Egan Associates is currently analysing data from 2016 annual reports – over the year we will examine reports for 500+ companies.
At this time of year, we like to have a detailed look at the remuneration reports of the top 50 companies to obtain an indication for remuneration trends. When large companies adopt certain remuneration practices, it is not unusual for smaller companies to emulate them in later years.
Our observations from the observed reports are below.
Changes to the remuneration framework
Of the companies that released their reports, around 80% had made or intended to make some sort of change to remuneration arrangements.
- Approximately a third of companies adjusted their remuneration mix, generally to increase the amount of variable remuneration.
- Around a third made changes to the STI performance conditions, adjusting the mix for financial and non-financial incentives, adding, or changing incentives. There was no noticeable trend towards or away from a particular set of incentives, although a number did highlight culture based incentives.
- Almost as many companies made or were considering changes to LTI performance conditions. A number were adding or strengthening the weighting for Return measures such as Return on Capital Employed or Return on Invested Capital, although one company noted that the latter could be volatile and it was considering whether it should be removed.
- Six companies added or increased the length of deferral for STI schemes, while one removed mandatory STI deferral.
- Those companies that changed the performance period of their long term incentive increased it rather than decreased it. Changes to peer groups were generally towards more tailored, selective peer groups.
- Four companies moved from using fair value to allocate equity under their long term incentive plans to using face value. Two companies disclosed an increase in the proportion of total remuneration comprised of long term incentives due to a prior change from fair value to face value.
Fixed remuneration increases
A large number of companies have indicated that their CEO received no increase to fixed remuneration in 2016 or will be receiving no increase in 2017. Often, this was accompanied by a statement that the CEO’s fixed remuneration has not increased for a number of years, sometimes as many as five.
Where increases have occurred, however, they were at times significant. Treasury Wine Estates has rewarded its CEO for his ability to turnaround the winemaker, providing him with an increase from $1.7 million to $2.2 million, for example.
This raises the question of whether many companies have decided to only award fixed remuneration increases to CEOs upon evidence of performance. Another possibility is that Boards are waiting for better economic conditions to increase fixed remuneration. However, they should be cognisant that a number of institutional investors and proxy advisors will heavily scrutinise fixed remuneration increases that are considered to be “catch-up” increases following years without.
Executives are a different matter. Certain members of the executive team appear to be receiving significant increases, often in double digits without any explanation. These changes will vary substantially, leading to the assumption that there may have been a change in role or accountabilities, however, this is often not clear.
Increases to Board fees are split between companies that are keeping Board fees the same as the prior year, those that are increasing fees by a modest amount (under 3%) and those that are increasing fees by a significantly larger figure. For the latter, the increases are often to committee fees, which in general are not changed often.
The majority of companies provided information on the proportion of the STI award potential that had been awarded, although not all provided this information as a percentage of a maximum award, with some only providing figures as a percentage of target.
The median award for a CEO or an executive was approximately 75% of maximum or the potential award – in line with that observed by Ownership Matters and ACSI in a recent CEO Pay report and by Egan Associates in a 2015 analysis.
The median difference between the lowest award and the highest award for executives within a company was just under 18%.
Four companies paid no STI to their CEO, with two also awarding no STI to the top executives.
A significant majority of companies also provided information on the percentage of potential LTI awards that had vested during the year. Five companies reported 0% vesting. 13 companies reported vesting at levels below 50%. Four companies reported 100% vesting. The median vesting amount was approximately 60%. Unsurprisingly, materials companies had the lowest level of vesting, while Healthcare companies experienced the highest level of vesting.
Disclosure of actual remuneration received
The number of companies that are disclosing a non-statutory remuneration table summarising the remuneration executives actually received during the year (including vested incentives) has not increased since we ran this analysis two years ago – the proportion remains around two thirds. Of the companies which had released their report, only 12 did not provide this information, although two of these did provide actual remuneration solely for the CEO.
The information in the tables has, however, become more consistent. Most companies provide fixed remuneration, short term incentive cash earned during the financial year (but that may be paid after the completion of the year), STI deferred and LTI grants that vested during the year. A small number combine the STI Deferred and LTI equity vesting values into one figure.
Lend Lease uses an interesting method to describe the value of incentives vested. It discloses the value of the incentives that vested based on the market price at grant date and then separately discloses the increase in value of those shares since grant as well as the value of dividends on those securities. In this manner, a reader of the report can see how much value the executive received as part of the Board’s original remuneration intent and how much the executive received due to appreciation in the shares and dividends. The latter is remuneration shareholders would also have received.
More than half the companies applied no discretion to the operation of remuneration awards (as there was no mention of discretion being applied), except to determine the outcomes of non-financial key performance indicators or elements on balanced scorecards.
Where Board discretion was mentioned, four Boards exercised discretion that acted to remove remuneration from executives, six Boards acted to increase the remuneration of executives, 3 Boards applied discretion that both advantaged and disadvantaged executives, and two Boards noted that they had considered whether discretion should be exercised due to special circumstances and had decided not to exercise their discretion.
Where downwards discretion was exercised, impairments, loss of earnings, fatalities or a combination of these reasons were responsible for the Board deciding to reduce or not pay a short term incentive. Interestingly given the concerns we raised about utilising an earnings-based compound annual growth rate for LTIs, one company also exercised its discretion to have its LTI vest solely based on a relative TSR measure, noting that it would not be appropriate to use the return on equity measure because the base year included impairments that would make the hurdle too easy to meet.
Where upwards discretion was exercised, it was:
- To exclude certain impairments from the results used to calculate a bonus (this practice is conducted by a number of companies, but many do not identify it as discretion as they have noted in their incentive rules that they use underlying profits in calculations.)
- To reward or compensate executives following a takeover via automatic vesting of incentives that are on foot or provision of additional incentives to balance dilution.