The Agenda – April

International law changes and developments

  • At the end of March, Israel’s parliament passed legislation reducing the amount of remuneration for CEOs of finance and insurance companies that can be claimed by the company as a tax-deductible corporate expense. The previous cap on deductable remuneration was 3.5 million shekels ($1,190,000). Now, it will be capped at 35 times the salary of the lowest paid worker in the organisation (44 times net salary), which works out to just under 2 million shekels ($680,000) if the organisations employ workers on the minimum wage.

  • Regulators in the US are meeting to consider a new rule that would see banks, investor advisors and broker dealers forced to defer employee bonuses for a much longer period than the current three-year norm. The longer deferral program would enable the use of claw back over a longer period.

  • The New Zealand Stock exchange has released submissions on its proposals to broaden governance rules for listed companies. The exchange would like to bring governance in NZ in line with the “best practice” adopted by the ASX, including more detailed disclosure of executive remuneration.

    Submissions from listed companies and law firms were wary of adding non-financial reporting requirements, advocating voluntary disclosures that could be tailored to each specific business. There were concerns around the costs of introducing more detailed executive remuneration information and also around the release of commercially sensitive information relating to short term incentives. Submissions from investors recorded a desire to see more information regarding executive pay including what performance indicators were used in incentive plans.

  • In order to increase the number of women in executive roles at financial services organisations, the UK Treasury has released a charter for organisations to sign that commits them to:

    • have one member of the senior executive team who is responsible and accountable for gender diversity and inclusion;
    • set internal targets for gender diversity in senior management;
    • publish progress annually against these targets in reports on the organisation website; and
    • have an intention to ensure the pay of the senior executive team is linked to delivery against these internal targets on gender diversity.

  • A panel of UK executives and Directors researching ways to simplify remuneration has reported its initial recommendations, including:

    • Allowing more flexibility around LTI plans – companies could continue with traditional LTI plans, defer bonuses into shares, grant restricted shares that are not dependent on performance, or award incentives for performance that has already occurred. The added certainty of some of these schemes would necessitate a reduction in LTI award levels, potentially up to 50%.
    • In order to avoid payment for failure, clawback could be used where threshold performance levels are not achieved.
    • Executives should hold up to five times their salary in shares depending on company circumstances and share price.

    The group will now consult on its initial report.

Research and studies

  • US organisation Glassdoor Economic Research has revealed that there is an unexplained gender pay gap in Australia of 3.9%. It examined 4,044 salaries anonymously reported on the Glassdoor website by Australian employees, finding a 17.3% pay gap. When adjusted for age, education and years of experience, the gap shrank to 12%. When further adjusted for industry, occupation, state, year, company size, company and job title, it reduced further to 3.9%.

    The message behind this result, according to Glassdoor, was that the gender pay gap was real but that its primary cause was not overt discrimination, rather “occupation and industry sorting of men and women into jobs that pay differently throughout the economy”.

    While overt discrimination may not be the primary cause, the abovementioned sorting reflects social pressures that divert women into some professions and away from others, according to Glassdoor. The organisation also pointed to differences in pay negotiation, gender norms around care giving and the need for workplace flexibility as drivers of the pay gap.

  • Research into performance targets at over 700 US organisations conducted by Washington University and Arizona State University found that a disproportionately large number of firms exceeded goals by a small margin as compared to those falling short of goals by a similar margin. The researchers believed the results were not normally distributed because organisations were actively managing their reported performance.

    Those organisations that only just met their goals were more likely to meet subsequent performance goals. Organisations that only marginally exceeded EPS goals had higher than normal accruals and lower than normal research and development expenditures.

    The effect was more significant for a number of situations including where organisations used earnings and profit goals, where the performance payout relationship was non linear, or where the incentive plan only had only one goal. There is no tendency to beat performance goals by a small margin where relative performance hurdles are used.

Salary surveys and analysis

  • Pearl Meyer’s annual director compensation survey covering 1400 US public companies revealed:

    • Small increases in year-over-year pay, with a 1% to 3% increase in total remuneration against the prior year. Smaller companies with revenue of below $500 million experienced larger increases of 9%.
    • A continuing trend to simplify director pay by eliminating individual meeting fees.

  • Analysis of proxy disclosures by Willis Towers Watson found that total remuneration for CEOs at the largest US corporations increased by 2% in 2015, driven largely by weaker corporate and share market performance, flat bonuses and lower pension values. Breaking total remuneration down, CEO salaries increased by 3%, target bonuses by 3% and target LTIs by 6%. Fewer companies paid annual incentives to CEOs above target levels in 2015 than the previous year. The analysis was based on 315 S&P 1500 companies with consistent CEOs that filed 2015 proxy statements by mid-March.

  • Australian law firms will have difficulty achieving growth over the next five years as competition from new market entrants increases, according to market researcher IBISWorld. The current average law wage of about $99,488 would increase to about $100,477 by 2020-21, a rise of around 1%.

Australian Government and Regulatory Developments

  • The Australian Productivity Commission has released its 2016 productivity update, reporting on performance over the 2014-2015 period. The report revealed positive growth in labour and multifactor productivity, with multifactor productivity growth of 0.8% in the measurable market sector being the highest achieved in recent years. Mining was the best performer in terms of multifactor productivity, reflecting industry’s transition from investment into production. Australia’s per capita income, however, reduced by 0.9% over the period and the terms of trade continued to decline.

  • The Australian Government has released draft regulations to support its life insurance reform package. The reform package (which comes into effect on 1 July 2016) lifts the exemption on conflicted remuneration for life insurance advice, introduces caps under which commissions are able to be paid and enables the claw back of commissions where policies lapse in the first two years. The regulations set out situations where clawback does not apply and ensures existing remuneration arrangements are grandfathered consistent with FOFA laws.

  • The Australian Taxation Office has developed a set of standard document templates to assist eligible start-ups in establishing and operating an Employee Share Scheme granting options to acquire newly issued ordinary shares. It has created a standard employee option plan, a standard offer letter and an instruction guide on how to use the documents.

  • The Fair Work Commission is currently considering submissions to the annual review of the minimum wage, which have been published on the organisation’s website. Views from the submissions are summarised below.

    • The Victorian government pointed to an increasing gap between median and minimum wages and a decreasing gap between minimum wages and the poverty line. It also believed an increase to be important for social inclusion. “While employment is a key determinant of social inclusion, merely having a job is not always enough. A job with inadequate pay can create social exclusion if the level of income limits a person’s capacity to engage in the cultural, economic, political and social aspects of life.”

    • The NSW Government urged caution on wage increases, noting soft market conditions and weak national demand such that unnecessary increases to minimum wages that do not reflect productivity improvements may limit the capacity of businesses to absorb the increases and hinder growth. Its social inclusion focus is keeping workers in employment, which it noted required balancing the level of minimum wages with the continuing provision of employment opportunities. It stated that Enterprise Bargaining Agreement increases had been around 3.5%, adding that any minimum wage increase needed to maintain an incentive for reaching agreements that reward productivity and enable flexible work practices.

    • The Federal Government has also urged a cautious approach, noting continuing global and domestic economic uncertainty and the fact that the minimum wage was only one part of the safety net provided to low wage employees. Higher employment from a modest minimum wage would also provide flow on benefits for the community in terms of lower spending on welfare and health.

    • The Australian Chamber of Commerce and industry advocated an increase of 1.2% or $7.90 per week. It argued that in weak economic conditions, the poorest workers were hit the hardest and large numbers of low paid workers are young. It believed priority needed to be given to those employees not in employment or seeking more hours, which would be increased given lower wages. It also analysed data, concluding that minimum wage employees received higher wage increases than non-managerial workers in the general workforce between 2010 and 2015.

    • The National Retail Association supports an increase of not more than $10.70 per week for a 38-hour week, or 1.6%, with a nominal dollar amount increase preferred across all levels rather than a percent increase. In the Association’s opinion, this figure appropriately reflects the current low rate of inflation and wage growth, added to the increase in unemployment over the past five years and the likelihood that economic growth will continue to be below trend.

    • The Australian Hotels Association claimed that the industry had continued to experience low growth and poor trading conditions due to a low domestic consumer spend and reduced domestic tourism, while operators struggle with increased utility, compliance and wage costs. It suggested no increase to the minimum wage, but if there is to be an increase, it should be no more than 1.2% or $7.90.

    • Australian Business Industrial and the NSW Business Chamber advocated that any increase not exceed 2%. They questioned the sustainability of current drivers of growth, being household spending, government spending and net exports. They also highlighted low productivity growth. They questioned the sustainability of trying to grow the minimum wage at the same pace as the median wage, because employees at the median wage “in a compositional sense, are continually moving to higher value-added activities”. Other datasets could be more useful as a comparison, they noted, such as the wages growth of employees grouped by skill set.

    • The ACTU called for a $30 per week increase (4.6%) for the workers on the minimum wage, recommending 3.9% increase for those on higher classifications. It highlighted that the economy grew 3% in 2015 and added that although multifactor productivity growth may not be high, labour productivity considerably exceeded the OECD average. It also noted that the four most award-reliant industries grew faster than overall national GDP. Business bankruptcies were down to their lowest level since the GFC, while the unemployment rate fell slightly in the second half of the year.

    • The National Farmers Federation submitted that a 1.1% increase is appropriate given economic conditions. It stated that there was financial pressure on farms due to low beef prices, dry conditions, high farm debt and the reduction in land values and livestock numbers. Although higher beef prices were expected to increase farm incomes, this would be reduced by the number of saleable cattle after three years of stock reduction. The weather has also been unpredictable, and the ability for farmers to pay wages during periods of recovery is constrained.

    • Australian Industry Group called for a rise in minimum wage of $10.50 a week, a 1.6% increase, referring to the fact that wages grew at the lowest rate on record for the year to December 2015. Its reasons were paltry economic growth, lack of global competitiveness, weak inflation, low wage growth and almost 1.8 million unemployed. “It is important that the Expert Panel not put the interests of those in secure jobs ahead of the needs of those searching for jobs, or for more work, and the needs of those whose jobs will be threatened (including many low paid workers) if an excessive minimum wage increase is awarded,” it stated.

    In review of submissions, the Fair Work Commission will consider the latest consumer price index data, which was negative for the first quarter of 2016 – the first time this has happened since 2008. Companies will be pondering their budgeted wage and salary increases, particularly given a number of economists believe the CPI will return to the prior underlying annual rate of adjustment.

  • The report into the independent parliamentary entitlements system was released in the last month. It makes 36 recommendations including:

    • A change in terminology from entitlements or benefits to work expenses
    • A clearer division of responsibility for work expense decisions between the remuneration tribunal, the law, and the Special Minister of State.
    • The creation of a mechanism to review the work expenses framework periodically
    • The dissemination of an overarching principle of “value for money” to support parliamentarian’s travel decisions and publication of guidelines and other key documents
    • A reduction in the lodgement deadline from 60 to 30 days and a requirement to publish parliamentarian expenses quarterly
    • The enablement of greater discretion for choice of travel method in large electorates and an examination of whether current caps are appropriate for these electorates
    • Prohibition of car use with drivers for primarily personal trips and examination of the use of the COMCAR shuttle service during sitting periods to obtain better value for money and ensure the government is being offered the same rates as other COMCAR clients
    • Abolishment of the private vehicle allowance if vehicle leasing options are adopted
    • Abolishment of the overnight spouse allowance, tightening of the conditions under which parliamentarians can claim travel for family to reunite with politicians, and an update of the definition of dependent child
    • Reduction in the post retirement travel for non Gold pass eligible former parliamentarians from five return trips to Canberra or their former electorate office in six months to three economy return trips in three months.
    • Introduction of a penalty loading of 25% for adjustments to work expenses

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