10 minutes on.proposed changes to remuneration disclosures

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Caroline Mason
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1 December 2012 What you need to know about emerging topics essential to your business. 10 minutes on.proposed changes to Brought to you by PwC, December 2012

2 Highlights The key changes in the Bill mirror what was expected and include: requiring listed companies to disclose whether, in the case of a material misstatement of financial statements, KMP remuneration has been clawedback or, if not, why not; refining remuneration report disclosure: details of past, present and future pay for each KMP to be disclosed; all payments made to KMP in connection with their termination from the company to be disclosed; remuneration governance framework to be described; removal of the requirement to disclose the value of lapsed options, and the percentage of remuneration that consists of options; and relieving certain unlisted companies from their obligation to prepare a remuneration report. Submissions on the draft legislation close 15 March On 14 December 2012 Treasury released the Corporations Legislation Amendment (Remuneration Disclosures and Other Measures) Bill 2012 (the Bill). If passed, the remuneration disclosure changes will take effect for financial years starting on or after 1 July The Bill contains a range of measures seeking to enact several of the Corporations and Markets Advisory Committee s (CAMAC s) recommendations, as well as a proposal for claw-back and other measures. The Government is seeking feedback and comments on the draft legislation via a submission process that closes on 15 March For more information, or to make a submission, refer to the below link: proving-disclosure-requirements This alert provides detail on the draft legislation in respect of only the proposed remuneration disclosure changes 1 and what these mean for your company. The intention of these changes is positive, being to simplify and to provide increased clarity in some areas. However, we question whether these benefits outweigh the consequences of greater complexity and length in remuneration report disclosures. 1. Non-remuneration matters covered by the draft Bill include amending the test for the payment of dividends, removing the requirement for some small companies limited by guarantee to appoint auditors if they are not obliged to have their financial reports audited, and transferring remuneration setting responsibilities for the offices of the Financial Reporting Council, Australian Accounting Standards Board, and the Auditing and Assurance Standards Board to the Remuneration Tribunal. PwC 2

3 Key change Clawback of remuneration a requirement for listed disclosing companies whose financial statements have been materially misstated (in any of the previous 3 financial years) to disclose details of any reduction, repayment or other alteration to Key Management Personnel (KMP) remuneration, and if not, to provide an explanation of why not. Past, present and future pay a requirement to disclose KMP remuneration in three separate categories: i. Past pay: remuneration that was granted to the person before the start of the year and paid to KMP during the year ii. Present pay: remuneration that was granted and paid to KMP during the year, and iii. Future pay: remuneration that was granted to the person during the year, but is not to be paid to KMP until after the end of thepwc year. PwC - What this means Many companies already have clawback provisions in place, particularly in the case of a material misstatement of financial accounts, so this will not represent a significant change. While the legislation introduces a disclosure requirement for a company s clawback policy, the choice to clawback remuneration, and the nature (if any) of the clawback mechanism, remains with the board. Accordingly, there is flexibility for companies to broaden out the circumstances in which clawback may apply. For example, companies may like to impose a hindsight performance check ( if I knew back then what I did today, would I have awarded that incentive? ) or require the employee to comply with the company s code of conduct over the vesting period. The draft legislation refers to clawback taking the form of a reduction, repayment or other alteration. Due to this, we expect that clawback provisions will apply to unvested amounts only as opposed to also including cash amounts already paid. This reflects the trend to date. As the draft clawback disclosure requires a lookback over the past 3 financial years, companies may be inclined to increase their deferral periods to align with this timeframe. If this is not done, companies may have clawback provisions in place but may find themselves in the if not, why not category because they applied over an insufficient timeframe for the purposes of disclosure. While the intention of this change is positive, there are a number of challenges being: it delinks remuneration disclosed from company performance in the current financial year. This will likely require increased communication, particularly where a bonus was awarded in a prior year based on strong financial performance but is partially paid in a year of poorer financial performance; it is likely to lead to more complex and lengthy remuneration report disclosures (rather than having one remuneration table, three may now be required); and there is no clear guidance around how to provide the additional information, such as what is meant by the term amount paid. This could lead to increased complexity and a lack of consistency in determining amounts paid particularly for equity-based remuneration. For example, is equity-based remuneration that vested during the year but is still subject to a further holding period paid to the KMP during the year? 3

4 Key change Benefits on termination a requirement to disclose details of all benefits (including statutory and other accumulated payments specifically for termination, and post severance arrangements) given, or to be given, to all KMP upon their retirement from the company or a related body corporate. Remuneration governance framework inclusion of a description of the company's remuneration governance framework within the remuneration report or, if already disclosed elsewhere in the Annual Report, details of where the description is set out. Disclosure should include a description of the company s process for determining KMP remuneration. Options the requirement to disclose the value of lapsed options, and the percentage of the value of remuneration that consists of options, will be removed. Relieving certain unlisted companies from their obligation to prepare a remuneration report the requirement of unlisted PwC disclosing entities to prepare a remuneration report is removed. PwC - What this means Shareholders will have a more informed view of the total value of benefits that are provided to KMP upon termination of employment. This includes: statutory and other accumulated payments specifically for termination. Increased communication is likely to be required to explain and differentiate between those entitlements that are statutory and non-statutory, as well as those entitlements that are contractual and relate to prior service and those that have been negotiated at the point of termination (eg treatment of unvested equity); and post severance arrangements. Future benefits (such as consultancy or other arrangements) are often entered into after separation and it may not be known how long they will be in place. Further guidance is required regarding how this will be applied in practice. Many companies already disclose this information on a voluntary basis so this does not represent a significant change. The proposal enables companies to cross-reference to another area of the Annual Report, which avoids repetition. Where this information is not currently disclosed, shareholders will now have a higher level understanding of the company s remuneration governance framework and how KMP remuneration is set. As specific details of remuneration governance disclosures have not been legislated, each company has the flexibility to decide upon what disclosures they would like to make to meet this requirement. These are positive amendments as they lead to more simplified remuneration report disclosures. This amendment limits remuneration reporting requirements to those companies who are subject to the two-strikes rule. It represents a significant reduction to the regulatory burden on unlisted disclosing entities. 4

5 How PwC can help To have a deeper discussion about these issues, please contact: Sydney Debra Eckersley Ph: (02) debra.eckersley@au.pwc.com Emma Grogan Ph: (02) emma.grogan@au.pwc.com Alena Mackie Director Ph: (02) alena.mackie@au.pwc.com Melbourne Della Conroy Ph: (03) della.conroy@au.pwc.com Daryl O Callaghan Principal Ph: (03) daryl.ocallaghan@au.pwc.com PwC Legal Nick Brown Director Ph: (03) nick.brown@au.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it 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 limited by a scheme approved under Professional Standards Legislation. PwC 5

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