Target or Maximum? Confusion Reigns on STI

Through the last AGM season, questions about pay were often focused on long term incentive elements due to the complexity of these plans and their potential value. Yet research by Egan Associates reveals that in the last reporting cycle many companies’ short-term incentive (STI) plans were often just as confusing. While in some cases this related to the plan design itself, often the confusion occurred due to two words: target and maximum.

In a clearly explained STI disclosure, the Board ideally will lay out what the company intends to pay an executive who achieves planned performance – STI at target. This is an important indicator of what the Board believes the executive should be paid if performance meets its strategic, growth and profit expectations.

However, there can be circumstances where an executive will deliver exceptional performance that exceeds the Board’s expectations. To capture this, the Corporations Act mandates that companies disclose “estimates of the maximum and minimum possible total value of the bonus or grant (other than option grants) for financial years after the financial year to which the report relates”.

Most often, both maximum and target STI are described as percentages in a remuneration mix diagram or as a multiplier of base pay, to best illustrate the company’s remuneration structure.

Unfortunately, many companies are not disclosing these elements and in many cases are confusing maximum and target STI, making it difficult to comprehend the executives’ total reward opportunity.

Egan Associates examined STI disclosures for CEOs of the top 50 Australian companies. Of those, 24 companies had some deficiency, with the main problems being:

  • No information on maximum and/or target STI opportunity.
  • Information found in sources other than the remuneration report, such as ASX announcements
  • Contradictory or confusing information provided.

Macquarie Group and Goodman Group1 gave no indication of how much they intended to pay their executives and CEOs for either target performance or maximum performance. Of the rest, 13 companies did not provide information on what they would pay executives for “on target performance”. Nine did not provide information on the maximum amount they would pay executives. In some cases it was not clear whether the companies had provided maximum or target.

We have chosen a few examples to further demonstrate the confusion:

  • Computershare states in its annual report that executives have a “maximum entitlement” for STI amounting to 22.5% of the “on target package guide”.  Is this target or maximum?
  • Tatts Group outlines that executives have an “STIP entitlement of up to a maximum of 70% of FAR”. Indeed, this was the amount of STI CEO Dick McIlwain received. However, in a footnote under the remuneration table, it says he “received 100% of his target STI in his cash bonus”. This would imply that target is the same as maximum.
  • Woolworths sets out a table providing information on the percentage of total remuneration to be paid for STI at target performance (100% TFR exclusive of deferred STI), but then proceeded to disclose elsewhere that “Mr O’Brien’s maximum STI is 100% of TFR”.  Another target maximum muddle.

STI target and maximum opportunity comparison for top 20 and top 50 companies

Our analysis of the top 50 companies has shown that, on average the STI opportunity for CEOs was just over 90% of fixed remuneration for target performance and 140% of fixed remuneration for maximum performance. For the top 20 companies, the average topped 100% of fixed remuneration for target performance and 170% of fixed remuneration for maximum performance.

[1] Goodman Group is not covered by the regulation because of its trust structure. Macquarie Group uses a profit share pool approach based on NPAT and ROE. There is no maximum ceiling imposed on the plan, so the organisation can not disclose a maximum.

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