About the Australian Shareholders' Association
The Australian Shareholders’ Association (ASA), a not-for-profit organisation, has been protecting and advancing the
rights of shareholders in Australian listed companies since 1960. With a focus on good company performance and
governance, the ASA has been successful in raising the standard of corporate behaviour in Australia. Our extensive
network of experienced company monitors review company performance and governance issues, analyse financial
statements, raise concerns and vote at annual general meetings and report all of their insights to members.
Shareholders can nominate the ASA to vote on their behalf at company meetings. The ASA also provides access to
value for money, independent education seminars and workshops, regular meeting and discussion groups and a
monthly magazine, Equity.
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MEDIA RELEASE
Monday 23 March 2009
ASA toughens stance on executive remuneration
The Australian Shareholders’ Association (ASA) today released its new policy on Executive Remuneration.
Commenting on the new policy, Chair of ASA board Helen Dent said, “The ASA requires companies to
meet a basic set of standards aimed at ensuring there is a link between executive remuneration and
company performance. The recent downturn in the market has highlighted the weak relationship
between pay and performance, requiring us to strengthen our policy.
Amongst the enhancements the ASA will require that long-term incentives are not paid to executives
unless they have met performance criteria over at least four consecutive years.
Ms Dent commented, “Shareholders measure the long term over at least seven to ten years and it is
appropriate that executives are measured likewise. Key management personnel should be focussing on
the health of the business not for one year but for four or more years.
The policy goes further requiring executives to hold a meaningful portion of any incentive earned in
company shares for at least another two years, even if they leave the position.
Ms Dent said, “Executives’ actions have long reaching consequences. Requiring them to keep part of
their pay invested in the company during and after employment will mean they make more sustainable
decisions about strategy, performance and their successor.”
The ASA will be taking decisive action against companies where shareholders disapprove of the
approach to executive remuneration.
Ms Dent commented, “Directors are responsible for setting executive remuneration. They have the
power to ensure that excessive payments to executives are a thing of the past. If they continue to fail
shareholders then it is not appropriate for them to remain on the board.
“If a company was a recipient of a shareholder backlash on executive pay last year, and directors have
failed to remedy the situation, the ASA will hold those directors responsible and vote against their re-
election at the Annual General Meeting.”
The policy, Executive Remuneration, is attached.
FOR FURTHER INFORMATION:
Helen Dent
Chair
Mobile: 0404 822 307
Stuart Wilson
Chief Executive Officer
Phone: 02 9411 6663
Mobile: 0421 705 251
MD1815167.doc
Page 2 of 4
Executive Remuneration
ASA Policy Statement: 23 March 2009
Background
Rates of increase in executive remuneration have accelerated over the past decade to such an extent
that multi-million dollar packages have become commonplace in larger listed companies. The gaps
between the pay of Australian CEOs and senior executives on the one hand, and other employees and
the workforce in general on the other, have become huge and are the subject of increasing levels of
valid criticism.
Retail shareholders have long been sceptical of the need for Australian CEOs to be remunerated with
such increasing largesse. They have questioned the necessity, often claimed by boards, of
having to
meet international standards set by the two highest paying regimes of USA and UK. They view with
suspicion the advice of “independent” remuneration consultants contracted by,
and accountable to,
those same boards. Retail shareholders have widely condemned the large
termination payments
granted to CEOs and others who have left their positions on retirement,
resignation or sometimes
following unsatisfactory performance. There is also increasing
concern about high levels of short-term
incentive payments and the potential for executives to
focus on achieving short-term goals to the
detriment of the longer-term interests of shareholders.
The structures of those components of remuneration packages which are classified as long-term
and
short-term incentive payments, often described as “at risk”, have been challenged with some
success
and it is now the norm for payments to require preset performance hurdles to be met. Nevertheless,
progress here has been modest and there remains a widespread view that incentive payments are too
easily given for performance which is satisfactory only and by no means superior,
and that these
payments are neither earned nor well aligned with returns generated for shareholders.
Recent and current global financial turmoil and the accompanying massive diminution in
shareholder
wealth have reinforced the view that senior executive remuneration levels are
excessive. Equally
disturbing, in too many cases they have provided support to shareholders’ conclusions that
incentives
embedded within remuneration structures are not well aligned with the interests of shareholders and
encourage activities that conflict with long term wealth creation. The Australian Shareholders’
Association (ASA) does not support statutory restrictions on remuneration levels and believes it is the
responsibility of the boards of companies to deal with the problem. Nevertheless, ASA recognises an
increasing risk of
intervention by the Australian Government if the corporate sector fails to act.
Consequently, ASA has prepared this updated policy paper for the guidance of listed companies. This
updated policy position represents a hardening of ASA’s position to one that is more reflective of the
attitudes of retail shareholders towards remuneration issues.
The ASA Position
1.
The structure and disclosure of executive remuneration should be concise, easily understood and
transparent to investors.
2.
The base salaries of senior executives need to be and in the great majority of listed companies
probably already are, at sufficient levels to provide full and appropriate compensation where
performance is adequate but not superior.
3.
Incentive payments in addition to base salaries are acceptable where these reward superior, as
against merely satisfactory, performance, which has been proven by the achievement of
predetermined and challenging targets.
MD1815167.doc
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4.
It is appropriate for the remuneration package of a CEO to include a substantial “at risk” element. As
a broad indication only, intended as a guideline for any board which is planning the structures of its
CEO’s remuneration package, an incentive award equal to the amount of the base salary package
is acceptable for a CEO who has achieved significantly superior performance. Payments which are
significantly above this level, other than on an exceptional basis, are excessive and are
unacceptable to retail shareholders.
5.
Long-term incentive (LTI) arrangements based on preset performance hurdles and properly aligned
with the interests of shareholders are the appropriate means for providing CEOs, and possibly other
senior executives, with motivation and reward for demonstrated superior levels of performance.
Recommended guidelines for achieving this alignment are set out below.
6.
Short term incentives (STIs) are questionable as incentives for CEOs. They should be used only where
the performance targets support and are entirely consistent with the company’s long-term goals. STI
arrangements may be appropriate for other senior executives, providing these awards are
conditional upon achieving pre-set performance targets that are clearly disclosed to shareholders.
7.
Boards must not permit executives to enter into arrangements (such as hedging) which reduce the
risk elements essential to effective incentive schemes.
8.
Termination payments to failed executives which are above statutory entitlements or that include
additional amounts in lieu of notice are unacceptable to retail shareholders. Boards should consider
this when negotiating departure conditions in employment contracts or subsequently.
9.
Golden parachutes are totally unacceptable to shareholders. Other lump sum payments additional
to the agreed annual remuneration package, for example, executive retention payments, and
compensation for “benefits foregone at previous employers” are also in principle unacceptable to
shareholders. Any exceptions need to be very clearly described and strongly justified as being in the
company’s best interests in the remuneration report.
10.
Where there has been a significant, for example 20%, vote against a Remuneration Report by
independent shareholders and the board concerned has failed to take appropriate corrective
action, the ASA intends to vote undirected proxies against the re-election of any of the directors at
the next AGM of that company.
Guidelines
Long-term Incentives
1.
ASA views long term incentives as a means of (i) rewarding executives for creating shareholder value
and (ii) providing incentives to create further value. There is no single test that adequately meets the
requirements of both objectives. Consequently, LTIs should be based on two components, each
subject to achieving company performance above a hurdle threshold, with all details clearly set out
for shareholders at the time of adoption:
a.
One component should be clearly aligned with shareholders’ interests and based on the
achievement of total shareholder return (TSR) above the median for an appropriate
comparator group. In this case vesting should commence at a modest level (no more than
10%) only when the company achieves a 51st percentile ranking
and should increase
progressively to reach full vesting no earlier than at the 75th percentile of the group.
b.
The second component should provide an incentive to achieve long-term improvement in
company performance, typically the achievement of a hurdle that is based on a pre-set and
superior level of increase in company earnings. This can be measured by, for example, growth
in earnings per share, return on funds employed or another verifiable metric that the board
considers best reflects long-term progress across the cycle.
2.
LTI awards should be made in equity.
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3.
LTI performance should be assessed over a fixed period of no less than four consecutive years, with
vesting at completion of the full assessment period.
4.
The share prices used within the calculation of the TSR, i.e. those at the start and end dates of the
vesting period, may be subject to short-term smoothing in order to avoid the unintended effects of
price volatility, (for example, averaging over the three month period around the start and ending
dates of the vesting period). However in such cases the formula used must be specified within the LTI
scheme at the outset.
5.
Should TSR be negative over the vesting assessment period there should be no award for that
component, irrespective of relative performance against the comparator group.
6.
There should be no retesting of performance against LTI hurdles. The need for retesting is eliminated if
the vesting period is adequate and short-term smoothing is adopted.
7.
In order to promote and support management succession and other strategic long-term objectives,
CEOs’ equity-based plans should provide that a meaningful portion of any equity awards shall not be
made available to the CEO for at least two years after vesting. This restriction should apply
irrespective of whether the CEO remains in the position.
8.
There should be no company loans associated with LTIs as this decouples any alignment with
shareholders’ interests that might otherwise have existed and is an inappropriate use of shareholders’
funds.
Short-Term Incentives
1.
Around 50% of STI awards should be based on verifiable financial performance metrics at the
company level and/or of the area of responsibility of the individual executive.
2.
The remainder of any award should be based on quantifiable performance indicators that are set at
the start of the period.
3.
In the interests of transparency, the performance indicators used to determine STI awards should be
disclosed to shareholders. Disclosure may be retrospective if necessary to avoid disclosing
commercially sensitive information.
4.
Disclosure of STI amounts paid to senior executives should be supported by details of the maximum
and minimum amounts available to be earned under the scheme.
5.
A proportion of STI awards (ASA recommends at least 50%) should be in the form of equity. This equity
must not be made available to the executive for at least two years after the end of the relevant
performance period, irrespective of whether the executive remains in the position.
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