Independence and Conflicts of Remuneration Advisers

When ASX listed companies seek independent counsel on remuneration issues, remuneration advisers can find themselves faced with numerous scenarios which can result in conflict with a departing Executive, especially where the level of compensation as part of a separation or nominal resignation is being discussed.

Some typical scenarios include:

  • options to exercise discretion in circumstances where a termination benefit was limited to 3 or 6 months;
  • an option to enable equity incentives to vest when performance hurdles have not been met;
  • challenges associated with negotiated separation arising in circumstances of under-performance (not constituting fraud or malpractice) revealing failure in leadership.

Boards often struggle in their efforts to manage separation to avoid incrimination, legal action or disputes, where either one or both parties have fallen short of effectively managing a situation.  The role of the Remuneration Adviser needs to be wholly independent, providing advice which is accurate, defensible and which represents the most appropriate response under the circumstances.

Issues can arise in relation to incentive awards, particularly when there is a dispute in relation to an executive having the authority to change certain pre-existing agreed initiatives where there are contrary views of Board members, and/or where that tension has led to errors of judgement and/or poor execution of prior approved strategies and programs.

Another difficult situation can arise when an incoming executive discovers, within a relatively short period of time, that a number of business units are operating unprofitably and are poorly led.  In these circumstances, shareholders and proxy advisers will often query separation arrangements where a retiring executive receives rights to considerable incentive benefits, though subsequent results reflect undisclosed under-performance.

Separation can also arise in circumstances where the primary reason is not apparent and settlement negotiations are contrary to company policy and market practice.  In this situation, the Board’s remuneration adviser needs to be fully appraised if called upon to attest to the reasonableness of the termination arrangements and their alignment with contractual entitlements.

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