The Corporations and Markets Advisory Committee (CAMAC) released its report Executive Remuneration on 25 May 2011 (Report).
In December 2009, the Productivity Commission delivered its report, Executive Remuneration in Australia. The report concluded that, although Australian corporate governance and remuneration frameworks were highly ranked internationally, they could be made stronger by further amendment to the corporations legislation. The Commission's report recommended the Government establish an expert panel under the auspices of ASIC to advise on necessary amendment to legislation relating to remuneration reports. The Government supported this recommendation in its April 2010 response (Response), but noted that CAMAC was already a suitable advisory panel.
In May 2010, the then Minister for Financial Services, Superannuation and Corporate Law, the Hon. Chris Bowen MP, referred aspects of Australia's executive remuneration framework to CAMAC for consideration and advice.
Terms of reference and methodology
The Corporations Act and Corporations Regulations require companies, other than small proprietary companies, to prepare a report each year regarding remuneration of key management personnel: section 300A, reg 2M.3.03.
The Minister asked CAMAC to:
- examine the existing reporting requirements in the corporations legislation and identify possible areas of simplification, to better meet shareholder and company needs;
- recommend revisions to the legislative architecture to reduce remuneration reports' complexity;
- examine potential revisions to the framework for setting executive remuneration so that advice was provided on simplifying the incentive components of executive remuneration arrangements; and
- recommend the best way to revise the legislative architecture so that incentive components of executive remuneration arrangements were simplified.
CAMAC released an information paper in July 2010, seeking submissions. Submissions were received from a broad cross-section of interested parties, including the Law Council of Australia, the Australian Shareholders' Association, the Australian Institute of Company Directors and Chartered Secretaries Australia. A Roundtable was also held in December 2010.
At the time CAMAC finalised its Report, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 was still before Parliament. The Report assumes that its provisions, particularly the two strikes rule, will be enacted in the form in the Bill.
In a nutshell, CAMAC recommends small amendments to the corporations legislation, (principally section 300A and reg 2M.3.03) but concludes that 'now is not the time' to make major changes given the pending two strikes rule.
The Report reasons the two strikes rule is likely to trigger changes to remuneration practice, so once those changes have crystallised it may be appropriate to reconsider replacing the current regime with a non-prescriptive reporting approach.
CAMAC concludes incentive and other components of remuneration arrangements and policies for directors and other key management personnel are ultimately matters for companies to determine for themselves, and that close prescription of those arrangements and policies will not necessarily improve shareholder outcomes.
However, CAMAC emphasises that meaningful and complete disclosure to shareholders of the nature of those arrangements and policies is likely to improve shareholder understanding and acceptance of executive remuneration. To this end, CAMAC has broadly recommended removing the current requirement of disclosure in accordance with relevant accounting standards. CAMAC also recommends amendment to section 300A to permit companies to exclude commercially sensitive information concerning a performance condition from their report, provided that the exclusion is disclosed and a general description of the excluded information is provided (possibly based on the existing provisions in subsection 299(3)).
Giving the market flexibility
Given the changeable nature of the market, CAMAC indicated that unduly prescriptive requirements risk mandating disclosure or remuneration structures that do not meet current shareholder needs. Therefore, the structure of executive remuneration is ultimately something for boards to determine and shareholders to review.
Framework for remuneration
However, CAMAC has underscored that 'matters of remuneration design require close consideration by each board' (at [1.3.1]), and that there is no room for complacency:
"Well-designed remuneration arrangements can have a decisive positive influence on the immediate performance of a company and its longer-term prospects, just as poorly or inappropriately designed arrangements can damage the reputation or financial viability of a company, adversely affecting shareholders, employees, creditors and others having dealings with it."
Submissions to CAMAC expressed concern that enforced simplicity in remuneration arrangements would not necessarily align executive compensation with shareholder interests, and in fact may lead to circumvention (at [2.3.2]). CAMAC agreed enforced simplicity may preclude otherwise appropriate and well-designed arrangements designed to drive superior executive performance.
The Report states that boards should determine the executive remuneration structure by taking into account the most appropriate mixture of the following for their company's 'complexities, risks and challenges':
fixed and at risk components;
short-term and long-term performance benchmarks for at risk components;
current and deferred compensation; and
cash, non-cash and shares or options (equity compensation).
CAMAC considers boards may determine the inclusion of equity compensation to be appropriate, but that if included it should be in a way that guards 'against compensation outcomes driven solely by market effects' (at [2.3.5]).
Disclosure of remuneration
CAMAC considers that a remuneration report should 'explain to shareholders how the remuneration system for key management personnel is intended to function, and how it in fact functions' (at [3.3]). Requirements for the report should emphasise disclosure rather than dictating or recommending the adoption of certain types of remuneration arrangements.
To this end, the Report recommends that three key areas should be addressed:
- remuneration governance and policy;
- remuneration framework; and
- remuneration outcomes.
CAMAC's position is that the report should include, for each member of key management personnel:
- actual pay received, ie present pay and any crystallised past pay; and
- remuneration entitlements granted in the current reporting period but deferred as future pay.
In relation to the vexed question of termination payments, CAMAC recommends the legislation should require separate disclosure of:
- entitlement payments (statutory and other accumulated payments such as leave);
- severance payments (payments directly related to termination); and
- post-severance arrangements (such as payment of medical or insurance expenses).
Other issues raised in submissions
Employee share schemes
The use of employee share plans in remuneration arrangements is subject to the disclosure and licensing requirements of the Corporations Act. ASIC Class Order [CO 03/184] provides relief from those requirements, provided the company shares to be issued won't exceed 5% of total issued share capital. Submissions received from, among others, the Law Council and the Australian Bankers' Association encouraged ASIC to raise the 5% cap. However, the Report notes that the current cap does not seem to create practical difficulties and that there have been few applications to ASIC for case-by-case relief.
Tax law reform
Both the Productivity Commission report and various parties making submissions made proposals for changes to the tax laws relevant to executive remuneration, including to the taxing point for shares within employee share plans. The Report notes the Government has articulated its reasons for maintaining termination of employment as the taxing point (Response, pp 14-15), and that amendment to the tax laws involve questions of fiscal policy outside the remits of both the Report and CAMAC.
Government and industry response
In a 25 May 2011 media release, Parliamentary Secretary to the Treasurer, Mr David Bradbury, welcomed the Report and indicated the Government would respond 'in due course'. The Australian Institute of Company Directors described the Report as a 'missed opportunity' 'to recommend more sweeping reforms' given the imminent commencement of the two strikes rule, in its 25 May 2011 media release.