EXECUTIVE REMUNERATION STRATEGY

A Balanced Perspective

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Executive Remuneration Strategy - Finding the Right Balance

Executive Remuneration remains a key corporate governance priority. How a company pays its CEO and executive team impacts on its capacity to attract the best people and to motivate them to maintain focus on critical business objectives. There is no one size that fits all. Executive remuneration strategy needs to be targeted, transparent and aligned to the market in which the company operates.

Boards and Remuneration Committees need to have a clear understanding of the impact of their executive remuneration strategy on business outcomes. Strategy needs to be formulated in such a way to as to support business performance and the interests of all stakeholder groups.

The Corporations Act in 2011 places 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 and ASX Principle 8, Remunerate Fairly and Responsibly.

The key issues for Directors and CEOs include:

  • ONE: Ensuring that the quantum of executive remuneration in line with market practice.

    This needs to be based on a rigorous analysis of your target market. Positioning too low will create attraction and retention issues. Positioning too high will waste financial resources.

  • TWO: Determining the right ratio of fixed to variable remuneration.

    This is a key strategy issue. Finding the right balance for your operating environment depends on the drivers of your business, the capacity of executives to impact results and the view of key stakeholder groups.

  • THREE: Setting the right short and long term KPIs.

    The balanced scorecard approach is well established across most industry sectors. The weighting of financial and non-financial metrics has been the subject of much discussion lately, particularly in the Financial Services Sector.

  • FOUR: Designing STI and LTI Plans.

    Overly complex models can detract from the line of sight around critical KPIs. Your performance based plans should be streamlined, transparent and aligned to business strategy.

  • FIVE: Drafting the Executive ‘Employment Agreement’ (Contract).

    This is a critical document which sets out the legal parameter of the employment relationship. Beware of the boilerplate approach.

“I have known and worked with Geoff Nunn & Associates over a 10 year period in my capacity as chair and director of various utility companies. They have always been able to source reliable and accurate Utilities Benchmark remuneration data that has enabled the setting of board fees, CEO and executive team remuneration packages which support the attraction and retention of the best talent”

Dr Tom Parry, Former Chair and Director, ActewAGL, Founding Chair, Powering Australia Renewables Fund, Former Director, Icon Water, Founding Chair, AEMO, Former Chair, Sydney Water

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CASE STUDY

In 2020 Integrated Transmission Networks (ITN) was struggling with an executive remuneration framework that had become overly complex and unwieldy. There was no formalised fixed remuneration structure and the STI and LTI contained a diverse range of KPIs, some of which added little value to overall corporate performance. The Remuneration Committee frequently debated remuneration outcomes for lengthy periods. Decisions were seldom supported by all directors and inevitably a compromise.

We were asked to review and make recommendations for streamlining the executive remuneration strategy. In order to do this we embarked on an in-depth process which involved:

  1. Holding discussions with each Non-Executive Director individually to ascertain their perspective and views on to core drivers of the business.

  2. Meeting and workshopping with the MD, CFO and GM People to explore the shortcomings of the existing framework and assess the appetite for change.

  3. Generating innovative solutions based on analysis of market practice and our expertise in remuneration strategy developed over a 40 year period.

  4. Further reviewing of potential solutions with the MD, CFO and GM People to agree a preferred preferred strategy option.

  5. Presenting various solutions and the preferred option to the board remuneration committee for consideration and approval.

  6. Communicating with all executives on the new approach to executive remuneration on how it might impact on them individually.

Corporate performance improved as a result and board and executive spent less time on the management of executive remuneration.

Geoff Nunn & Associates has worked in the area of board and executive remuneration since 1993. We have provided independent remuneration advice to over 1000 organisations across Australia, New Zealand and Singapore. For a preliminary discussion contact Geoff Nunn on +61418 595 107 or email gtnunn@gna.net.au

“Re-thinking the nature of executive remuneration in our corporations to better align with the interests of all stakeholders is a priority for Australian boards.”

— GEOFF NUNN SUBMISSON TO THE FINANCIAL SERVICES ROYAL COMMISSION MAY 2018