When hiring new talent, an important decision is how much and what form of remuneration to offer the prospective hire.
The dilemma is particularly acute where the new hire will serve on the Board of Directors. In such a case, their remuneration is considered a “related party” transaction and must be approved by shareholders unless it is judged to be reasonable given (i) the circumstances of the public company or entity giving the remuneration; and (ii) the related party’s circumstances (including the responsibilities involved in the office or employment). (Section 211 of the Corporations Act 2001).
Egan Associates is often called upon to attest to whether remuneration is reasonable or not. This is a complex task, especially since the law does not define what is reasonable. There are many elements that need to be considered before arriving at a view, including:
- The executive’s experience and attributes
- The scarcity of comparably qualified and available executives
- The economic and living conditions in the locality of employment,
- The relative level of the executive’s remuneration compared to peers in the same industry or location;
- The executive’s accountability for the organisation’s establishment, development, recovery or continued prosperity
- The nature, extent and scope of the executives’ accountability
- The business scale, complexity and diversity
- The alignment of reward strategy to published corporate policy and practice
- The alignment of reward strategy to shareholder interests
- The extent of control exerted by the executive and/or the Board.
Remuneration constitutes various elements including fixed salary, employment benefits, superannuation, annual bonuses, longer term incentives (normally equity based) and one off incentives such as sign on or retention grants or milestone incentives. It is not possible to consider each of these elements in isolation – remuneration must be considered in its entirety.
Considerations must also balance the expectations of shareholders, management and the Board.
Shareholder expectations might include that:
- The cost of executive talent should be competitive but not excessive
- Fixed remuneration needs to have some anchor to relevant comparators
- Equity incentives should be strongly performance tensioned and have appropriate time lines
- Conditions of equity grants should remain stable and not be changed to suit management
- The company should meet the market, not lead the globe
- Reward strategy should be localised or internationally benchmarked subject to industry and geographic diversity
Management’s expectations might include that:
- Reward should reflect their personal capital/expertise
- Reward should reflect risk
- Reward should reflect expected tenure
- Reward should reflect location
- Reward should reflect prospect of a failure/sector volatility;
- Reward should reflect the executive’s contribution to value creation
- Reward should reflect a fair share in the company’s success being delivered to the management team
The Board’s expectations and policy settings might include:
- Remuneration policy enables the company to attract and retain appropriate talent
- Remuneration constructs encourage the best performance possible under the company’s current circumstances
- Remuneration structure discourages risk taking and/or unethical behaviour
Egan Associates is generally asked to judge whether remuneration is reasonable at two points of the hiring process:
- In the planning phase of recruitment in collaboration with a search firm.
- After a new hire has been offered a role at a particular level of remuneration.
Although Egan Associates regularly examines remuneration arrangements after contracts have been signed, it is best that the Board considers what is reasonable during recruitment process rather than after the fact. Before a firm agreement has been made, there is often flexibility to make adjustments based on any resulting recommendations.