29/04/2010 - 00:00

Tax a key driver of remuneration restructure

29/04/2010 - 00:00


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The government may have further inflamed the simmering debate over executive remuneration.

ON April 16, the federal government responded to the Productivity Commission’s report on executive remuneration in Australia.

At the time of the release of the draft report, I wrote that I thought the commissioners had largely got it right. It was a view that was based not only on the report itself, but also formed from observing all of the appearances before the commissioners in Sydney last November.

Time and time again the commissioners pushed for detailed explanation of the views presented, not because they could, but because they wanted to as far as possible avoid unintended consequences.

Although it is pleasing to note the government has heeded the commissioners’ rejection of imposing caps on total pay and bonuses, it seems the Rudd government has applied bellows to the embers of the executive remuneration debate.

The fire that had largely died down as a result of the commissioners’ considered approach, which acknowledged the high regard Australian corporate governance is held internationally, now has a new supply of oxygen thanks to increasing use of legislation, the rejection of recommendation 13, and the addition of a provision to clawback bonuses paid when it is found financial information is materially misstated.

The government supported 16 out of the 17 recommendations and suggested strengthening six. It expects to have the necessary changes in place by the beginning of the 2010-2011 financial year following further rounds of public consultation on exposure drafts and discussion papers.

The government:

• seeks to strengthen recommendations 4 and 5 by extending the prohibition on executives voting their own shares on remuneration reports and hedging of unvested equity or equity subject to holding locks to ‘closely related parties’. This is designed to ensure that related parties are not used to circumvent the intention of the prohibition;

• has extended the recommendation to require all proxy holders to cast all of their directed proxies to all resolutions not just the remuneration report (recommendation 7). It believes this extension ensures that shareholders have increased confidence that the voting system is representative of their intentions;

• by appointing CAMAC as the advisory committee for the recommended changes to improve the information content and accessibility of remuneration reports (recommendation 8) the government seeks to minimise costs that would be associated with a stand-alone panel. They will also instruct the CAMAC to make recommendations on how the incentive components of executive pay could be simplified;

• aims to ensure transparency and accountability in relation to remuneration consultants and potential conflicts of interest that may arise as a result of their engagement by proposing legislation and extending recommendations 10 and 11 to all listed companies, not just the ASX300;

• rejected recommendation 13 to remove the cessation of employment as the taxation point for deferred equity to risk of forfeiture, stating that to remove it would result in a disproportionately large benefit to higher income employees, compromise the integrity of the tax system, make it more difficult to ensure the correct amount of tax is paid, and have a significant cost to Australian government revenue; and

• has added a clawback proposal designed to provide shareholders with the ability to recover overpaid bonuses that have occurred as a result of materially misstated financial statements and will be subject of a discussion paper to be released in coming months.

The rejection of recommendation 13 is the response that has met with most criticism. By removing the cessation of employment as the trigger for the taxation of deferred equity, the commissioners originally sought to strengthen the link between executives and shareholders past the point of the executive leaving the company, ensuring that the executive continued to hold equity and therefore have a vested interest in the long-term performance of the company.

In rejecting the recommendation, the government has effectively robbed shareholders of an improved mechanism to prevent executives from being rewarded for performance that proves to destroy value in the long-term and made taxation a key driver for remuneration structure.

Is this perhaps an unintended consequence that the commissioners were at pains to avoid?

We now have the response and await the discussion paper and draft legislation.

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



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