- Be confident with the remuneration strategy
Has the remuneration committee reviewed the remuneration framework recently? Does it still fit the strategy for the company and changing community and proxy advisor expectations? What is the market doing? If the company is not following what is considered “best practice”, is this appropriate? Finding the answers to these questions may require the engagement of an advisor.
- Carefully consider whether incentive payments and pay increases are appropriate.
After following the documented process for determining short term incentive and long term incentive awards and vesting amounts, consider whether the outcomes match the value delivered to shareholders and perceptions of performance.
If there is a mismatch, consider using discretion. Where discretion is exercised, transparency of the rationale is paramount. Where underlying earnings have been used to calculate incentive outcomes, ensure that exclusions are fully disclosed, as well as the reasons behind those exclusions.
For increases in fixed pay, ensure increases are relative to the growth rate of wages in the community, unless there is a particular reason that the team, or an individual, should receive a higher rate. This reason must be disclosed. Benchmarking methods should be scrutinised to ensure they are robust, especially when hiring new talent at a premium.
- Know your register
Who are the major shareholders on the register? Do they make their own decisions regarding remuneration report votes, or do they default to a proxy advisor? If they are an investment fund, does the investment manager vote, or is the vote taken by an overarching group?
Once it is clear who will be passing judgement on the remuneration report, examine any voting guidelines provided by these entities.
It’s important to talk to important voting blocks routinely to discover concerns they might have with the company’s remuneration framework and outcomes. Where the remuneration committee makes a major change, or makes a decision that is likely to be controversial, proactive engagement is likely to be more effective than engagement after the remuneration report has already been published.
Even when the remuneration committee has designed the most appropriate incentive structure possible for their executive team, if they don’t explain it clearly in the remuneration report, misunderstandings can lead to adverse votes.
Long reports do not necessarily translate to good reports, but it’s critical not to leave out important information, especially when it comes to showing the link between pay and performance. Where anomalous or high payouts do occur, extra explanation is required.