Incentive plans can be effective for promoting performance year-on-year given ordinary circumstances. Yet they rarely cover all eventualities. There will be occasions when a Board believes management personnel require an additional payment or incentive as a one-off consideration.
We outline seven circumstances where the Board might consider a special payment or incentive.
GUD Holdings made a special incentive grant related to a joint venture that involved the sale of 49% of Sunbeam Australia and New Zealand. The price was contingent on the performance of the Sunbeam business in the year to 30 June 2015.
The company issued performance rights to the Business Unit head, Kate Hope, that were contingent on these performance conditions being met.
Upon the decision to sell the remaining 51%, Hope was issued with approximately the same number of rights that were also contingent on the buyer endorsing the performance outcomes to June 2016. Arising from this special incentive opportunity, Hope did not receive her usual annual bonus.
Fortescue Metals offered a bonus to recognise its CEO and CFO’s success in substantially reducing costs, something Fortescue noted was “required to ensure continued business sustainability and value protection in the context of the falling iron ore price and consequent market shifts”.
The Board labelled the CEO and CFO’s achievement as “extraordinary”, stating that cost savings had amounted to US$1.6 billion for the 2013 to 2015 financial years and that a plan was in place to deliver additional cost savings of US$1.9 billion.
In recognition of the achievement, the Board decided to exercise its discretion and make a one-off payment of $2,000,000 to the CEO and $500,000 to the CFO, which it noted was less than 0.1% of the cost savings that had been delivered at the time of payment.
Qube, in order to focus its executives’ efforts on a $1.5 billion public-private infrastructure partnership, decided to introduce special incentives.
In 2015, it awarded a special STI payment to the team that negotiated the contracts for the project with the Commonwealth Government, with payments made on top of their ordinary annual bonus. Half of this bonus was deferred as a retention mechanism.
Qube also implemented an additional 3-year long term incentive plan to run in parallel with the traditional long term incentive plan with its own grants and project specific performance hurdles.
Where an initial public offering requires significant additional effort on the part of executives over and beyond their day to day accountabilities with the company, it may be appropriate to recognise this using a special IPO bonus or equity grant. This is often tied to meeting prospectus forecasts.
For example, GTN Limited’s executives received IPO bonuses on top of their normal short term incentive payments of between US$1 million and US$2.5 million.
ASX Limited’s former CEO Elmer Funke Kupper decided to resign from the company due to an investigation into alleged bribery payments made while he was CEO at his former company Tabcorp.
While the Board sought a replacement, Deputy CEO Peter Hiom and General Council and Company Secretary Amanda Harkness were appointed to lead the organisation.
The additional contribution required was recognised by a one-off payment amounting to $250,000 each.
Often, to secure a high performing executive, companies will agree to compensate an executive for at risk equity they forfeit for leaving their current employer. Alternatively, the Board may simply agree to a sign-on grant in negotiations in order to provide the executive with the necessary incentive to sign on.
For example, challenged supermarket operator Metcash agreed to special grants to former Coles executive Steven Cain as part of his agreement to lead its supermarkets and convenience division. Metcash notes that “The purpose of this grant was to provide an incentive for Mr Cain to accept Metcash’s offer of employment, retain his services for three years from commencement of employment and to provide an incentive to successfully execute the Metcash Supermarkets business.”
Shareholders are more likely to accept sign on payments if they are made in equity and, if possible, are attached to future service and performance conditions.
Where the Board considers an executive is particularly crucial to the implementation of company strategy going forward, it may decide to award an additional retention benefit.
For example, National Australia Bank decided to award restricted shares as a retention mechanism to three executives in the 2016 financial year, subject to service and performance conditions. One executive was accountable for a sale of part of the business as well as implementing a transformation initiative. The other two executives were identified as being critical to the success of what the Board considered to be key strategic business segments that contribute significantly to the profit of the group.
It is important to note that proxy advisors and institutional investors can be skeptical of retention benefits, especially if the quantum is high and they are delivered in cash rather than equity.