The Hayne Royal Commission into banking, and consultation on the proposed 4th edition of the ASX Corporate Governance Principles and Recommendations has once again shone a spotlight on remuneration practices, often an underlying driver of culture. The last time remuneration received such broad ranging attention was post GFC which prompted the introduction in 2011 of the ‘two strikes’ test and the director re-election process for listed companies.
From a shareholder perspective equity remuneration, that is share based payments, can be difficult to understand, significantly consume reported earnings, and influence their views on your value to the company and the value of the company. Because of this it is important to get your remuneration value proposition right and for it to be clearly articulated.
So in this time of increased scrutiny from government, the media, regulators, and shareholders what do directors of listed companies need to do when remuneration is on the boardroom table?
You need to get your remuneration structure and the value of it right and it needs to be supported by an independent1 and reliable valuation that provides the basis of the valuation and the material underlying assumptions.
The “basis of the valuation” means the reasons why the particular valuation methodology has been chosen to value the remuneration and the “underlying assumptions” are the inputs into the valuation.
Boards need a remuneration structure that:
- Attracts and retains high quality directors, executives and employees
- Sufficiently and fairly remunerates and incentivises current directors, executives and employees, and
- Is sufficiently transparent, and justifiable.
Each of these require an assessment of value.
The valuation of your company’s remuneration needs to occur at three points:
- Structuring the remuneration package
- Presenting remuneration to shareholders for approval, and
- For the financial and remuneration reports.
The first and second need to be clear and supportable for inclusion in the financial and remuneration reports.
Making Sure Your Value Proposition is Defensible
Shareholders get to vote on the value of a director’s remuneration at least once, sometimes twice.
The First Opportunity
At a shareholders’ meeting required to approve the remuneration under Chapter 2E of the Corporations Act or Chapter 10 of the ASX Listing Rules.
The Second Opportunity
At your AGM when shareholder no votes of more than 25% for two AGMs in a row leads to a director spill meeting in 90 days.
To ensure your remuneration is defensible we advise you obtain an independent and reliable valuation that will provide you with the basis of the valuation and the underlying assumptions which can then be disclosed in the materials supporting your remuneration resolutions.
What are the Common Forms of Remuneration?
Options, Performance Rights, Share Appreciation Rights and Loan Share Plans are the common forms of remuneration for directors, senior executives, or as part of a broader employee share scheme.
Each has its advantages and disadvantages, disclosure complexities, and most appropriate valuation methodologies.
As a rule of thumb, options are the easiest to value and disclose, and loan share plans the most complex. This is because of the different forms and vesting conditions (market or non-market based) that require valuation methodologies of different levels of complexity, and the disclosure for all forms must include all material terms and conditions, value, underlying assumptions, and vesting conditions.
When disclosing your remuneration, shareholders must have sufficient information to assess the value of the overall remuneration package keeping in mind the greater the complexity the more supporting explanation is required.
IMPORTANT: Significant Increase in ASIC Fees For Shareholder Remuneration Approval
If your remuneration requires shareholder approval under Chapter 2E of the Corporations Act you must lodge the company’s notice of meeting and accompanying material (not draft) with ASIC at least 14 days before despatch to shareholders, with fees. This gives ASIC the opportunity to comment on the content of the materials before being sent to shareholders.
If ASIC requires amendments the company will need to re-lodge the materials, with fees. Each re-lodgement starts the 14 day clock again.
There is an opportunity to make an application to shorten (an abridgement) the 14 day period and this is often used by companies as a cheap way to buy time. As from 1 July 2018 the lodgement of meeting materials and buying this additional time has become far more expensive.
Unless you are willing to buy time at a high cost, you should have your remuneration proposal settled at least two months before your meeting.
Chapter 2E fee increases
|Notice of Meeting (ASIC Form 5057)
||Abridgement Application (ASIC Form CF11)
|Pre- 1 July Fee
||Pre-1 July Fee
BDO has a team of professionals experienced in the valuation of remuneration and structuring remuneration packages based on our benchmark survey of over 1,400 listed companies. They can provide valuation reports that include the basis and underlying assumptions for all remuneration forms, across all industries, and tailored to the purpose of the valuation.
Some useful additional reading can be found here -
Governance and Remuneration when preparing for an IPO – Page 25
BDO Valuation Services – Employee Share Schemes
BDO Board & Executive Remuneration Report 2018
1ASIC Regulatory Guide 76: Related party transactions