The Agenda – April 2017

Egan Associates pleased with emerging face value focus

PWC this month highlighted the dramatic shift in recent years from companies using fair values to allocate equity under long term incentive plans to using face value. In the ASX 100, of those disclosing an allocation methodology, almost two thirds were using face value in 2016.

Remuneration and governance news

Egan Associates considers this to be a victory – in December 2013 we raised concerns that the use of fair value for the purposes of allocating equity to executives under long term incentive plans was inflating grant values. Since then proxy advisors have addressed the topic in their own reports and guidelines, making the use of face value for allocation current best practice.

That accounting firm PWC acknowledges face value and not accounting valuations are the “clear standard” for allocation purposes is telling.

UK Inquiry report makes bold remuneration recommendations

The report for the UK’s Business Energy and Industrial Strategy Select Committee’s inquiry into corporate governance failings has been released. The report made controversial recommendations, including that:

  • LTIs be phased out, with grants of restricted shares to be made instead to align executives with shareholders.
  • Binding votes on remuneration be introduced in the year following a 25% adverse vote on a remuneration report.
  • A ratio between the CEO and senior executives and the CEO and “all UK employees” be published.
  • A voluntary corporate governance code be introduced for large private companies.
  • From May 2020, at least 50% of new appointments to senior and executive management level positions be women, with companies to report success against this target on an if-not-why-not basis.

The Select Committee inquiry outcome and the green paper reported on in our last newsletter are different though have been conducted by the same department.

Further pressure to change LTIs

Norway’s oil fund, which reportedly owns on average 1.3% of every listed company in the world, has announced a new pay policy that expects current long term incentives to be phased out, stating that it would prefer simple executive remuneration structures and requirements for executives to own substantial stakes in companies.

“We are signalling that we expect change in the way remuneration is constructed. Over time, we expect long-term incentive plans to be gradually phased out, particularly with regards to the recruitment of new chief executives,” Yngve Slyngstad, the head of the oil fund, told the Financial Times.

In Australia, Ian Silk, the CEO Australia’s largest industry superannuation fund AustralianSuper, has also called for a rethink of executive remuneration.

Remuneration needed to be simpler, according to Silk. “Pay models are absurdly complex, as evidenced by ridiculous remuneration disclosures in annual reports,” he said.

Performance hurdles also needed to be simplified. “Short-term incentives too often become default base pay. If you have short-term incentives they need to be set  with appropriate hurdles so business-as-usual performance is not rewarded with exceptional remuneration,” he Silk said.

He was also a proponent for deferral of remuneration until sometime after an employee left, in case executives presided over value destruction that later surfaced.

AMP Capital corporate governance report

AMP Capital has released its biannual report on its voting on meeting resolutions. In its report, it again voiced its support for non-financial performance hurdles.

“It is important to acknowledge that just because a hurdle may be hard to measure objectively, it doesn’t make it any less appropriate. Sometimes, non-financial targets like people and culture are exactly the targets that executives should be focusing on,” Karin Halliday, Senior Manager, Corporate Governance AMP Capital said.

She addressed perceptions held by many shareholders that non-financial targets are often actions that should be considered as part of an executives’ job rather than tasks that require a bonus.

“Yes, CEOs are already paid to manage people and culture as part of their day job but linking bonuses to such factors can focus the mind and send valuable signals about what’s important,” she said.

“It is easy to blame culture when things go wrong. However on the flip-side, when companies perform well, shareholders rarely give credit to the culture and capability that drove those results. Were shareholders to do that, there would perhaps be less scepticism around the value of the so-called ‘soft’, capability-building initiatives.”

AMP Capital stated that it had generally voted against remuneration reports in the 2016 season due to:

  • Overly generous retention benefits coupled with generous new grants
  • Performance hurdles that vest well below earnings guidance
  • Retrospective changes to performance hurdles or start dates or using Board discretion to vest incentives when hurdles were not met
  • Excessive quantum
  • Structural issues where remuneration incentivises behaviour that may be contrary to the best interests of shareholders (eg making acquisitions)
  • Unlimited discretion for Boards to allow incentives to vest upon termination
  • Overly complex incentive structures
  • Poor disclosure

AMP Capital voted against less than 15% of the remuneration reports for companies it held.

It voted against grants or incentive plans for:

  • Weak or lacking performance hurdles
  • Short performance periods
  • NED involvement
  • Generous grants
  • Poor disclosure
  • Non-recourse loans
  • Automatic vesting on change of control

Skilled migration scheme overhauled with 457 visas to be given a new name and stronger rules

The Coalition Government has announced the end of 457 visas in their current form. Skills shortages will be addressed via temporary two-year visas (or four-year visas for higher skills).

The more expensive visas will have strengthened English, work experience (minimum three years), market testing, criminal check and age requirements as well as a reduced list of professions for which they can be obtained (651 reduced to 435 professions). The maximum age of the visa holders will be 45, which may make it difficult to hire CEOs or other experienced executives from overseas.

The other major difference between 457 visas and the proposed visas is that at the conclusion of the new visa, the holder will not be able to seek permanent residency, as is currently the case for the 457 visa holders. There will be a “pathway” to permanent residency for those on the four-year visas after three years. The short-term visas will only be able to be renewed once in Australia.

Market testing will be mandatory for all professions (except where international obligations exist from free trade agreements) but will be conducted by employers rather than independently, as recommended in a prior review into the scheme. However, the government stated that employers who failed to conduct the process properly would be named and shamed.

Employers will need to pass a test showing Australian applicants are not being discriminated against and invest into training Australian employees.

457 visas of current holders will be grandfathered.

NZ also cracks down on skilled worker migration

NZ has also adopted a NZ workers first policy, raising the wage threshold for paying skilled migrants to the median NZ wage, ensuring that employees looking to pay below the median must hire NZ workers. Workers looking to enter New Zealand for a job not classed as skilled will need to be paid 1.5 times the median income to be accepted. Those set to earn over NZ$97,000 will receive extra points.

Factors that previously added points to an application, such as qualifications or having close family in the country, will no longer have any weight. Applicants in their 30s and those with skilled work experience will receive more points than previously.

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