This AGM season, the third of the two strikes regime, has signalled a certain coming of age for the controversial rule.
The number of major companies receiving a strike has reduced, with those at the top of the pile becoming accustomed to providing better disclosure and being more receptive on stakeholder views.
The lower ASX ranking companies are still finding it difficult to avoid controversy, some because their remuneration policies have not kept up with a swift growth path, others because of large agenda-fuelled shareholding blocks, while a few maintain questionable pay practices.
The following tables provide a 2013 summary of strikes at AGMs for the top 300 companies based on market capitalisation at the end of the September quarter. AGMs have only been considered to 5 December. Some organisations have been mentioned despite being outside the top 300 companies as they were in the previous year’s round-up.
Strike newcomers included:
|Alumina (2013 AGM for 2012 year)||The CEO was awarded 50% of his short term incentive (STI) potential for meeting individual objectives, but investors believed no STIs should have been awarded given the company’s loss. They also thought disclosure of these objectives was lacking and the company should spend less on executives in general, because they believed the company to be little more than a “post-office” for the collection of dividends from the AWAC alumina/aluminium business, 40% owned by Alumina but managed by the 60% shareholder, Alcoa of the US. The market response fails to acknowledge the level of engagement of Alumina management in capital management strategy and operational review, though clearly flags a key issue, being the critical nature of profit as a gateway for incentive payments.|
|Aurizon||ISS Group believed Aurizon should have made the LTI hurdle more difficult following a $1.1 million share buyback, which it said materially affected LTI performance. Aurizon argued it had decided not to alter hurdles to adjust for one-off events in response to criticism of prior hurdle adjustment, and making no adjustment for this case was consistent with this. The issue of share buybacks on EPS performance hurdles has been around for more than a decade – market precedence supports the company’s stand. A question which remains is “should buybacks be addressed by regulation and performance hurdles tied to EPS be adjusted accordingly?” There are formula for adjusting entitlements under LTI programs in the event of bonus issues and rights issues.|
|Super Retail Group||Super Retail Group stated that shareholders were happy with remuneration levels, but it should work on its disclosure. ISS Group believed STI performance against targets had not warranted the payout received. It also believed LTI performance hurdles were not challenging enough.|
|David Jones||David Jones noted a large amount of comment on the link between performance and pay for its STI plan, adding that the company had implemented an additional customer experience measure for the 2014 STI and increased the percentage deferred. It has also decided to reduce Directors’ fees and keep executive fees steady. Some shareholders were said to have voted against the report due to the news of CEO Paul Zahra’s resignation and an ill-timed share purchase by Directors.|
|Karoon Gas||The Board used its discretion to have options vest to executives despite performance conditions not being met, although they were not in the money. The Chairman believed concerns unrelated to remuneration played a part in the no vote, such as a desire for the company to sell stakes in exploration ventures.|
|Southern Cross Media Group||Proxy firm ISS Group stated that Southern Cross Media did not bother to engage with shareholders. The CEO and CFO received significant salary increases and the CEO received over 50% of his target STI while EBITDA declined in the 2013 year.|
|Automotive Holdings Group||Following a 2011 strike, Automotive Holdings Group designed a new remuneration framework. It escaped a strike in 2012 and believed this year’s strike was mainly due to the adverse vote of major shareholder AP Eagers. The ASA disapproved of the use of the fair value for long term incentive (LTI) allocation, a practice Egan Associates is also troubled by.|
|SCA Property Group||The company revealed that it had received negative feedback on the complexity and generosity of its remuneration, as well as the structure and metrics of its incentive plans. STI criteria and amounts were discretionary. There was a one-off equity grant to make up for the lack of an LTI grant for the period after listing to the end of the financial year.|
|NEXTDC||NEXTDC noted that due to its fast trajectory from start-up to top company it is not yet following proxy advisor best practice. For example, its STI pays out when “pre-determined key performance goals have been met” and its LTI is a loan-funded share plan. It criticised stakeholders who voted against the remuneration report due to frustration over a recent capital raising and founder Bevan Slattery’s sale of a large tract of shares.|
|Forge Group||The Board paid an ex-gratia payment of $300,000 to the CEO over and above the maximum STI payment due to outperformance. He also received a one-off sign-on fee to account for foregone annual incentive, equity and retention benefits payable under previous performance arrangements, which reportedly irked institutional voters. The ASA was concerned a “culture of remuneration excess could develop”.|
|Hills Holdings||Hills Holdings recorded a loss for the 2013 financial year. The Board is currently overseeing a transformation, which required a restructure of the executive team. Although there were no LTI grants during the 2013 year, STI payments were made to recognise executives’ transformation achievements.|
|Servcorp||Servcorp had an unusual integrated STI and LTI plan, payments of which were predicated on the achievement of defined profit outcomes. The plan provided for a payment in subsequent years where the cumulative return met the hurdle. The Board exercised discretion to pay out the cumulative reward in a circumstance where the cumulative return had not been met. The year-on-year performance had clearly improved. The payments represented a very high proportion of the incentive opportunity, though the stretch hurdles were not met.|
|iSelect||The organisation mentioned three main issues that stakeholders had with its remuneration: additional discretionary remuneration for Directors and certain executives to compensate them for work they had conducted during the listing and equity raising; discrepancies in the disclosure of STIs between years; and the introduction of a loan share plan as a LTI.|
|Thorn Group||The organisation was disappointed with the strike; it believed its remuneration was reasonable and proxy advisors had not consulted with it about shortcomings. The Chairman did, however, receive an increase in salary and fees and there was a significant protest against the vote to raise the Director fee pool from $550,000 to $650,000.|
|St Barbara||St Barbara was caught by gold’s drop in value and a problematic acquisition, leading to a significant loss for the 2013 financial year. Despite this, executives received STIs. The organisation said the poor annual performance had led to prior LTI awards lapsing.|
|Greencross||Greencross was a well performing company which achieved profit growth in excess of 30%. We suspect the strike was in part influenced by the increase in the executives’ fixed remuneration and a financial performance hurdle for the annual incentive plan which represented two thirds of forecast growth.|
Near misses included:
|Brickworks||Shareholders had concerns about increases to the fixed remuneration of selected executives, the level of disclosure in the remuneration report and the structure, vesting periods and performance hurdles of the incentive schemes – the proportion of the STI is governed by Board discretion while the LTI is an employee share scheme that only has a time-based hurdle. Commentators suggest there may have also been non-remuneration issues behind the protest vote.|
|Oroton Group||Oroton had already received a strike in 2012 due to lack of transparency of remuneration structures and a disconnect between performance and pay. It improved its disclosure of performance plan hurdles, disclosing more detail about STI key performance indicators, as well as providing EPS targets for LTI awards vesting in the year being reported. These actions were only just enough, with the company recording a protest vote of over 20%.|
|Lynas Corp||Lynas Corporation has been modifying its remuneration structure over the last few years, adding a formal STI plan and new LTI hurdles, as well as a clawback policy. There were reportedly concerns over a $953,000 termination payment made when the Executive Chairman became Non-Executive Chairman, given he was still with the company. The Board later explained it as compensation for his reduction in pay.|
|Red Fork||Red Fork Energy received a strike in 2012 and only just escaped a strike in 2013. The company improved disclosure, appointed more independent Directors to sit on the remuneration and nomination committee, abolished performance-based equity for NEDs and introduced new STI and LTI plans.|
Second and third strikes:
|Cabcharge||Cabcharge received a third strike in 2013. Reg Kermode is still the Executive Chair and commentators believe his remuneration to be high in comparison to CEOs at companies of similar size. The company has had performance issues, but will not significantly revamp its remuneration or abolish the joint CEO/Chairman role until he leaves. Kermode believes it is difficult for the company to adjust the KMP remuneration mix until new appointments are made, unless shareholders were ready to shoulder additional costs.|
|Linc Energy||Linc Energy also received a third strike. The CEO believes the vote is more a general protest vote than one against remuneration. His fixed pay increased from $500,000 to $1,000,000 over his three-year contract to 31 December 2013. The company intermittently makes grants under an LTI plan but has no formal STI plan, although it promised to have one by 2013 and is now promising to implement one for 2014. Following its first strike, Linc Energy engaged PwC to help redesign the company’s reward framework including STI and LTI plan eligibility, quantum, performance period and vesting conditions.|
|Cash Converters||Cash Converters received a second strike. It believes the strike was due to proxy advisors not having all the information on its performance plans, although the company does not seem to have made significant changes since it incurred its first strike. Disclosure on STI plans in the annual report is very brief. STIs vested “in recognition of the company’s performance” and LTIs vested due to the organisation meeting budgeted NPAT (undisclosed), which proxy advisors considered weak. Shareholders voted against a spill.|
Companies that received a strike in 2012, but not in 2013:
|Amalgamated Holdings||Concerns were raised about the CEO’s maximum STI of 150% fixed pay. Other executives received 50%.||The organisation froze the MD’s fixed pay and reduced the maximum STI opportunity from 150% to 100% of fixed remuneration. It is considering deferring part of the STI and changing the LTI equity type.|
|Austal||There was a lack of transparency on STI hurdles. 100% of the STI was paid despite lower accounting profit.||Austal has frozen KMP salaries in 2013, restructured the executive team, reduced KMP participation in a new LTI plan with revamped hurdles, suspended the LTI plan for 2013 and introduced new STI performance measures.|
|Cochlear||A CEO options grant was in the money at the date of the AGM. Performance hurdles and the valuation method for option allocation were also questioned.||Cochlear improved its remuneration report clarity and disclosure, adjusted LTI hurdle difficulty and decided to use contract value instead of accounting value to allocate amount of LTI equity. This lowered LTI allocations so the company increased STI values and introduced STI deferral.|
|Fairfax||Gina Rinehart used her voting power to force a first strike. There were concerns over the quantum of Board pay.||Fairfax froze fixed remuneration in 2014; Executive KMP volunteered to sacrifice 10% into restricted shares. It replaced STI and LTI plans with one “transformation” plan.|
|Kingsgate Consolidated||Performance hurdles were confusing and equity grants with a time condition caused protest.||The organistion provided additional information on its LTI hurdle, benchmarked its remuneration, and will not be providing any more time-based equity to the MD, although his executive team is eligible to receive grants.|
|Lend Lease||Accounting issues exacerbated concerns on quantum of CEO pay, despite a decision to cut some STI awards by 10%.||Lend Lease extended the CEO’s STI deferral period, capped STI cash, mandated an executive shareholding level and introduced malus provisions. Following a review, it then negotiated a lower target remuneration package for the CEO, adjusted the remuneration mix towards LTIs, increased STI deferral and added a ROE hurdle for its LTI.|
|MacMahon Holdings||The former CEO was paid a large STI award just prior to a downgrade. No clawback provisions existed.||A new CEO was employed on a lower package, the KMP accepted a 10% pay cut (permanent for the Board), remuneration will now be benchmarked at the 62.5th percentile, not the 75th percentile. STI deferral was introduced, STI maximum opportunity reduced, time-based equity abolished and LTI retesting removed.|
|M2 Telecom-munications||The independent Non-executive Chair received an STI. The NED fee pool increase was refused. LTI options were in the money at the time of the AGM.||M2 discontinued the Chairman’s cash settled share-based bonus plan and won’t pay performance bonuses for NEDs in future. It also introduced a new LTI plan with equity vesting according to TSR and EPS growth. (The option plan vested on STI targets).|
|Peet||Despite a 2013 pay freeze and no 2012 STIs being awarded, there were concerns about the CEO’s fixed pay.||Peet said it considered feedback from meetings with institutional investors when it set performance measures under the LTI program for the 2014 year. Executives forewent the bonuses they could have received for meeting non-financial KPIs.|
Many of the lessons from this year’s strike season are the same as last year’s, with the key questions revolving around “why” rather than “how much”.
Companies attempting to avoid remuneration report strikes should:
- Avoid large increases in fixed pay without cause or explanation.
- Ensure they understand the context of remuneration benchmarking data when raising pay levels or risk being caught out.
- If the company has reduced in size (market capitalisation, total assets or revenue), consider whether pay is still in line with the market.
- Think carefully about the proportion of STI that will be paid when the company is losing money. It may be necessary to consider a financial gateway or modifier to ensure limited payments for poor financial performance. If STIs are awarded when a company has recorded a loss, an explanation is mandatory.
- Be cautious of exercising discretion on payments above plan. If downwards discretion seems necessary, consider whether the remuneration structure is appropriate.
- Consider deferring part of the STI.
- Avoid complex incentive plans where alignment to the business is unclear.
- Avoid amending performance hurdles without good reason.
- Avoid offering loans to acquire shares which are subject to forfeiture and future performance hurdles.
- Avoid paying dividends on unvested shares under an LTI plan.
- Keep termination payments for termination.
- Proactively engage with shareholders who may have an agenda other than remuneration.
- Disclose, disclose, disclose! Investors who are kept guessing are unhappy investors.
In our experience, many strikes against remuneration reports have been exacerbated by remuneration reports which poorly communicate 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 provides remuneration report services to ensure the remuneration message comes across both clearly and correctly. Don’t hesitate to contact us when preparing your next report.