Egan Associates is well into the analysis of 2014 annual reports released for companies reporting to 30 June. Examining companies within the top 50 that have released their 2014 reports, we observe some interesting trends.
- Remuneration and Fee increases
Of the 33 companies examined, some stated that Board or executive fixed remuneration would remain static while the rest indicated a rise, generally around 3%. In outlier cases there were larger rises of 10%.
- Remuneration framework
The songbook for this year reads “no significant changes”. When changes have been made they have been in the areas of:
- Establishing or increasing STI deferral. Decreases in LTI have often facilitated these increases in STI to keep total reward stable.
- Increasing target levels of STI or LTI to have more pay contingent on long-term performance or to bring levels in line with the market.
- Adjusting the LTI hurdle – Companies are favouring a broader EPS hurdle with a lower threshold and higher maximum.
- Moving to annual LTI grants rather than larger infrequent grants.
- Replacing or adding to STI and LTI hurdles, either due to feedback in prior years from stakeholders or due to a review of the link between pay and strategy. (ROIC was added in two cases instead of ROE and EPS, a customer satisfaction measure was added in another case.)
- Reducing or removing the retesting of LTI performance conditions.
- Adding or strengthening malus/clawback provisions
- Creating a mandatory shareholding policy for executives
There were four cases where the Board had used discretion to reduce an executive’s reward and two cases where the Board had used discretion in the executive’s favour – to increase awards or provide the executive with a second chance to meet performance conditions.
- Disclosure of “actual” remuneration
Around two thirds of companies examined voluntarily disclosed a table in addition to the statutory table noting what executives were actually paid. What this table comprised varied, however, with three main variations:
- Fixed remuneration, STI cash earned during the year, STI deferred earned in the year, LTI vested during the year.
- Fixed remuneration, STI cash earned during the year, STI deferred that vested during the year, LTI that vested during the year.
- Fixed remuneration, STI cash paid during the year (ie relating to the last year), STI deferred vested during the year, LTI vested during the year
Option B is proving the most popular.
Some companies that had adopted a past, present and future pay disclosure in preparation for the former Labor Government’s pending legislation dropped this table and did not replace it with any other form of voluntary disclosure. One company maintained it, with one table showing present, past and future pay.
Approximately two thirds of the companies mentioned a clawback or malus provision. The Third edition of the ASX Corporate Governance Principles and Recommendations (which did not have to be complied with for this report) state that companies should disclose a summary of clawback policies for the event of serious misconduct or material misstatement in the entity’s financial statement.
Many companies had gone a step further, noting that they would cancel deferred bonuses or long term incentives if executives:
- Act dishonestly;
- Breach their obligations to the group;
- Receive an award the Board considered unwarranted or unfair;
- Cause reputational, financial or operational harm; or
- Behave in a manner that could adversely affect the company’s financial performance or long-term strength.
One company covered all bases with an “any negative issues that might arise” clause. The “clawing back” generally involves unvested equity under deferred STI and LTI plans rather than awards that have already crystallised to the executive.
- Fair Value
There was almost an even split between companies that used fair value to allocate equity under long term incentive plans versus those that used a volume weighted average share price. Egan Associates has previously written of our concerns with the former practice. It was not always perfectly clear from the annual report exactly what method was used for allocation.