10 minutes on... Executive remuneration trends staying out of the strike zone

Transcription

1 February 2012 What you need to know about remuneration trends in FY11 Brought to you by PwC, 28 February minutes on... Executive remuneration trends staying out of the strike zone

2 Uncertain times The continuing global economic uncertainty has local implications for executive remuneration These are uncertain and volatile global economic times, with some economies strengthening and experiencing employment growth, while others struggle with government debt, political turmoil, double-dip recession risk and further regulatory change. Australia has also experienced this divergence across industry and company performance, resulting in the multi-speed economy. Remuneration committees are constantly adjusting to this new reality and their extended oversight role. Continued regulatory reform of executive remuneration, including the introduction of the two strikes rule, has put further pressure on remuneration committees to examine the appropriateness of executive remuneration within the broader economic and community context. Against this backdrop, we analysed FY11 remuneration structures and levels within ASX 100 companies to determine recent market trends (see slide 9 and 10 for how we did this). Highlights Minimal change to executive remuneration design and amounts between FY10 and FY11. Fixed pay increased by 7% for CEOs and 5% for other executives (same incumbent), with many executives not receiving an increase (circa 30%). Enhanced oversight by remuneration committees and extensive stakeholder engagement. Compulsorily deferred STI has increased slightly and deferral periods are longer. Options continue their decline as an LTI instrument, used as a sole instrument in only 8% of ASX 100 companies. Relative TSR remains a hurdle of choice for nearly three-quarters of the ASX 100 (used as either the sole hurdle, or in conjunction with another hurdle). Remuneration committee fees have increased significantly, reflecting the heightened attention, scope and responsibilities of these committees. Despite the rhetoric only 5% of ASX 100 companies received a first strike (that is, a greater than 25% no vote on their remuneration report), down from 7% in FY10.

3 Total remuneration levels Total remuneration has remained broadly consistent with FY10, with higher increases for CEOs In FY11, ASX 100 median total remuneration increased by approximately 8% for CEOs, and 2% for executive positions. The increase was largely driven by higher STI payouts due to increased company performance, and, in the case of CEOs, by higher levels of LTI granted (see figure 1). Part of the increase was also attributable to year-on-year changes to the companies within the ASX 100. Total remuneration level relativity between executives remained consistent with FY10, with the median executive receiving approximately 28% of the median CEO s total remuneration. The median total remuneration relativity between the CEO and the next highest paid disclosed executive in each company was 47%. $,000 Figure 1.0: ASX 100 FY11 CEO, CFO and Executive total remuneration levels $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 CE0 CFO Execs CEO CFO Execs Median 75th percentile Fixed Actual STI LTI at grant

4 Fixed pay Treatment of fixed pay was varied Among the same incumbent CEOs from FY10 to FY11, fixed pay increases at the median were 7%. However, approximately 30% of CEOs did not receive a fixed pay increase, which is slightly higher than the period FY09 to FY10 (25%). This demonstrates a continued reluctance on the part of some remuneration committees to adopt pre-financial crisis annual uplifts. Same incumbent other executives from FY10 to FY11 had fixed pay increases at the median of 5%. Like CEOs, many executives did not receive a fixed pay increase, suggesting that the reluctance for uplifts is not confined to the CEO s remuneration. Despite the same incumbent fixed pay increases mentioned above, the ASX 100 medians for CEOs and other executives remained fairly consistent year on year (2% increase for both). This lesser increase compared to same incumbent CEOs is due to year-on-year changes in the companies within the ASX 100. Among the same incumbent CEOs from FY10 to FY11, fixed pay increases at the median were 7%.

5 Short-term incentives There has been limited change in STI plan design More than 95% of ASX 100 companies awarded a STI payment to at least one executive in FY11. Where target amounts were established, almost 40% awarded STI at or above the target opportunity. The year-on-year STI increase at the median was 27% for CEOs, 8% for CFOs and 10% for all other executives. Figure 2 shows that the number of companies that paid STI between 75% and 99% of target increased significantly (14% increase from FY10), while fewer companies paid less than 50% of target (7% decrease), or over 150% of target (9% decrease). The most commonly used metrics were group profit/earnings (60% of companies); health, safety and environment (40%); customer satisfaction (26%); and business unit profit (20%). There has been a slight increase in compulsory STI deferral schemes since FY10, with 43% of companies now opting to compulsorily defer a portion of STI payments (up from 40%). Deferral within financial services is higher than in other sectors. The majority of companies that deferred STI payments did so for two or more years (64%), typically in the form of equity (shares or rights were used in around 80% of companies). The number of companies that deferred STI for three or more years increased year-on-year, reflecting a shift to longer deferral periods. Clawback provisions are also increasing and are now common market practice in the financial services sector. % of Companies Figure 2.0: ASX 100 average actual STI as a percentage of target STI 50% 40% 30% 20% 10% 0% <50% 50-74% 75-99% % % >150% Company average actual STI as a percentage of target STI FY10 FY11

6 Long-term incentives Relative TSR as a hurdle, and performance rights as an instrument, are used most prominently Consistent with previous years, relative TSR (total shareholder return) continues to be the most commonly used performance hurdle in LTI plans in the ASX 100. It is used by 73% of companies as either a sole hurdle (31%), or in conjunction with another hurdle (42%), see figure 3. Dual hurdles, used by 45% of ASX 100 companies in FY11, decreased in prevalence (51% in FY10). Common internal hurdles other than earnings per share (EPS) included return on equity (ROE), return on funds employed (ROFE), and earnings before interest and tax (EBIT). Despite some pressure for longer-term vesting and performance periods, three-year performance periods continue to be the most common (79% of companies), followed by four-year performance periods (12%). This is consistent with FY10. With respect to LTI instruments, the shift away from options has become more pronounced, with only 8% of companies retaining options as a sole instrument in FY11 (see figure 3.1), down from 16% in FY10. The use of options with another instrument, such as rights or shares, also decreased. The use of performance rights as a sole instrument has increased further and is now used by half of the ASX 100 (50%). Figure 3.0: ASX 100 FY11 LTI Performance Hurdles Relative TSR and EPS 28% Absolute TSR 3% EPS 9% Relative TSR 31% Figure 3.1: ASX 100 FY11 LTI Instruments Options and rights 17% Options 8% Options and shares 2% None 1% Relative TSR and other hurdle 14% Other internal hurdle(s) 13% Share price growth 1% Performance shares 10% Loan-based shares 1% Rights and shares 3% Cash 9% Peformance rights 50%

7 NED fees There has been some movement, up and down, in non-executive director base and committee fees FY11 median non-executive director base fees remain largely the same as FY10. However, the median chair fee has decreased by 8%. The reduction is due to the changes in the companies within the ASX 100 (see slide 9). Year-on-year, the same incumbent company chairs median fees remained the same, while the median NED base fee saw a 3% increase. Around 35% of companies increased NED base fees and 40% increased chair fees. Of the company chairs which received an increase, the median increase was 8%. Of companies which increased the base NED fee, the median increase was 7%. There has been an increase in fees for remuneration committees, which reflects the heightened attention, scope and responsibilities of these committees. Around 8% of ASX 100 companies requested an increase in NED fee pools during FY11, consistent with FY10. Of those companies that requested an increase, the median increase was 24% (23% in FY10). NED Fees (Median) FY11 FY10 Change $ $ % Chair total fee * 400, ,000-8% Non-executive director base fee 152, ,000 1% Committee fees Chair Audit Committee 40,000 40,000 0% Member Audit Committee * 20,000 22,500-11% Chair Remuneration Committee 30,000 25,000 20% Member Remuneration Committee 16,000 13,600 18% * Reductions in Board Chair and Audit Committee medians are due to changes to the companies within the ASX 100.

8 Shareholder voting Shareholders appear to be comfortable with decisions made Three ASX 100 companies^ received a first strike under the Corporations Act amendments of 1 July 2011 (in other words, a no vote of more than 25% on their remuneration report). This compares to five ASX 100 companies in FY10. A significant majority of companies (72%) continued to receive favourable (more than 90% yes ) remuneration report votes in FY11, though down slightly from 79% in FY10 (see figure 4). Only four companies in the ASX 100 sought shareholder approval for termination benefits payments. All resolutions were passed with varying levels of shareholder support. This suggests that most companies are operating within the new termination benefit cap provisions. No. of Companies Figure 4.0: Remuneration Report Voting in FY11 50% 40% 30% 20% 10% 0% <75% 75-79% 80-84% 85-89% 90-94% % FY10 FY11 Votes for as a % of total votes cast* ^ Up to 19 January *Excluding absentee votes.

9 Regulatory update Regulatory changes continued to occur, with the possibility of more to come 2011 saw significant changes to regulation concerning executive remuneration. The major change was the Corporations Act amendments, which came into effect on 1 July Other regulatory trends in 2011 include increased disclosure requirements from ASIC, and an incentive clawback disclosure proposal from the Government. CAMAC remuneration report disclosure recommendations Context On 21 February 2012, the Federal Government announced that it was accepting several of the recommendations proposed by the Corporations and Markets Advisory Committee with respect to executive remuneration disclosure requirements. The accepted recommendations impact disclosures of: Market response Whilst attempting to simplify remuneration reporting, arguably the CAMAC recommendations add a further layer of complexity to reporting requirements. remuneration governance frameworks Corporations Act (1 July, 2011) ASIC review of remuneration report disclosure (2011) Context There were two changes with implications for remuneration: introduction of the two strikes rule and the re-election process relating to the non-binding vote on the remuneration report rules and disclosure requirements on the use of remuneration consultants ASIC reviewed a sample of remuneration reports, formally calling for better disclosure of the relationship between pay and performance, specifically: board policy for determining KMP remuneration better description of non-financial performance conditions tied to incentives Market response Greater focus on defensible remuneration arrangements and proxy adviser feedback on reports Establishment of formal internal processes to engage remuneration consultants Increased communication with stakeholders regarding remuneration decisions Most larger ASX-listed companies already provide full disclosure on remuneration Anecdotally, companies took this guidance under more careful consideration when completing FY11 remuneration reports Clawback proposals value of lapsed options and percentage of remuneration consisting of options termination benefits remuneration outcomes (past pay, present pay, and future pay) Draft legislation to enact these reforms is expected to be released for public consultation in the latter half of 2012 Further to the acceptance of certain CAMAC recommendations, the Federal Government also announced a reform which requires companies to adopt clawback provisions, by requiring these provisions to be disclosed in companies remuneration reports. These provisions are limited to where there is a material misstatement in the company s financial statements. This announcement has come after a lengthy consultation period, and is part of a broader agenda to enhance the executive remuneration framework in Australia. Clawbacks on unvested equity is an emerging trend, particularly in financial services companies Clawback of cash amounts already paid is not seen in the market, however this may change once the reform is legislated rationale for selection of performance conditions better description of incentive plan terms, including terms and conditions of each grant

10 What might we be talking about next year? We foresee further evolution in the approach to executive remuneration FY11 saw minimal change in executive remuneration design and amounts, however, boards continued to enhance their oversight role and stakeholder engagement on this topic. We also expect to see the following trends shape executive remuneration over the next year and beyond. Broadening the reference for acceptable pay There is growing pressure to consider alternative methods of determining the reasonableness of executive remuneration other than traditional benchmarking. Other considerations may include community acceptability, relationship to shareholder returns over executive tenure, and ratio to average employee pay. And any alternative methods of determining acceptable pay may lead to calls for further restraint on total amounts. Continued divergence due to the multi-speed economy The divergence in performance across industries and companies is likely to continue in FY12. Among industries where workforce cutbacks and other budget tightening measures are proposed, shareholders and other stakeholders may be more sensitive to executive remuneration outcomes. Additionally, variance in industry performance will increase the importance of using targeted peer reference groups when making remuneration decisions. Greater and more effective dialogue between boards, shareholders and proxy advisers While FY11 saw increased engagement with institutional shareholders and proxy advisers, we believe that more companies will actively involve key stakeholders earlier in the process and take a strategic view of this important process. In addition, proxy advisers are refining their mechanisms for review, including greater scrutiny of the relationship between company performance and executive remuneration. Enhancing the focus on strategic LTI measures Despite the tendency for companies to use classic LTI measures (for example, relative TSR or EPS), there is an emerging trend towards the use of strategic measures in the LTI plan. This is becoming increasingly common in the UK and we expect to see this trend emerge in the Australian market as the remuneration committee seeks to use the LTI as an enabler for long-term strategy execution. Strategic measures would typically operate alongside those linked to superior shareholder returns.

11 Appendix: Our analysis (excluding non-executive directors) Item Explanation Item Explanation Disclosed executives FY11 and FY10 Fixed pay Short-term incentive (STI) Long-term incentive (LTI) The data in this report relates to Key Management Personnel only (as defined in the Accounting Standards) Companies that have a FY11 financial year-end refers to those companies that have a year-end between 1 October 2010 and 30 September 2011 Companies that have a FY10 financial year-end refers to those companies that have a year-end between 1 October 2009 and 30 September 2010 Fixed pay includes salary, superannuation, and non-monetary benefits Where disclosed, any amounts relating to expatriate benefits, termination payments, leave accruals and one-off retention amounts have been excluded Actual STI represents FY11 STI amounts paid Target STI represents a company s policy target STI. Maximum STI represents a company s policy maximum STI STI includes the value of any deferred equity or deferred cash that is awarded as part of the STI plan STI data excludes nil bonuses LTI market data was determined using a fair-value calculation, which represents the value of an instrument discounted by the probability of vesting. For a market-based performance hurdle, we used the disclosed AASB 2 fair value. For a non-market-based hurdle, we applied a 35% discount to the disclosed AASB2 fair value to reflect the probability of achieving the performance hurdle and the lack of dividends received by participants over the vesting period (if this is the case) Total Remuneration ASX 100 Data sources Same Incumbent Total remuneration is the total of fixed pay, actual STI (inclusive of deferred amounts) and LTI It is exclusive of one-off payments such as those linked to termination, retention or commencement of employment The largest 100 companies listed on the ASX as at 30 September 2011, excluding foreign registered companies, real estate investment trusts and externally managed funds. Only companies that met this criteria as at a set date (30 September 2011) were included. We did not map back on a like for like basis to the sample group of companies used in last year s Executive Remuneration publication, unless otherwise specified Of the 86 companies in the FY11 ASX 100, 69 were the same as the FY10 ASX companies were new additions, replacing companies which either dropped out based on market capitalisation, or were de-listed due to takeover or merger Remuneration data is based on each company s most recently released annual report to 30 September 2011 The date used in this report is derived entirely from publicly available information. Not all company disclosure is consistent, and while every effort was made to interpret this data in the manner in which it was intended to be read, that data has not been verified with the companies in question Individual executives in the same company within the same position as in FY10 and FY11 LTI data excludes nil LTI amounts Analysis included in previous Executive Remuneration publications used a 40% discount to the disclosed AASB2 fair value A key plan (in which the majority of KMP participate) per company has been analysed in the plan design commentary

12 Appendix: Our analysis (non-executive directors) Component Base fee Committee fees Superannuation Explanation Base fees are the base policy fees paid to chair and non-executive directors for their service on the board All company data including any applicable superannuation, but excluding committee fees (where applicable), and other ad-hoc fees (where applicable) Committee fees are the policy fees paid to chair and non-executive directors (where applicable), and include superannuation (see below) We have benchmarked fees inclusive of superannuation In respect of base fees for Australian-based companies, superannuation has been included on the basis of AUD $15,199 (the relevant FY11 Australian Government mandated Superannuation Guarantee) or 9%, depending on each peer company s superannuation policy In respect of committee fees, superannuation (where applicable) has been included on the basis of 9% of the committee fees for those companies where the policy is to pay 9% (uncapped). Where the company policy is to pay the Guarantee capped amount only, we have assumed this has been covered in the base policy fee, and have not added this amount to the committee fee

13 Executive remuneration trends staying out of the strike zone How PwC can help To have a deeper discussion about these issues, please contact: Sydney Debra Eckersley Partner Phone: debra.eckersley@au.pwc.com Alena Mackie Director Phone: alena.mackie@au.pwc.com Melbourne Della Conroy Partner Phone: della.conroy@au.pwc.com Daryl O Callaghan Principal Phone: daryl.ocallaghan@au.pwc.com Emma Grogan Director Phone: emma.grogan@au.pwc.com 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Liability is limited by the Accountant s Scheme under the Professional Standards Act 1994 (NSW)