Overview of the Australian 2014 AGM Season

In 2014, it was believed that the focus of annual general meetings would move from remuneration to Board composition and governance.

Indeed, Director tenure, Director independence and Director workload received particular attention, with cases occurring where Director elections were cancelled at the last minute or received high protest votes. Succession issues and Director and company performance were also factors in votes.

However, remuneration issues were far from being on the back burner, with a number of strikes recorded against the remuneration report of prominent companies.

Strike newcomers included:

  • Flexigroup
  • Harvey Norman
  • McMillan Shakespeare
  • Mortgage Choice
  • Newcrest
  • Primary Healthcare
  • Paladin Energy
  • Seven Group
  • Sino Gas Holdings
  • UGL

Near misses included:

  • AGL
  • Bentham IMF
  • Cedar Woods Property
  • GWA Group
  • Karoon Gas
  • Ozforex
  • Village Roadshow

Serial strikers:

  • Cabcharge
  • Cash Converters

Amongst other reasons, strikes or protest votes occurred where:

  • Disclosure of remuneration arrangements was unclear, inconsistent or incomplete, often paired with a lack of stakeholder engagement. Poor disclosure of short term bonus rules, hurdles and rationale for awarded amounts was a particular issue.
  • Significant payments were made or offered to secure CEO or executive talent, whether in the form of sign-on payments or a generous long- and short-term incentive opportunity
  • Remuneration framework was considered unbalanced, generally with either too much fixed remuneration, too much STI (especially when the award was 100% cash), or too little LTI
  • Review of market remuneration levels led to significant uplifts in fixed remuneration
  • Corporate governance practices were questionable
  • Performance period for the LTI was not long enough – generally the expected minimum is three years, not including periods where a service condition is the only hurdle.
  • Performance measure choice for STI or LTI was inappropriate or the hurdle was not considered difficult enough. Advisors will now often compare hurdles to analyst forecasts.
  • Cliff vesting presented an all or nothing scenario for the vesting of variable incentives.
  • Termination benefit frameworks were considered too generous.

In many cases, concerns were exacerbated by organisations’ performance, showing how difficult it can be for Boards to manage stakeholders’ perceptions while attracting and retaining the right executive team to achieve growth or transformation. Resources organisations are feeling particular pressure on their remuneration as commodity prices tumble.

Votes this year have also highlighted how voting exclusions or high shareholdings can affect the two strikes process.

For example, in response to the strike at Harvey Norman following the significant pay rise for his spouse and company CEO Katie Page, Executive Chairman Gerry Harvey said “nothing will change”. Harvey has the power to defeat any spill resolutions due to his 30% stake in the company.

“I understand where they’re coming from and that’s fine, but in the big picture I wonder whether it’s all worth it,” he said.

Paladin Energy meanwhile complained that the strike reflected only 5% of the share register.

Avoiding a second strike

Although there were some serial strikers (notably this year was the first time the Australian Shareholders’ Association voted yes for a spill motion, defeated at Cabcharge’s AGM), most of the companies that received a strike last year escaped a second strike, often after making significant changes to their remuneration structure or quantum.

The list below of companies that received a strike in 2013 but not in 2014 notes the changes these companies undertook.

Company Actions
Alumina (AGM for 2013 year held in 2014)
  • CEO total remuneration now reflects the 25th percentile against two different peer groups
  • Incoming CEO has a lower STI opportunity than his predecessor. (From target at 80% and maximum at 100% of fixed remuneration to 35% and 80% respectively.
  • Long term incentive opportunity reduced from 50% to 30% of fixed remuneration. No retesting for vesting of performance rights.
  • Alumina did not pay the corporate element of the STI scheme to any senior executive because of the financial result and lack of dividend. STI payments were 40% lower than 2012.
  • Revised disclosure for greater transparency
Aurizon
  • Fixed remuneration frozen for KMP
  • CEO bonus and total package lower than former year
  • New contracts become effective 1 July 2014 with maximum termination payments of 12 months
  • Hurdles changed for STI (ROIC removed and EBIT threshold increased)
  • EPS hurdle replaced by ROIC for LTI
  • Improved disclosure of 2014 STI targets and determination of outcomes.
Automotive Holdings Group
  • Few changes, since a remuneration consultant had already been engaged in 2012 with a new remuneration framework implemented in 2013. This framework was maintained in 2014 with minor amendments, such as the inclusion of clawback provisions.
  • Fixed remuneration was increased following benchmarking. Fixed pay increased by up to 2.5% for the executives and 5% for the CEO.
David Jones
  • The company never made it to a 2014 AGM due to its acquisition by South Africa’s Woolworths.
Forge Group
  • Delisted
Greencross
  • Greencross did not acknowledge a strike in the 2014 AGM results or in the 2014 remuneration report, despite proxy votes indicating a no-vote of over 25%.
Hills
  • The remuneration mix will be changed with more weight to be given to LTI.
  • After concerns about a LTI grant proposed for the MD at the AGM, the performance hurdles were changed to be relative TSR and underlying EPS growth. They were previously based on share price and EPS growth.
  • The 2014 STI has a stronger financial focus (was previously mainly strategic)
iSelect
  • Maintained loan share plan, but added EPS growth hurdle, lengthened performance period to three years and ended retesting.
  • A review of fixed remuneration was undertaken.
  • Changed gross profit STI hurdle to operating revenue target.
  • Addition of a STI threshold below which no STI is paid.
  • Changed the payment of STI from quarterly to biannual, and will move to annual payments in 2015.
  • Departing executives will not receive pro-rata bonus payments on departure.
  • No bonus payments are to be made for NEDs.
Karoon Gas
  • STI performance is now measured against the company as a whole rather than business groups
  • Introduced a bespoke peer group for relative TSR hurdle that Karoon’s Board believed better reflected the size and operations of the company
  • Remuneration structure for executive Directors brought in line with the rest of the team – instead of fixed remuneration made up of cash and options without performance conditions, the Directors will have fixed remuneration, STI and LTI
  • Disclosure improved
Linc Energy
  • Delisted
NEXTDC
  • Provided greater disclosure of STI performance measures
  • Introduced three-year TSR-based LTI plan
  • Grandfathered loan funded share plan
  • Changed remuneration mix to be more heavily weighted towards LTI
SCA Property Group
  • Improved communication
  • Increased STI threshold and target hurdles
  • Increased LTI baseline for calculating growth
  • Increased LTI performance period, introduced graduated vesting profile instead of cliff vesting, added ROE as a third performance measure.
  • Expanded clawback to apply where earnings are not maintained during deferral period
  • Executives now receive distributions over the performance and vesting periods for each vested STI and LTI right.
Servcorp
  • Expanded disclosure
  • Added gateway NPAT hurdle to STI and adjusted targets
  • Considered introducing deferred STI and LTI but decided against it due to international jurisdictions
  • Benchmarked selected Board and exec KMP positions against local comparators
Southern Cross Media Group
  • Improved disclosure of STI performance hurdles and LTI comparator group
  • Increased the weighting of financial metrics in STI
  • Made changes to LTI including adding a performance measure.
St Barbara
  • Directors fees reduced by 10% in 2014, no increase in 2015. No increase in executive fixed remuneration in either year. Board now has absolute discretion on payment of STI.
  • No STI incentives paid in 2014.
  • New MD’s 2015 fixed remuneration and STI is 20% less than predecessor, LTI 25% less.
Super Retail Group
  • Developed a policy on the treatment of one-off adjustments to STI targets following 2013 target being based on underlying profit before tax.
  • Reviewed and retrospectively applied performance metrics for performance rights, separating EPS growth and ROC hurdles so achievement of one hurdle allows partial vesting to remove cliff vesting impact. It also introduced a sliding vesting scale, increased the difficulty of the EPS hurdle, and adjusted the ROC hurdle to take into account the negative impact of a changed capital structure
  • Clawback policy introduced for LTI
  • Changed the vesting conditions for the case that an employee ceases their role. (Directors can determine that some of the LTI vests rather than everything lapsing)

However:

  • Continued to raise base salaries to bring them in line with market median.
  • Decided not to introduce STI deferral
Thorn Group
  • Disclosure of STI improved
  • LTI comparator group revealed and reasons outlined for prior retention payments to CEO
  • The company is considering benchmarking KMP remuneration and reviewing the STI and LTI structure.

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