Letter to a Newly Appointed Remuneration Committee Chair

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Friend,

Congratulations on your appointment to your new role. We’re sure you’re settling in well. But just in case you’re having post-appointment nerves, or you’re wondering what you’ve signed yourself up for, we thought a few words of advice might not go astray.  After all – what is the use of remuneration consultants if we don’t provide the odd piece of advice? If you find yourself panicking as you head towards your first KMP pay review, here are our ten tips for your consideration.

1. Stay informed and make sure your fellow committee members are too

If we can promise you one thing, it is this: remuneration norms and laws will not be the same when you start as when you finish. This holds particularly because of the scope of your portfolio, which usually canvasses not only Director fees, CEO and executive reward (including fixed remuneration as well as annual and long-term cash and equity based plans) and contractual arrangements, but also on occasions employment policies and agreements for all staff. It is imperative you stay ahead of stakeholder expectations from a) shareholders, b) proxy advisors c) employees d) government and e) industry specific regulators. It’s the only way to ensure the committee can exercise sound judgement.

2. You can say no

No matter how important an executive believes they are to the company and no matter how hard they push for more remuneration, remember the market context, the individual’s experience and standing, the performance of the company and its vulnerabilities as well as the potential benefit or disadvantage of an increased package to your shareholders before acquiescing to their requests. Remuneration must be reasonable and linked to performance and strategy execution. Do not ever be tempted to move performance hurdles unless there are materially extenuating circumstances. You will not do the company any favours by letting charismatic executives dictate their pay. If your hands are tied, make sure your accommodation for the year in question is not recurrent.

3. A stitch in time saves nine

Just because proposed legislation (or a recommendation to a government review) is unlikely to be introduced for a few years doesn’t mean you shouldn’t be taking steps towards implementation. This will not only take the pressure off when the time comes around, but your implementation will provide informed feedback to legislators, aiding the gradual evolution of better policies over time. A good example of this is the reaction by many companies to the crystallised past pay, present pay and future pay disclosure recommendation made by the Corporations and Market Advisory Committee, a form of which is soon to be implemented in legislation.

4. There is no such thing as a global remuneration template

It is a small world, but it’s still complicated and houses a multitude of very different labour markets. Each will have its own tax laws, disclosure laws and laws defining remuneration amounts and structure. Do not assume, or let parent companies assume, that the remuneration policy at HQ can be adopted in Australia or that you can pay your expatriate executive the same way as you do your locally based team. Make sure too that you understand foreign norms (eg sign-on payments) before approving appointment and termination conditions for international KMP hires.

5. Remuneration work often starts before a hire

Some remuneration committees will be heavily involved in Board nominations, succession planning and general human resource policies. Find out whether you need to provide input to such processes and act accordingly.

6. Every company is different

If your remuneration committee experience was gained in another organisation, do not expect things to function the same way in your new role. The breadth and depth of the committee’s role will be influenced by the ownership and maturity of the organisation.  Remuneration Committees exist in large private companies, corporatised government entities, international subsidiaries, Boards of joint venture entities, not-for-profit organisations and unlisted public companies, to name a few. 

Not all organisations would be subject to the Corporations Act; the majority will.  Organisations within government will be required to manage matters in accordance with relevant acts governing employment in government-owned enterprises. Meanwhile, private companies preparing for listing will require the remuneration committee to set up or adjust the policy framework and practices for the organisation and ensure future shareholders are fully informed of the KMP remuneration structure and quantum through the prospectus.

The company’s history and culture will also guide its remuneration. The Googles of this world pay differently than the Commonwealth Banks. Don’t forget what makes your company unique.

7. Remuneration Reports are your time to shine

What’s the use of having the best remuneration policy in the world if you don’t communicate it properly? The majority of Remuneration Committees are accountable for the oversight and signing off on a published Remuneration Report. This will require liaising with the organisation’s remuneration, legal and accounting advisers, auditors and occasionally actuaries and other specialists including communication and investor relations specialists. Make sure the policy is clear to all involved, and ensure those completing the report understand what your disclosure expectations are. When the report is complete, consider it from the eyes of your different stakeholders. Would a retail investor understand it? Would a proxy advisor approve of it? Would a media representative find it reasonable? Does it meet legislative requirements? Will employees understand it and will it motivate them? Would the disclosure of more or less information improve it?

In many instances the Remuneration Committee will also have oversight of a proportion of the Notice of the Resolutions to be put forward at a Notice of Meeting and the preparation of the explanatory notes. This is not something to be done at the eleventh hour. Remember, it is often the Remuneration Committee Chair who will be answering shareholder questions on the day.

8. Mindless compliance breeds complexity

Just because you need to add information into the remuneration report to tick a legislative box does not mean you can’t put thought into how you do it. The most important consideration should be comprehension. How can you best convey the information required under the legislation such that it is as illuminating as it possibly can be to the shareholder? Does your implementation fit the spirit of the legislation?

9. Shareholder engagement is more than the AGM

Again, what’s the use of spending months on your new short term incentive policy if one of its elements rubs your major investors or proxy advisors the wrong way, leading to a strike on your remuneration report? It’s best to pick up on such issues as early as possible, which will mean frequent investor meetings outside of the AGM.  Don’t procrastinate.

10. You are not alone

There is no problem so knotty that your peers or subject matter experts like Egan Associates will not be able to help you with it. You only have to ask.

We hope this letter lays out some of the dos and don’ts of the remuneration world. We wish you the best of luck. Drop us a line some time to tell us how you’re getting on.

Kind Regards,

The team at Egan Associates

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