Remuneration has always been a hot topic, but in recent years it’s come under intense scrutiny.
Community concern over excessive executive pay has continued to grow, and shareholders and regulators are calling for reinforcement of accountability and more effective consequence management to be evident in remuneration outcomes for executives.
And in recent times we have witnessed an increase in the number of ASX 300 companies receiving strikes against their remuneration reports.
Against this backdrop, 73% of NEDs say their Board is changing or has made changes to its remuneration policy.
So, what are they doing differently?
Close to 60% are reviewing bonus and incentive schemes to ensure they are more effective. Around 40% are putting a greater weighting on non-financial metrics, including risk and customer. And almost one-third are introducing the ability to claw back incentives to apply consequence management over longer time frames.
Over half of the respondents reported more rigorous challenge from the remuneration committee on all substantive remuneration decisions while close to 40% were applying increased remuneration consequences for negative risk outcomes to either individuals or collectively. One third were introducing or enhancing formal annual tests of the effectiveness of remuneration policies in driving the desired behaviours and outcomes.
Despite these positive potential changes, directors acknowledge that getting shareholders to support new remuneration arrangements can be a challenge, particularly given how hard it is to link remuneration outcomes to longer-term results:
“Our business has changed its remuneration to include some reference to softer HR-type targets. Some shareholders and proxy advisors have reacted very negatively to this. This response is not consistent with the outworkings of the Hayne report.”
“I think we have allowed pressure from proxy advisors to interfere too much in setting our executive remuneration arrangements.”
“The biggest challenge is remuneration structure, given that it is shorter term and primarily financially driven. Shareholder expectations can sometimes be on the shorter term side.”
“In a sustainable organisation, the interests of shareholders, customers and staff are aligned in the longer term. The issue is to get shareholders to understand this is the context of short term results, as well as executive remuneration.”
“It is common for shareholders to disagree amongst themselves about preferred remuneration structures and the extent to which non-financial measures should be included in incentive schemes. The Board needs to find the right balance and prosecute its case.”
Following the release of APRA’s draft prudential standard on remuneration in late July, PwC also asked ASX 300 Directors in a separate survey about its likely impacts.
Of the 130 Directors that responded, 41% said it will result in more change than they were anticipating making around remuneration (35% slightly more and 6% significantly more) and 38% believe it will result in a substantial (an extra 5-10 hours) or major change (an additional 10+ hours) to their roles and workloads.
“While APRA’s draft prudential standard on remuneration directly impacts regulated entities, it will have a knock-on effect across industries as it starts to become the gold standard that all boards work towards."
The APRA standards have more prescriptive requirements, including for financial metrics to be capped at a weighting of 50 per cent, and for more substantive deferrals to apply for longer periods which helps provide boards with the clarity they need to go forward with remuneration.
“However, its impact cannot be underestimated, and the challenge ahead for Directors is to work out how to execute on APRA’s full package of remuneration measures practically, without adding additional complexity to an already complex process.”
Partner, PwC Australia
Tel: 612 8266 3034
Senior Executive Advisor, Risk Consulting, PwC Australia
Tel: +61 421 056 456
Partner, People and Organisation, PwC Australia
Tel: +61 (2) 8266 2420
Partner, Strategy& Australia
Tel: +61 (2) 8266 1299