28/01/2011 - 00:00

Remuneration rules populist, heavy handed

28/01/2011 - 00:00

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The federal government’s populist approach to executive remuneration will further complicate the issue for all concerned.

AS most companies were winding down for the Christmas break, the parliamentary secretary to the treasurer released an exposure draft: ‘Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011’ as well as a consultation paper: ‘The Clawback of Director and Executive Remuneration in the Event of a Material Misstatement’. Both items follow the government’s response to the Productivity Commission’s recommendations on reforming executive remuneration handed down on January 4 2010.

Seven recommendations have, as expected, been included in the exposure draft.

The changes that relate to no vacancy, key management personnel (KMP) voting and proxy controls are as expected, make sense from a governance perspective, and therefore uncontroversial.

On the other hand, the proposed ‘no vacancy’ and ‘two strikes and re-election’ amendments will continue to be controversial as they pit shareholders and directors against one another.

The ban on hedging unvested equity remuneration also makes sense, however has the potential to further complicate incentive payments. This is especially so when put into the mix of the government’s refusal to remove cessation of employment as the taxation point for equity based long-term incentives, complicated laws surrounding the granting of employee equity and clawback provisions that are the subject of the discussion paper.

Although the government flagged it would implement recommendations 10 and 11 through legislation rather than via listing rules as proposed by the Productivity Commission, what wasn’t expected was a raft of complex new provisions, breaches of which will now be deemed a criminal offence.

The proposed provisions include:

• A disclosing entity will be required to disclose in its remuneration report, details relating to the remuneration consultant. In particular: the name of the consultant; the name of each director who executed the contract under which the consultant was engaged; the name of each person to whom the consultant directly gave the advice; a summary of the nature of the advice and the principles on which it was prepared; the amount and nature of consideration provided under the contract of advice; the nature of any other work the consultant did during the financial year for the company; and the amount and nature of consideration for the other work described above.

• Only non-executive directors can execute a contract to engage a remuneration consultant.

• Remuneration consultants are to provide their advice directly to the directors for the company (except executive directors, unless all of the directors are executive directors).

• If the remuneration consultant prepares the advice and provides it to a prohibited person (at this point understood to be someone other than a non-executive director including the company secretary and human resource executive), the remuneration consultant will be guilty of a criminal offence.

These changes have a wide-ranging impact and undermine activities legitimately undertaken by management. The HR function will no longer be able to commission and receive every-day advice on incentive plans, taxation, and superannuation.

The CEO will no longer be able to obtain advice on KMP that are their direct reports. Accountants, lawyers, and search firms who advise on contractual and nature of remuneration may also be captured by the definition of remuneration consultant.

Increased pressure is placed on non-executive directors if the provisions do not allow for the preparation of the advice to be facilitated by the company secretary or HR executive.

It is common practice that remuneration consultant works with management in the course of preparing the advice for the board in order to ensure the advice is workable from a HR systems point of view and takes into account the specific circumstances of the company with which management is (rightly) more intimately aware.

The proposed legislation goes way beyond the original intent of the recommendations, which were to ensure that advice was given within a framework of good corporate governance and appears heavy handed especially when the explanatory memorandum states: “It is noted that, while the advice of remuneration consultants may be influential in determining a company’s remuneration decisions, the primary responsibility for remuneration arrangements rests with company directors”.

Having attended the public hearings conducted by the Productivity Commission in 2009 and discussed the intent of the recommendations with two of the commissioners, I believe they largely got it right when their final recommendations were announced last year.

Their comprehensive report concluded Australia’s corporate governance and remuneration frameworks rated highly internationally and as a result took an approach that did not include legislative change. The government, on the other hand, has taken a populist, heavy-handed approach that will only serve to further complicate executive remuneration.

• Pamela-Jayne Kinder is principal of PJ Kinder Consulting – Board and Executive Remuneration Governance and Advice.

 

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