Remuneration and Governance Trends

The future of pay

There’s been less demand for remuneration benchmarking. Many organisations are limiting remuneration increases or not adjusting fixed remuneration at all.

Instead, the focus has been on the structure and relative weighting of KPIs under annual incentive plans and the differential between the level of reward offered for achieving target performance versus performance beyond the Board and the market’s expectation.

Boards have been increasingly focused on risk, which has also been highlighted via a stronger focus on clawback and deferral of STI awards.

For long term incentives, discussion has centred around the appropriateness of performance hurdles and concerns over the use of modified accounting standards for equity allocations. Sensitivity has also arisen, particularly among companies outside the ASX Top 50, regarding the level of equity grants to Chief Executives compared to other members of the leadership team.

In terms of Director remuneration, we have participated in a significant number of assignments in the past 12 months involving reviews of Board fees in both the government, not-for-profit and private sector. The emphasis has been less on the base or retainer fees and more on Committee fees in the context of the increasing workload for Committee members, especially the Chairman.

We continue to observe a degree of sensitivity in relation to the level of Directors’ fees, particularly in the private sector where companies’ results have not met market expectations.

Boards are increasingly addressing succession and renewal, both to address age, gender or cultural diversity and to ensure their Boards’ skills are keeping pace with the needs of the organisation. To aid in this endeavour, Boards are looking to capability matrices to identify their skills requirements while monitoring their performance via a formal Board review process.

Remuneration committees have become much more knowledgeable about remuneration practices, yet there are still a large number of remuneration committees who are purchasing information from consultants without understanding the context of that information. We believe this is likely to change, with more Boards recognising the value of informed recommendations from a remuneration consultant, rather than data on its own.

I also believe the remuneration committee’s role will expand to encompass a company’s culture, ensuring that the company is embracing diversity issues, as well as hiring and rewarding the right talent via the right recruitment strategies, performance management, succession planning and talent management. Boards are now saying this is an important lever to ensure a sustainable business.

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