Turbulent times in executive remuneration Is it time to rethink your approach?
The spotlight is on executive remuneration What are the alternatives? Should you be making changes? Where to from here? With pressure from companies, executives and shareholders is it time to rethink your executive remuneration approach? The executive remuneration strategy should be as unique as the company itself. You should use an alternative structure only if it suits your circumstances and strategy. We expect turbulent times to continue are you prepared? 1 Turbulent times in executive remuneration Is it time to rethink your approach?
The spotlight is on executive remuneration With pressure from companies, executives and shareholders is it time to rethink your executive remuneration approach? After a couple of relatively quiet AGM seasons, 2016 has been very active from a shareholder perspective, with a greater number of companies so far experiencing a significant no vote. While there is a divergence of views on some issues, key pressures are emerging that impact the future of executive remuneration. What we hear from companies What we see in the market STI > LTI The short-term incentive ( STI ) is more highly valued than the long-term incentive ( LTI ). Evidence shows long-term performance equity is almost always undervalued by executives compared to STI. Polarising views Investor views are polarising. There is direct opposition between some proxy and institutional investors regarding executive remuneration design, such as the use of non-financial and relative TSR measures. The long-term is uncertain The long-term view of performance is often too uncertain to set realistic and challenging targets. >50% For many companies, more than 50% of shareholders don t vote 1 Not all investors vote on the remuneration report which can significantly skew votes. Unclear if high cost of STI is delivering The STI represents a significant cost to the company. However, companies have concerns around setting performance expectations, lack of variability in outcomes and effectiveness of the STI to deliver the right messages to participants. Shareholders believe pay is excessive Shareholders and proxy advisors believe the amount executives are paid is excessive and, in particular, STIs are certain. For example, nearly 70% of ASX100 companies have paid their CEOs above 80% of target in the past two years 2. 1 EY analysis of the 2016 AGM season (ASX300 companies) 2 EY analysis of recent STI payments to CEOs (ASX100 companies) 2 Turbulent times in executive remuneration Is it time to rethink your approach?
What are the alternatives? The executive remuneration strategy should be as unique as the company itself. Most large listed Australian companies executive remuneration framework comprises fixed remuneration, STI and LTI. A successful executive remuneration strategy combines both the structures you use to deliver pay and the decisions you make about how much you pay. Both should reflect the strategy and culture of your business. For some companies, the market prevalent approach will continue to work small changes (for example to the measures or remuneration mix) may be appropriate. If your company is in a position where the current executive remuneration approach is not delivering the desired results, there are alternatives, depending on your focus. Short term tactical focus Remove performance based LTI + STI (with STI partly in equity) + STI (both elements delivered partly in equity) (cash) Short and long-term incentive plan: Prevelant structure STI (cash) (likely with deferral into equity) Business specific, long term performance focus Modified traditional LTI structure LTI without relative TSR or LTI (equity) with TSR and another financial measure LTI with company specific/strategic milestone measures Medium to long-term strategic focus Modified incentive approach + LTI + combined variable remuneration incentive Note: may be delivered partly in equity These are not the only alternatives Major changes Minor changes LTI: Long-term incentive STI: Short-term incentive TSR: Total Shareholder Return 3 Turbulent times in executive remuneration Is it time to rethink your approach?
Should you be making changes? Alternative examples You should use an alternative structure only if it suits your circumstances and strategy. Short-term tactical focus Long-term strategic focus For example For example Fixed remuneration in cash and equity STI in cash and equity 1 year performance Fixed remuneration Restricted equity with service requirement LTI in equity with 3 year performance When might you use this structure? When might you use this structure? 1 Company is in a short-term turn-around situation 1 Company has clearly articulated long-term goals and does not wish to dilute 2 Long-term strategy is unclear focus on those goals in the short-term 3 Desire to control costs and preserve cash 2 Long-term retention element is desired 4 Desire to get equity in executives hands quickly based on annual performance 3 4 Annual budget focus is for investments, not to gauge performance Significant focus on share price 4 Turbulent times in executive remuneration Is it time to rethink your approach?
Where to from here? We expect turbulent times to continue are you prepared? In the future we expect to see: Greater volatility and variation in incentive outcomes Reflecting different structures, measures and greater Remuneration Committee judgement. More alternative approaches, but not the majority Companies will re-think structures and/or performance measures. Consultation, engagement and disclosure of continued approach and any changes will be enhanced. Higher no votes on Remuneration Reports The view of what is considered a high no vote will evolve. For example, in 2015 the median no vote was 3% across ASX200 companies 3. As investor views continue to polarise, the new norm will be a higher no vote percentage. We expect to see Remuneration Committees make hard decisions about how, and how much, remuneration is delivered Remuneration Committee membership is not for the faint-hearted, with executive remuneration becoming a statement of what the company is about. Remuneration Committees need to be prepared to exercise informed judgement or discretion and make the hard calls on quantum when necessary. Contacts To discuss your executive remuneration strategy further, please contact: Joanne Avasti Tel: +61 3 9288 8212 joanne.avasti@au.ey.com Bruno Cecchini Tel: +61 3 9288 8423 bruno.cecchini@au.ey.com Rohan Connors Tel: +61 2 8295 4318 rohan.connors@au.ey.com Chris Galway Tel: +61 2 8295 6476 chris.galway@au.ey.com Mike Hogan Tel: +61 2 8295 6853 michael.hogan@au.ey.com 3 EY analysis of the 2015 AGM season (ASX200 companies) 5 Turbulent times in executive remuneration Is it time to rethink your approach?
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