As we near the end of the financial year here in Australia, companies begin to prepare their Remuneration Reports. Those tasked with composing the report this year may be wondering, “What can be simply rolled over and what needs to change?”
After all, the last couple of years required some extra attention to specific areas which may not be as front of mind for investors this year. Unexpected adjustments due to COVID-related influences on remuneration were made on the fly, and the importance of explaining them was critical.
So this year, what can we expect investors and proxy advisors to hold under the microscope?
The past couple of years saw many companies focused on ‘damage control’ measures to minimise the financial detriments of the pandemic. (E.g. ensuring salary and incentive expectations were met despite difficult working conditions.) Remuneration reports reflected that. This year, we are seeing the aftershock ripples of COVID through the number of resignations and a seemingly restless workforce across all sectors. Companies that have made significant adjustments to address any challenges related to human capital for example, (e.g. retention payments, sign-on bonuses, etc.) should recognise that investors and proxy advisors will want to hear about it.
It can also sometimes be helpful to look for clues in the unfolding US and UK proxy seasons, which annually precede ours. Recent insights from the United States indicate that stakeholder priorities will revert back to a focus on financial metrics and pay-for-performance structures as companies move away from discretionary awards and other pandemic-induced responses. It is clear that the ‘surprise’ element of the pandemic is no longer applicable.
What makes for an effective Remuneration Report?
Each year, The Reward Practice evaluates the Remuneration Reports of over 150 companies in our database representing a cross section of companies of all sizes and from various sectors. Each Remuneration Report is given a rating based on the overall quality (e.g., level of disclosure, readability and accuracy).
Our analysis of Remuneration Reports for 2021 showed that there was a general overall improvement in the quality. This was largely in the areas of accuracy and readability. We note the average number of pages slightly increased in the last two years from 16 to 18 pages. Whilst we don’t think this necessarily holds a causal relationship with increased quality it does indicate that Remuneration Reports aren’t getting any shorter!
Figure 1: Comparison of Remuneration Report Quality (approximately 150 companies)
What to include in your 2022 Remuneration Report
We have previously written about how to improve the quality of a Remuneration Report from a structural and compositional standpoint. (Read 3 Strategies To Improve Your Remuneration Report). However in this article, we’re focusing on specific sections, chapters or references to include so that the company’s remuneration storyline and the rationale behind it is clear to all stakeholders. A.K.A. some of the key signals that your investors are looking for this year.
Providing a summary up front is critical
To open the Remuneration Report, companies should provide an introductory letter from the Remuneration Committee Chair or, alternatively, provide a summary of key highlights for the year. In the context of business performance, your investors want to understand (right up front!) what have been the remuneration highlights over the year (positive or negative) and what is planned for next year. Remember that in addition to the actual changes, shareholders and analysts will be seeking details as to the rationale behind them to assess whether they align with their interests.
Commentary this year may include insights (what, how and why) for things like increases to fixed remuneration, issuing retention payments, sign-on bonuses, or anticipated remuneration framework changes for the year ahead. As noted above, the surprise element of the pandemic is unlikely to be applicable and companies should avoid using this as a crutch in support of pay outcomes in 2022.
Comprehensive disclosure for incentive outcomes and pay increases
Any level of payment for short-term incentives (STI) or vesting of long-term incentives (LTI) is likely to receive attention from investors. Data from our Remuneration Pulse Survey Report released in December 2021 shows that the majority of companies plan to pay out STIs at 75% and higher which should be commensurate with the company’s performance outcome. (See Figure 1 below.)
Sufficient detail on metrics, assessment process and overall outcomes will be needed to support the alignment between executive reward and overall company performance. This is especially important when it comes to non-financial metrics and related incentive payments. As an example although a growing trend to include in incentive programs, ESG targets can be more difficult to measure, so we suggest being as clear as possible about the why when payments are issued. It can also be beneficial to illustrate the link between executive pay and company performance over time.
Figure 2: Anticipated STI payouts from Jan 2022 to December 2022 (data from our December 2021 Remuneration Pulse Survey)
Again based on our latest Remuneration Pulse Survey Report, some fixed remuneration changes were anticipated for company leaders this year (refer to Figure 2 below). To the extent there are increases above market expectations for 2022/23, details to support the increase will be important (e.g., external benchmarking, comparator group selection).
Figure 3: Anticipated increases in remuneration from Jan 2022 to December 2022 (data from our December 2021 Remuneration Pulse Survey)
Address “No” votes or weak support for last year’s Remuneration Report
During 2021 shareholder ‘no’ votes continued at similar levels to prior years with 10% of ASX300 companies receiving less than 75% support for their Remuneration Report. In many of these cases similar themes contributed to the opposition including performance measures not challenging enough, poor disclosure and of course protest votes relating to broader company issues (see our 2021 ASX Company Reporting Season update).
For any company that received a substantive “No” vote on its Remuneration Report last year, investors will expect the Remuneration Committee to provide a response addressing the concerns (known or perceived). (See our 2021 ASX Company Reporting Season review.) To address any remuneration contention from the previous year, we suggest that companies follow these steps.
- Demonstrate an understanding of the drivers behind the negative outcome
- Accept concerns as valid, then provide sound justification for the actions
- Highlight any specific actions (and no actions) taken to address the concerns
- Describe the ways in which shareholders were informed and engaged regarding this process
The Remuneration Report is meant to explain how remuneration drives and rewards company performance. Remember to use it as an opportunity to illustrate how the company’s remuneration framework supports strategic goals, manages risk and prioritises returns to shareholders.
The Reward Practice is an independent Australian remuneration consultancy that works with both public and private companies of all sizes and stages. One aspect of our service is helping public companies hone their Remuneration Reporting to align with stakeholder expectations.
Contact us for a no obligation discussion to find out how we can assist with your disclosure requirements.