In considering executive reward, stakeholders, be they shareholders, the Board, management, regulators or proxy advisers/consultants, often review information through a lens different to that of the Executive.
A more general application of a Board and management’s frame of reference is how to benchmark reasonable reward. Consideration is generally given to the nature of the position’s accountability, the capabilities and competencies required, the source of applicants and the location of the position – Australasia, North America, Asia, Europe or elsewhere.
To add further complexity to these challenges are the regulations and protocols governing reporting and the material utilised by those reporting to the community generally.
In this context, impacting on the complexity, the exercise of judgement, the integrity and foundation of the judgement and shareholder and community trust relates to whether information communicated reflects statutory reporting or actual remuneration received. A further area of concern is whether the performance hurdles, if financial, reflect year on year performance or multi-year performance particularly under LTIs where the equity instruments allocated are based on an accounting value, the market value or a contrived fair value.
The implications of these choices either recommended by advisers, or recommended by management and adopted by Boards, reflect on the integrity of the organisation, the adviser and the trust of shareholders.
Overlaying this complexity are views being expressed by those who modify their views from time to time, based on experience and/or a retrospective review of the correlation between traditionally adopted measures and their alignment with shareholder benefit, and/or emerging trends or comment arising from Government Inquiries or Royal Commissions which may reflect on the paucity of knowledge or information held by those in authority.
Our experience is that not all strikes against a Remuneration Report relate to remuneration but will often relate to other areas of shareholder concern, including:
- Write-downs arising from business failures or poor acquisitions;
- A decline in profitability;
- A decline in dividends;
- A decline in share price;
- A negative view by analysts in relation to prospects/sustainability.
All these will impact on the value of a shareholder’s investment and their view of the Board and management.
Many organisations today do not publish the potential remuneration arising from participation in awards but rather publish the target award which is often half the potential award. They do not reveal what leads to a payment well above target or the way in which relevant metrics might operate in determining such payment.
Where they exercise discretion, they will often not indicate the foundation for the exercise of that discretion, be it positive or negative. Realised remuneration, particularly under LTI plans, can often be a benefit accumulating over a series of up to five years. It is regularly not publicly reported as an annualised reward but rather a lump sum at the time it is realised. This distorts the nature of the market’s understanding of the award.
Many current shareholders, including institutional shareholders, may not have been shareholders over the duration of the incentive program and will react to recent performance rather than sustained performance.
The above summarised overview, which may lead shareholders to vote down a Remuneration Report, endeavours to encapsulate the complexity of remuneration decisions which are influenced by a multitude of factors:
- The criticality of judgement being exercised by an informed Board or management team;
- The criticality of integrity in adjudicating on remuneration outcomes;
- The relevance of each of those elements in gaining shareholder trust.
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