The forensic examination of documents by the Hayne Royal Commission is likely to lead to additional demands being placed upon Remuneration Consultants and Board Remuneration Committees. New requirements may include the provision of detailed evidence which the consultant has drawn upon in providing information or advice to a Company or in preparing a recommendation.
The Board’s specification for selection of a peer group for benchmarking purposes will also require the consultant to be provided with a comprehensive brief. In looking, for example, at the position of a Chief Executive Officer, the following questions emerge.
- Does the Board explore remuneration paid to chief executives among organisations ranked 10, 20, 30 either side of the company’s current ASX rank?
- Outside market capitalisation, does the company consider organisations with comparable revenues, assets and levels of profitability?
- As an example, in choosing companies ranked 20 either side of a candidate company ranked 50 on the ASX with a market cap of around $8 billion, does the company consider including companies ranked 30 with a market cap of around $12.5 billion and those ranked at 70 with a market cap of $5.5 billion? Or does the company consider companies between half and twice the scale, which would be those with a market capitalisation of $16 billion through to those with a market cap of $4 billion?
- Is the spread influenced by the company’s maturity and growth profile? Is it further influenced by industry factors or the internal/external talent pool? Are certain industry sectors excluded?
- Does the Board seek information on the policy settings of the comparator organisations rather than the prevailing value underlying awards under a long-term incentive plan or the parameters under an annual incentive plan, be that the target incentive is 50% of the executive’s fixed remuneration and the maximum 100%?
- In looking at long-term incentives, does the company look at the grant value? Is the grant value the fair value or face value of the securities issued at the time of the award or the statutory accounting value?
- Will data alone be sufficient?
- Should the Board also seek information on the tenure of the counterpart executives?
- Should the Board seek information from an organisation with a highly credible database, though seek advice with that information in hand from a consultant who is highly knowledgeable of the industry sector in which the company competes for talent?
- Should the Board seek a second opinion?
- Should the Chair of the Remuneration Committee have a series of meetings following the briefing with the consultant once the information/advice has been submitted?
- Should the remuneration consultant meet with all members of the remuneration committee or the entire Board in order to answer questions and provide appropriate background in relation to the company’s reward practices, the market’s reward practices, the alignment between the company’s practices and those of the market?
- Should the Board primarily rely upon information obtained by management as distinct from a consultant’s recommendation? What influence in adjudicating on remuneration data will the individual’s performance, level of experience, promotability, attractiveness to competitors, current performance and potential have upon the decision?
- In reviewing a KMP population of half-a-dozen executives, how much time would be expected for a Remuneration Committee to devote to preparing their recommendation in respect of each individual KMP, and how much time would be devoted at Board level in reviewing their recommendations?
- How does the Board ensure that all members of the Board, and particularly those on the Remuneration Committee, are well informed on market practices and have become highly engaged with management in exploring alternate incentive structures, both equity-based and cash-based?
Egan Associates have been leaders in the field of remuneration advice to Boards, Government and senior executives for more than three decades. Call us now on (02) 9225 3225 to talk through any issues you are experiencing or for a “health check” of your remuneration structures and policies for 2019.