Executive Remuneration - Striking the Right Balance
All Boards and Remuneration Committees need to have a clear understanding of the impact of executive remuneration strategy. It needs to be formulated in such a way to support the interests of all stakeholder groups.
Changes to the Corporations Act in 2011 placed compliance obligations on the Boards of listed companies to ensure executive remuneration decisions are made in a transparent and defensible manner. Many non-listed and government organisations follow the same principles as set out in the Act.
The key issues for Directors include:
•Ensuring transparency and governance requirements are met;
•Determining levels of executive remuneration in accordance with market conditions.
•Determining the right ratio of fixed to variable remuneration;
•Structuring the short and long incentive plans;
•Determining the right short and long term performance measures.
•Drafting the Executive ‘Employment Agreement’ (Contract).
All listed companies are required to submit a ‘Remuneration Report’ as part of the annual reporting process. This Report should cover all key aspect of Board and Executive remuneration. Most Boards seek independent remuneration advice, on an annual basis, regarding the quantum and structure of executive remuneration.
Evidence before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry suggests that some corporations have yet to find the right balance with their executive remuneration. The heavy weighting attached to financial KPIs in STI and LTI plans may be an issue when it comes to fullfilling core purpose.
Geoff Nunn & Associates has operated in the area of Executive Remuneration since 1993. We have provided independent remuneration advice to over 1000 organisations across Australia.