle targets and rem rationale. Also concerns about high fixed rem for CEO and MD. More info provided on rem rationale and historical EPS targets disclosed. Rem level and structure remains unchanged.
Dexus STI deferral plan was poorly communicated, such that it was mistaken for an LTI plan, and also enabled excessive pay for low levels of performance. Froze fixed rem, deferred part of STI award, new LTI plan including clawback provisions, new KMP security holding requirement.
Fleetwood Concerns over ex-gratia termination payment for COO and former MD when he became NED. No discussion on basis for STI award or why options had a strike price 20% under share price. New STI plan implemented with individual and financial targets, ex-gratia retirement payments for KMPs abolished, new max discount for option strike price. Only just missed a second strike.
GUD Holdings Large increase in CEO base pay. LTI incentive consists of cash. CEO fixed pay frozen for 2013, new LTI plan replacing cash with performance rights. 
Pacific Brands Board used discretion to award STI, despite company not meeting 90% budgeted EBITA gateway. Concerns over size of benchmark companies used to set quantum of CEO and execs. Reduced fees by 25% for NEDS, salary freeze on senior management, no STIs awarded or LTIs vested for 2012, reduction in future STI opportunity.
Perpetual NED and MD rem too high for smaller size of Perpetual, rem structured to reward short-term behaviour, lack of STI determinant disclosure, exclusions of write-offs and restructuring costs from NPAT STI hurdle. Payment of dividends on LTI awards prior to vesting. Fixed rem frozen for 2013, smaller exec team to reduce annual KMP target rem by 25%, total NED fees reduced by 30%, portion of STI awarded in deferred equity to increase to 40%, LTI equity issued as performance rights, therefore no dividends on unvested equity.
Sirtex Medical Founder Dr Bruce Gray with an 18% shareholding voted against the remuneration report. Shareholders gave feedback: they believed variable remuneration should only be for exceptional performance. Increased the base pay of some executives after remuneration audit. Altered LTI plan to have dual hurdles (equal tranches): EPS growth and absolute TSR. Gray intended to vote again against the report, but the company just avoided a second strike.
UGL Lack of explanation of rationale for rem strategies and quantum. Concerns with MD rem structure and level. Dividends paid on unvested shares. Better explanation of operation of STI awards. Dividends no longer paid for new LTI grants. Noted that MD’s contract valid to 2014, but would align his contract to market in 2014.

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Strike newcomers included:

Company Reason
Austal Lack of transparency on STI determinants. 100% of STI vested despite accounting profit falling by half.
Cochlear Amid difficult conditions, a grant of options to the CEO was in the money at the AGM date.
Fairfax Gina Rinehart has been pushing for Board seats and used her voting power to force a first strike. Concerns over quantum of Board pay.
Lend Lease Abigroup accounting issues exacerbated concerns on quantum of CEO pay relative to company size, despite decision to cut 2012 STI award by 10% for CEO and some of exec team.
MacMahon Holdings Former CEO paid a large STI award just prior to announcement of a significant profit downgrade. No clawback provisions.
M2 Telecommunications “Independent” non-executive chair receives STI pay. Increase in NED fee pool refused. LTI options for LTI well in the money at AGM date.
OrotonGroup Lack of transparency of remuneration structures, disconnect between performance and pay.
Peet Despite 2013 pay freeze and decision not to award STI for execs, ASA felt the 2012 CEO fixed pay increase of 7% excessive given share price and NPAT for the year significantly down.

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Near misses included:

Company Reason
Ausdrill Auditor (PwC) has also provided remuneration recommendation. STI discretionary, with no description of what performance measures are used.
iiNet Large CEO LTI opportunity for 2012 LTI plan, which is paid in cash (Max=$5.13m). iiNet believed the 23.3% vote against its rem report came from poor communication around its LTI.
Seven West Group CEO receives no at risk pay, just fixed remuneration. Anger over termination benefit for former CEO David Leckie of $1.8m. Concern over low share price.
Treasury Wine Estates ISS Group advised a no vote due to a 5% EPS CAGR hurdle for a proposed performance rights grant for the CEO worth $2.7m, despite market expectations of 30% growth.
Whitehaven Coal Disgruntled investor Nathan Tinkler used his 19% shareholding and an advertising campaign to try and get a strike against the remuneration report, in the hopes of spilling the Board.

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Second strikes

Cabcharge was the first ASX 300 company to receive a second strike. It has had an over 25% vote against its remuneration report five years in a row. Reg Kermode is the Executive Chair and has high remuneration in comparison to CEOs at companies of similar size. This is added to what many consider an acerbic and unapologetic leadership style and a 33% share price fall in recent months as the company faced criticism of its fee model. There were also concerns about an ex-gratia payment made to Board member Sharon Doyle. The proxy groups who advised shareholders to vote against the remuneration report did not recommend they vote for a spill, saying that action could wait until a third strike. The 85-year-old Kermode has set the wheels in motion for a new management structure that will not include an executive chair role when he retires, but has not announced a date or details of such a restructure.

Linc Energy also received a second strike. Managing Director Peter Bond’s contract has his base pay rising by $167,000 from $500,000 over his three-year contract to 31 December 2013, finishing at $1,000,000. The company has no STIs, but intermittently grants performance rights under an LTI plan. He said the vote was more about the share price, which has halved over the last year, than remuneration, but has said he will listen to shareholders’ concerns.

Some smaller cap companies have also suffered second strikes, with shareholders for Penrice Soda and Globe International voting to spill the Board. Penrice Soda Chairman David Trebeck has said that votes on the remuneration report is a “lightning rod to which all shareholder disaffection can be directed regardless of its nature”. In addition, because KMPs cannot vote on the remuneration report, for small caps, the chance of a minor group of shareholders or one shareholder being able to skew the vote is high. In Globe International’s case, only 8.6% of the company’s total shares were represented in the vote, as Directors and executives of the company own 74% of the shares.

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Is the two strikes rule working?

Recent analysis we conducted showed that CEO bonuses in particular have taken a hit in recent times for companies in the ASX 100. Only 83% of the 93 CEOs in our analysis received a bonus at all for 2012, compared to 90% in 2010. The percentage of CEOs required to defer part of their bonus has also risen from 28% to 35%, or 27 CEOs.

For those executives who did receive a bonus, the quantum of the average cash STI received in the year has reduced by approximately 20% to $1,063,173, while the quantum of the bonus deferred for applicable CEOs has reduced by 15% to $961,744.

Average fixed pay has also fallen over the same time period by approximately 4% to $1,644,242, while the average value of the most recent LTI granted (involving 63 of the 93 CEOs) has dropped by approximately 6% to $2,678,485, or more than one and a half times their fixed pay.

We also examined the top five executives other than the CEO from the ASX 100, looking at pay for 373 executives. Like the CEOs, cash bonuses for the 323 executives other than the CEO who received them were down by 15% on average to $396,813, while deferred bonuses (involving 131 executives) reduced 24% to $492,249. Fixed remuneration, on the other hand, increased by an average of 6% to $725,873.

It is interesting to note that the difference between average cash STI including zeroes and average cash STI excluding zeros for CEOs differs more markedly than it does for the top five executives. While 17% of CEOs in our analysis did not receive bonuses, only 12% of executives did not.

This could indicate the effect of CEOs standing more firmly in the spotlight of shareholder scrutiny, leading to the symbolic waiving of their bonuses. It could also reflect that the CEO has accountability for the company’s finances as a whole, while other executives may be awarded at least a portion of their bonus on other non-financial measures as well as business group/regional financial KPIs.

This would appear to indicate that the two strikes rule has affected high profile CEOs more than their executive team. However, we also note that a number of incumbent CEOs who were paid at a premium, with salaries set pre-GFC, have retired, being replaced by new talent at a lower base.

Whether the two strikes rule will have a long term effect on executive pay is yet to be determined – we believe that more years of data will need to be collected before a verdict can be reached. While we wait for that data, however, remuneration legislation is still evolving. We note plans to introduce laws to mandate disclosure of the pay an executive actually takes home in a year (including equity that vests in the year), which many companies have adopted to satisfy best practice guidelines.

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Long-term patterns

Looking back at the pattern of voting against remuneration reports since 2005, the percentage of Australia’s top 300 companies who would have received a vote of over 25% (equal to a strike under current legislation) or a 15% warning shot across the bows since 2005 looks like this:

Remuneration reports votes for the top 300 since 2005

The data for 2012 only includes companies that held their AGM up to 30 November.

As can be seen, the number of companies incurring a vote of over 25% on their remuneration report rose markedly with the onset of the Global Financial Crisis. Since that time, however, the number of companies receiving votes over 25% from their shareholders has steadily decreased, even after the commencement of the two strikes rule in the 2011 AGM season. In contrast, the number of companies receiving a protest vote greater than 15% increased in that AGM season.

Hence, it appears that most shareholders are using the new two strikes legislation to give their Boards a message on their dissatisfaction about KMP remuneration, without necessarily threatening the Board with a spill by causing a strike. The reduced over 25% vote since 2008 would also suggest that companies were gradually acting on shareholder concerns before the legislation was brought into play, or that shareholders were less concerned after the fear of financial collapse retreated.

Over this time, a variety of companies have been repeat remuneration offenders, judging by their remuneration report votes. If the current legislation had been in place over that time, Telstra would have faced a Board spill in 2007, Suncorp and Toll Holdings in 2008, Qantas, UGL and Sirtex Medical in 2009, and Coca Cola and Downer EDI in 2010. Transurban would have achieved its third strike in a row in 2010. Cabcharge would have received a strike for every year since 2008 up until this one.

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Takeaways:

Companies attempting to avoid remuneration report strikes should:

  • Beware of incentives that vest when returns to shareholders are low or negative – eg relative TSR for LTI.
  • If using a balanced scorecard with non-financial elements to award STIs, consider a financial gateway or modifier to ensure non-award for poor financial performance.
  • Be cautious of large payments to executives whose units have performed well while the company has performed poorly.
  • Avoid awarding large LTI allocations on a discounted market value arising from an accounting valuation incorporating the risk associated with performance hurdles not being met.
  • Keep clear of significant cash STI and sign on payments without deferral and clawback provisions. Consider deferring part of STI as deferred equity.
  • Avoid large increases in fixed pay or director pay if companies have performed poorly.
  • Be cautious of how you present CEO and KMP termination payments.
  • Ensure the report is clear, laying out policies in a transparent manner.
  • Avoid use of Board Discretion to award performance pay unless there is a valid circumstance, indeed using discretion to adjust downwards might be needed in some cases.
  • Keep strategic shareholder agendas in mind.

In our experience, many strikes against remuneration reports have been exacerbated by remuneration reports which poorly communicated the structure of executive remuneration. We have in the past spoken to clients only to discover that our professional understanding of their remuneration policies based on their documentation did not match the actual remuneration practice. Where confusion reigns, shareholders can vote for the wrong reasons. Egan Associates makes sure the remuneration message comes across both clearly and correctly.

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