How do we rebuild shareholder trust on executive pay

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Choppy waters These are not easy issues and they require considerable thought before any changes are made. A balance needs to be struck bet<strong>we</strong>en oversight and governance on the one hand, and, on the other, the free<strong>do</strong>m of management to use remuneration as a strategic tool to support enhanced performance. During 2010, remuneration committees should be considering at a minimum the potential impact of new guidelines and evolving practices on their role, charter and method of operating. 3. Set performance targets that make pay and performance alignment a reality The value derived from linking business strategy, performance management and remuneration strategy, as outlined in the chapter “Aligning reward to performance is an old idea – or is it?”, warrants serious consideration. We suggest that now is the time for remuneration and performance management models to be truly tailored to business strategy. The benefits of such an approach will likely be more important than ever in the challenging times ahead. 4. Annual performance and pay review – freeze or unfreeze? Fixed pay reviews will be a tricky area in 2010. Last year approximately one third of ASX 100 companies froze executive salaries, and others made only modest increases. It is likely that executives are expecting a fixed pay review this year, on the basis that it is de-motivating to freeze salaries two years running. Looking forward, there will also be significant tensions with <strong>shareholder</strong>s, who are not all of the view that one year of pay restraint is sufficient given the severity of the <strong>do</strong>wnturn and the impact on profits and share price. Issues to be aware of in the fixed pay debate: • Evolving <strong>shareholder</strong> attitudes and guidance – how strongly will they push for a continued pay freeze? • The economy – indications of a <strong>do</strong>uble-dip recession could change sentiment on pay increases very quickly. • Politics – recent evidence of government intervention in new legislation and regulation has shown how hard it is for politicians to resist public pressure in the executive remuneration area. <strong>How</strong> much further will politicians push this issue? These are matters on which remuneration committees need to keep a close eye, and ideally defer decisions until as late as possible. 5. Incentive award determination – pay for performance? Another major focus for 2010 will be the appropriateness of performance measures and targets in respect of short- and long-term incentive plans. Many remuneration committees have spent considerable time debating and mapping out potential changes to performance measures, in respect of both the measures themselves, and also – more importantly – the absolute targets. We have seen a number of companies reducing performance targets in long-term incentive plans. This requires not only careful calibration and scenario testing, but also real craftsmanship in respect of how such changes are communicated to <strong>shareholder</strong>s. Committees will need to take seriously the institutional <strong>shareholder</strong> view that if performance targets are reduced from historic levels, the incentive opportunity should be correspondingly lo<strong>we</strong>r. This approach needs to be balanced against the requirement to motivate executive teams through an extremely difficult period. Committees will need to be prepared to explain how they addressed this issue and, in the remuneration disclosures, exactly how they reached their conclusions. The handling of bonus outcomes for 2009/10 will also require care. Bonuses <strong>we</strong>re reduced in 2009, on average by about 20% from the previous year. This can be explained by the fact that the recession hit many businesses in the last half of FY2009, and so did not affect the full year results too badly. <strong>How</strong>ever, the recession did hit early enough for companies to reset their incentive targets for 2010. Many remuneration committees <strong>we</strong>re sensitive to the lo<strong>we</strong>r profit outlook and set targets for FY2010 that <strong>we</strong>re tougher, relative to budget, than would previously have been the case. In a number of cases, this resetting may mean that bonus payments rise while profits continue to fall. The communication of this issue needs to be handled carefully. It could be one of the biggest sources of dispute in the 2010 AGM season. Remuneration committees should therefore be sensitive to this when considering applying discretion in determining bonus outcomes. 38 | PricewaterhouseCoopers Executive Remuneration – Fourth Edition 2010
Choppy waters 6. Get <strong>shareholder</strong> communication right The remuneration report is one of the key tools of effective <strong>shareholder</strong> communication, but not the only one. Proactive engagement with all key stakeholders will be tangibly valued, and those companies that <strong>do</strong> so will benefit from a much greater free<strong>do</strong>m of action. The process for effectively managing the AGM and remuneration-related resolutions needs to be elevated on the remuneration committee’s agenda, particularly if the Productivity Commission’s for the ‘two strikes test’ proposal is a<strong>do</strong>pted in legislation. The two strikes test proposal recommends that where a company receives a 25% or higher against vote against its remuneration report for two years running, a resolution be put to <strong>shareholder</strong>s that the elected directors who signed the directors’ report stand for re-election at an extraordinary general meeting (EGM). If this resolution is carried by more than 50% of eligible votes, the EGM would have to be held within 90 days. We therefore anticipate that in future the remuneration committee will spend a great deal more time on disclosure, <strong>shareholder</strong> consultation and preparation for the AGM. 7. Evaluate remuneration committee performance It will be a busy year for remuneration committees in all sectors. More regular or longer meetings may be required than in previous years to cover all the relevant items in an appropriate manner. There will be a need for education about trends. Remuneration committees should consider holding sessions On the ‘two strikes rule’, this will actually reduce the number of ‘no’ votes on remuneration reports as <strong>shareholder</strong>s will be concerned about the possible implications of a high no vote. The proposal is not justified by the scale of the problem and is generally bad governance practice. I hope it is rejected by the Government . Graham Bradley – President, Business Council of Australia, Chairman, HSBC Bank Australia, Stockland Corporation, Angle American Australia Limited, Po Valley Energy Limited, Boart Longyear Limited, Director, Singapore Telecommunications Limited without the goal of formal decision-making, purely with the aim of reviewing trends, their possible impact on the strategic landscape, and their impact on the committee’s agenda. Given the increased requirements on the remuneration committee, its performance will need to be assessed annually, with the outcome of that assessment revie<strong>we</strong>d by the board. Wrapping up We believe that 2010 will continue to present many challenges for remuneration committees. Now is the time for remuneration committees to act to ensure they are <strong>we</strong>ll placed to meet these challenges. PricewaterhouseCoopers Executive Remuneration – Fourth Edition 2010 | 39
Page 1 and 2: Executive Remuneration Fourth editi
Page 3 and 4: xxxxxxxxxxxxxxxxxxxxxx Contents Bre
Page 5 and 6: Breaking the mould The increasingly
Page 7 and 8: Breaking the mould “What about pe
Page 9 and 10: Breaking the mould sharehol
Page 12 and 13: Risk and reward Globally, during th
Page 14 and 15: Risk and reward So what can be <str
Page 16: Risk and reward 1. 2. . . Understan
Page 19 and 20: Aligning reward to performance is a
Page 21 and 22: Aligning reward to performance is a
Page 23 and 24: Regulation, regulation and more reg
Page 25 and 26: Regulation, regulation and more reg
Page 28 and 29: Who wants to be the chair of a remu
Page 30 and 31: Who wants to be the chair of a remu
Page 32: Who wants to be the chair of a remu
Page 35 and 36: Being independent The perception an
Page 37 and 38: Remuneration committees need to bec
Page 39: Choppy waters It is clear from the
Page 43 and 44: A look in the rear-vision mirror: A
Page 45 and 46: A look in the rear-vision mirror: A
Page 48 and 49: Appendix 1: Productivity Commission
Page 54 and 55: Appendix 2: The APRA remuneration a
Page 56 and 57: Appendix 2: The APRA remuneration a
Page 58 and 59: Our Team Our People and Change team

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