In the last Egan Associates Newsletter, we analysed whether the implementation of the draft Corporations Legislation Amendment (Remuneration Disclosures and Other Measures) Bill 2012 would add additional complexity to already lengthy remuneration reports. We concluded that disclosing information on past, present and future pay need not lead to pages of additional disclosure but that some companies, in trying to fulfil the law to the letter, may present the required information in a complex manner that does not add to shareholder comprehension. This month, we continue our discussion, examining whether the legislation is the best lever to achieve the intended goal of clarity and transparency in remuneration reports.
During our frequent examinations of the remuneration policy explanations of Australia’s top companies, Egan Associates has often observed shortcomings: in some cases remuneration intent is not clear to remuneration experts, let alone retail investors. For example, in recent research for a client we examined 50 remuneration reports to determine short term incentive opportunities for a comparator group of companies. We found it was not clear in many of the remuneration reports how much executives would receive as a maximum performance opportunity and how much as a target opportunity.
One of the largest sources of confusion in remuneration reports is the disclosure of long term incentives: reports often lack clarity in relation to performance hurdles and disguise the remuneration intent of awards by the purported application of varying accounting guidelines to both allocate awards and value the benefit to executives should performance hurdles be met as opposed to being primarily guided by recent share price. There is also often a lack of clarity of the benefit executives have actually received from past awards and the basis for their initial grant.
From our observations, it is clear companies need to improve their disclosure to enhance investor understanding of remuneration intent and outcome. Yet while Egan Associates is keen to see clarity in remuneration reporting, we are not convinced the proposed legislation is the optimal avenue to achieve that goal.
Essentially, shareholders want to know:
- Executives’ potential reward opportunity if all performance conditions are met, separated out into fixed remuneration (accepting that receipt of the superannuation contribution is deferred) and variable short-term and long-term incentive components.
- How much of the potential reward the executive earned and received for performance during and leading up to the current year and why.
- The cost to the company of the executives’ remuneration (statutory table).
Arising from the Corporations and Market Advisory Committee recommendations preceding the proposed legislation, many companies have already adapted their remuneration reports to follow the spirit of the past, present and future recommendations and are disclosing most of the above information.
Yet, should the proposed prescriptive legislative approach to past, present and future pay go ahead, it could make it more difficult for companies to report the information in plain language that provides a concise explanation of key management personnel reward opportunity anchored to company performance. Organisations will be trying to meet specific requirements for reasons of compliance not clarity. Such an approach risks an additional reporting burden without necessarily increasing transparency.
We would ask whether it would not be better that the disclosure of information not already covered by current legislation be outlined as appropriate disclosure in ASX Corporate Governance Principles. This way, companies have leeway to adjust their reports to achieve disclosure in a clear manner relevant to the company’s remuneration structure. Given the current attention on executive remuneration due to the two-strikes rule, we believe there is little risk companies would disregard the guidelines.