You Reap What You Sow

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Our benchmarking article in the October Newsletter prompted much detailed and considered comment from clients, as well as from organisations not presently using Egan Associates as their prime service provider.

remuneration benchmarking

A small number of these, primarily Chairs of Remuneration Committees or Chairmen of Boards, posed interesting questions for our response, either as comment or as a written response to be presented to the Board.

Set out below are a selection of the questions which have been forwarded to us in response to the article. They clearly reflect a focus on the veracity and integrity of data available from remuneration information providers and advisers.

They also highlight the diversity of Board Remuneration Committee approaches to benchmarking, with a small number of committees revealing their process is subject to risk management assessment.

We have responded to clients who contacted us following our article. We believe it is important that all our clients understand the basis of our recommendations.

The Questions:

Data provenance

  1. Is benchmark data compiled and stored on your firm’s in-house data systems?

  2. Is your benchmarking data management outsourced to another party in Australia or managed in an offshore setting?

  3. Do you compile information on behalf of clients purely on a customised basis, entering information from selected benchmark companies at the time of their enquiry?

Data Quality

  1. What processes do you adopt in training and monitoring the integrity of data entry of staff deployed for this purpose?

  2. Is the material entered checked independently?

  3. Do you use more than one source of data to verify its integrity?

  4. Are qualified analysts/consultants reviewing benchmark data and the interpretation of various tables and explanatory information from remuneration reports?

  5. What are your quality control processes?

Scope of Data Collection

  1. On how many companies do you capture comprehensive benchmark information?

  2. Which of the following KMPs do you monitor:

    • Non-executive Directors;

    • Executive Directors; and/or

    • All other disclosed KMPs?

  3. Do you capture information on remuneration policy and practice including:

    • Company-stated competitive positioning;

    • Target short-term incentive (STI) and long-term incentive (LTI) values;

    • The nature of securities issued under a LTI plan;

    • The valuation and allocation protocols adopted under LTI plans;

    • The performance criteria under an annual incentive plan and, where disclosed, their relative weighting; and/or

    • The proportion of reward attributable to each core element of remuneration, notably fixed remuneration, STI, LTI?

  4. Do you record details and information on other reward and employment programs e.g. retention plans, unlatching awards, termination and notice provisions?

  5. Do you record information from all appropriate tables?

  6. Do you age the data and if yes how?

Elements of NED Remuneration

  1. Do you include or exclude superannuation guarantee charges if not separately stated? Do you include or exclude other sundry payments in the details of the annual report and why?

  2. Are “per diems” included in your analysis?

  3. Do you include or exclude committee fees in your analysis and why? Do you annualise said fees if the Director has only been there for part of the year and how?

  4. Do you separate payments to Non-executive Directors between fees and contributions to a retirement plan?

Position Changes

  1. Do you include or exclude an executive who leaves part way through the year in the sample? If included, how is this done?

  2. Do you record and separate cash or equity benefits associated with securing the services of KMPs from other organisations?

  3. What is the treatment of an executive’s remuneration when they change role part way through the year?

  4. If fees are changed during the year is an average used or the annualised new arrangements?

  5. If Directors have left in the year do you include the intended fee or are they excluded from the calculation?

Equity

  1. Do you compile information on Non-executive Director and other KMP shareholdings?

  2. Do you compile information on the number of securities granted to executives and the prevailing share price?

  3. Do you record information on the basis of the calculation of equity awards under LTI plans?

  4. Do you include or exclude incentive benefits, either short or long, that are subject to forfeiture?

  5. When equity (in whatever form) is part of remuneration do you include what is in the statutory tables (earned) or do you use paid?

  6. How do you value equity or rights to equity and can you provide some detail as to the mechanics of the calculation? If vesting occurs during the year is the value aged?

  7. Do you include dividends in remuneration calculations if the shares are fully paid and held in escrow?

Comparisons

  1. Can you state what the various shareholder groups think are the top two most important benchmarks for an ASX100 firm?

  2. What do you believe are the best two benchmarks to compare remuneration for the CEOs and KMPs and why?

  3. Which methodology do you use to rank organisations for the benchmarking exercise? Do use market capitalisation or do you use an index like the S&P/ASX200 or S&P/ASX300 Index?

  4. What is the basis of your calculations using market cap? For a 30 June year-end organisation, when do you measure which organisations are in or out? Do you use an average and, if so, over what period?

  5. How do you treat the data for organisations with differing year ends?

  6. How do you treat listed companies either moving into the benchmark or out of it over the period?

  7. If profitability is used as a benchmark what is the best level to judge it; i.e. gross margin, EBITDA (Cash Profit), EBIT, PBT, or NPAT, and why?

  8. When using the ASX100/200/300, do you (or can you) distinguish between using a CFO, as an example, who is responsible for just the finance, tax and treasury functions and one who may also have IT or strategy or secretarial functions? Or is it just the size of the firm (by whatever metric) that is seen as important?

Inclusions and Exclusions

  1. How are outliers treated and how do you define what you consider an outlier?

  2. Do you include or exclude executives who have earned no ‘at risk’ payments? Why?

  3. Is the remuneration of executives working in other countries included or excluded? If included, what adjustments are made if any?

  4. How are joint CEOs or Executive Chairman with a separate CEO treated? Are they excluded or included and if so how?

  5. Do you include or exclude organisations that place a heavy reliance on total fixed remuneration and pay very little by way of incentive payments, and why?

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