Share Schemes, Diversity and Other News

The world of remuneration and governance never stands still. We’ve put together a summary of key news from around the world from the first quarter of 2015.

Employee Share Scheme Legislation before parliament

At the end of last month the government introduced the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 into parliament. It is currently before the House of Representatives but is expected to pass without major amendments before the Bill’s effective date of 1 July 2015.

Remuneration and Corporate Governance News

Our original detailed article on the draft legislation can be found here.

The Bill had introduced changes to the taxation treatment for shares and rights including:

  • Rights eligible for deferred taxation are to be taxed at exercise rather than upon vesting
  • The maximum deferral period is to be increased from seven to 15 years
  • Employees will be able to participate in deferred taxation schemes as long as they do not own more than a 10% interest (or rights to own interest) in the company (previously 5%)
  • Refunds can be obtained on the tax paid on options that employees elect not to exercise

Start-ups received additional concessions, including the ability to provide shares and rights to employees at a tax-free discount of up to 15%.

The biggest changes to the draft legislation since our last article are around the eligibility for the start-up concessions, including:

  • Companies and group companies could not be older than ten years, listed or have aggregate turnover higher than AU$50 million. The legislation introduced to parliament now clarifies that investments by selected venture capital partnerships and early stage venture capital funds can be ignored when considering whether companies meet these criteria.
  • Employees that receive options under the scheme and exercise them to purchase shares will have the time they have held the option taken into account for capital gains tax purposes — this means that they can sell the shares they obtain from exercising their options within 12 months of acquiring them and still receive the 50% capital gains tax discount.
  • The amended draft legislation also provides certain exceptions to the three-year minimum holding period for rights or shares for the discount to apply. The tax commissioner can exercise discretion to reduce the period where affected employees are forced to dispose of their rights or shares before the end of the period — for example  in the case of a trade sale or IPO — as long as there was an original genuine intention for the minimum holding period to be met.

There has also been a clarification ensuring that employee share scheme interests deemed to have a nil value at grant are treated within the employee share scheme provisions and are not subject to fringe benefits tax, which was potentially the case previously.

For more information on the changes, these summaries from Allens and Baker & Mackenzie may be helpful.

AICD takes a stance on diversity

The Australian Institute of Company Directors has set a target for 30% of Board seats to be filled by women by the end of 2018, asking ASX 200 companies to voluntarily meet the goal rather than be forced via quotas.

In related news, a study released by the Federal Bank of New York examining the pay gap between women and men discovered that 93% of the difference was due to incentive pay. Female executives receive less in bonuses and equity grants than males, according to the study. When firm value goes up, the total accumulated value of equity held by the men rises ten times more than that held by the women. Yet, when firm value goes down, the accumulated value of equity held by the men declines around half that of the equity held by the women.

Super Boards to see reduced independent Directors requirement?

The Australian Financial Review reports that Assistant Treasurer Josh Frydenberg is gaining support for a model that would require Superannuation Boards to comprise one third independent Directors, not a majority as is recommended for listed ASX companies.

APRA releases standards for Private health insurers

APRA has released prudential standards for health insurers that are to come into force from 1 July 2015. In the governance standard, requirements were outlined in the areas of:

  • Board size and composition
  • Chairperson Attributes
  • Director residency and relationships
  • Board charter and policies
  • Board performance and renewal
  • Audit

Excess Contributions for Superannuation

Reforms allowing individuals to withdraw superannuation contributions in excess of the non‑concessional contributions cap made from 1 July 2013 and associated earnings were passed through parliament in March.

International news

OECD corporate governance factbook

The OECD has released a corporate governance factbook that may be helpful for organisations looking to expand the jurisdictions in which they operate. It compares corporate governance between countries.

Executive pay caps in the Netherlands

Executive salaries in public and semi-public organisations in the Netherlands were restricted from 1 January 2015 to 130% that of a government minister. Citizens have now called for ABN AMRO executives to be included in this cap, arguing that the company is state-owned.

Chinese executives leave after pay dip

In the wake of pay cuts to executives working for state-owned companies as part of the government’s austerity drive, a number of top executives have reportedly left the top state-owned banks. The cuts were said to be up to 50%.

UK executive pay falling

According to PWC, the executive pay in UK listed companies is falling in real terms. This was based on the first 39 FTSE100 remuneration reports released for the latest financial reporting period. The reports revealed that the median salary increase for CEOs was around 2% and median total pay increase around 0.7%. Approximately 45% of companies have frozen salaries. The UK’s five largest banks also cut their bonus pools by more than £1 billion last year.

Newly appointed Canadian Bank CEOs accept reduced salaries

A report on bank CEO pay by Toronto compensation consulting firm McDowall Associates showed that the base salaries for the new CEOs of Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank are all down 33% compared with the outgoing CEOs’ salaries, while the base salary for the new CEO of Royal Bank of Canada is down 13 per cent compared with his predecessor.

New Zealand companies freezing salaries

A survey of NZ chief financial officers found 58% were planning to freeze salaries in 2015 and just under half would freeze bonus levels. This compared to 52% planning to freeze salaries in Australia, according to the survey.

German wages on the way up

After years of depressed wages, large pay deals are being struck between unions and companies in Germany that will provide workers with pay rises of over 3% per annum.

Swiss CEO pay steady

There has been little change in the pay of CEOs in Switzerland, despite the high profile Minder initiative coming into force at the start of 2014. The initiative enforced a binding say on pay vote, bans on severance pay and annual voting for Directors.

US Companies budget more for Pension Pay

CEO pay is being inflated in the US because of pensions, according to data compiled by Bloomberg. Longer lifespans and lower discount rates have reportedly been forcing the companies to add more to pensions to meet return expectations and support future payouts.

However, in the finance industry, while ordinary workers at banks have seen their pay recover since the financial crisis, CEO pay has still not reached pre-crisis levels, leading to a lower CEO-worker pay ratio. Popular opinion is that high profile CEOs are being held to account by shareholders, whose memories of the crisis are still fresh.

Meanwhile, litigation is becoming a greater force in Director remuneration in the US, with a number of cases arising where shareholders are suing the companies regarding their Director pay programs. Lawyers believe this will lead to companies implementing an annual cap on Director remuneration.

Further US report of interest include:

Japan finalises corporate governance code

A new corporate governance code finalised on 5 March recommends that companies engage with their outside shareholders, take on at least two independent board directors, and reconsider cross shareholdings and anti-takeover measures. If they decided not to comply, companies must explain why. The code works hand in hand with a stewardship code that urges institutional investors to engage with the companies in their portfolio.

South Korean companies move on seniority pay

Hyundai is seeking to pay employees for performance rather than seniority, a path that is likely to lead to clashes with its unions since seniority-based pay has been in place for decades. The company wants to combat high labour costs in what is the world’s fastest aging major economy. If Hyundai succeeds in its efforts, other employers are likely to follow suit.