How do we rebuild shareholder trust on executive pay

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Appendix 1: Productivity Commission final report on executive remuneration Productivity Commission recommendations What this means / PwC view 1. ASIC should confirm that electronic • No material impact. voting is legally permissible without the need for constitutional amendments. 15. The Corporations Act should be • This is one of the more material recommendations and is amended such that: likely to discourage companies from a<strong>do</strong>pting innovative and – where a company’s remuneration company-specific remuneration plans that deviate from traditional report receives a “no” vote of 25% or remuneration plans for fear of a high “no” vote. more, the board should be required • The importance of <strong>shareholder</strong> engagement will increase to explain in its subsequent report as companies will need to understand what aspects of their how <strong>shareholder</strong> concerns <strong>we</strong>re remuneration practices are being voted <strong>do</strong>wn which is not clear by addressed and, if they have not been, a “no” vote on the entire remuneration report. These issues may the reasons why also differ from investor to investor. – where the subsequent remuneration • The re-election resolution has the potential to cause substantial report receives a “no” vote of 25% instability and may discourage investors from voting “no” on the or more, a resolution be put that remuneration report. In addition, <strong>shareholder</strong>s that submit their the elected directors who signed votes prior to the AGM are placed in a difficult position because the directors report for that meeting they need to vote on the re-election resolution not knowing whether stand for re-election at an EGM. this resolution will be activated and, if it was activated, the extent of Notice of the re-election resolution the “no” vote. would be contained in the meeting • PwC <strong>do</strong>es not believe that there is any reason for change in this papers for that AGM. If this resolution area. This is because the non-binding vote on remuneration is carried by more than 50% of reports is already working effectively as seen by the fact that the eligible votes, the board would be vast majority of companies who receive a significant “no” vote required to hold an EGM within address any issues the following year. In addition, <strong>shareholder</strong>s 90 days. elect directors to act on their behalf in terms of determining the company’s strategy, which includes the remuneration strategy. If <strong>shareholder</strong>s are not comfortable that the directors are acting in their best interests, there is already a mechanism in place not to re-elect that director when they present themselves for re-election which occurs every three years. • That said, PwC is supportive of the first part of the Productivity Commission’s recommendation as this promotes greater <strong>shareholder</strong> engagement and consultation. • PwC is not supportive of the second part of the recommendation for the reasons noted above. 16. If the ASX <strong>do</strong>es not give effect to • Requirements will be more stringent as they will be legislated as recommendations 3 or 11 and / or opposed to some of the recommendations that have currently been the ASX Corporate Governance put forward on an “if not, why not” basis. Council <strong>do</strong>es not give effect to recommendations 2 or 10, the Australian Government should give consideration to putting into effect the intent of those recommendations through legislative means. 1. There should be a review of the • PwC supports the review process. corporate governance arrangements that emanate from the Australian Government’s response to this report. This should be conducted no later than five years from the introduction of the new arrangements. 50 | PricewaterhouseCoopers Executive Remuneration – Fourth Edition 2010
Appendix 1: Productivity Commission final report on executive remuneration Findings Finding 1: Gender diversity - this is a new finding in the Productivity Commission’s report and is aligned with the amended ASX Guidelines which will take effect from the financial year commencing 1 July 2010. What this means / PwC view • If not already <strong>do</strong>ing so, boards should consider diversity objectives and plan to report progress. The Productivity Commission strongly en<strong>do</strong>rses the initiatives by the ASX Corporate Governance Council: • to require companies to a<strong>do</strong>pt and disclose, on an “if not, why not” basis, their progress against gender objectives set by their boards • to encourage nomination committees to review the proportion of women at all levels in the company and disclose annually the skills and diversity criteria used for board appointments. Outcomes should be revie<strong>we</strong>d three years after the measures have been introduced. Finding 2: Remuneration “check list” for boards • Remuneration practices and disclosure could be enhanced by considering: – how the remuneration policy aligns with the company’s strategy, its desired risk profile and <strong>shareholder</strong> interests – how the mix of base pay and incentives relates to the remuneration policy – how comparator groups for benchmarking executive remuneration and setting performance hurdles / metrics <strong>we</strong>re selected and how such benchmarks have been applied – how incentive pay arrangements <strong>we</strong>re subjected to sensitivity analysis to determine the impact of unexpected changes (eg in the share price) and how any deferral principles and forfeiture conditions would operate – whether any “incentive-compatible” constraints or caps apply to guard against extreme outcomes applies from formula-based contractual obligations; – whether alternatives to incentives linked to complex hurdles have been considered – whether employment contracts have been designed to the degree allo<strong>we</strong>d by law to inoculate against the possibility of having to “buy-out” poorly performing executives to avoid litigation – whether post-remuneration evaluations have been conducted to assess outcomes, their relationship to the remuneration policy and the integrity of any initial sensitivity analysis. • This could be a useful checklist for boards when assessing their remuneration practices. <strong>How</strong>ever, if incorporated into disclosures, this will add further complexity and length to remuneration reports. PricewaterhouseCoopers Executive Remuneration – Fourth Edition 2010 | 51
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 and 40: Choppy waters It is clear from the
Page 41 and 42: Choppy waters 6. Get shareh
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 50 and 51: 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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