As the end of the financial year approaches, ASX listed companies are again preparing their Remuneration Reports. Those tasked with writing the report may be wondering, “What can be simply rolled over and what needs to change?” In this article, we’ll share 3 must-haves for your Remuneration Report this year.

This year brings forth new dynamics and emerging trends that are set to impact the composition of remuneration reports. In contrast to previous years, where efforts were focused on addressing COVID-related issues, the current landscape will require attention to a strong link between executive pay and company performance, critical during challenging markets.

What can we expect investors and proxy advisors to hold under the microscope in 2023?

2022 witnessed the ripple effects of the pandemic, resulting in a surge of resignations and a restless workforce across sectors. Companies that have taken steps to address human capital challenges, like retention payments and sign-on bonuses, should recognise the importance of communicating these initiatives in their disclosures. While topics such as corporate law reform and ESG (Environment, Social, Governance) are gaining attention, insights from the US and UK proxy seasons (which annually precede ours) suggest that stakeholders are retaining a focus on financial metrics and pay-for-performance structures.

How effective are Remuneration Reports?

Each year, The Reward Practice evaluates the Remuneration Reports of a sample of 150 ASX companies in our database representing a cross section of all sizes and sectors. To understand effectiveness and quality, each Remuneration Report is given a rating based on three factors, i.e., level of disclosure, readability and accuracy.

The outcomes from our 2022 Remuneration Report analysis showed that there was a general overall decrease in the quality. As you can see in Figure 1 below, 30% of reports received a low ranking as compared to 19% in 2021. This was largely due to readability and accuracy.

Figure 1: Quality of Remuneration Report
Disclosure: The extent and quality of information provided to shareholders, it involves transparently disclosing relevant details about remuneration policies, structures, performance metrics, targets, and outcomes. 2022 Remuneration Reports provided less commentary around companies’ broader remuneration intentions outside KMPs (key management personnel) than 2021. There was also a slight drop in prevalence of cash based remuneration tables included in reports (see our blog Remuneration Reporting – What’s the Cash? : The Reward Practice).

Readability: A readable remuneration report uses clear and plain language, avoids excessive technical jargon or complex terminology, and presents information in a logical and organised manner. A recurring issue that affected readability scores in 2022 reports pertained to the separation and dispersion of long-term incentive (LTI) details throughout various sections of the annual report. Some companies had important information about their LTI plans mentioned outside of the remuneration report, often located in the financial statements section in a footnote.

Accuracy: Refers to the correctness, precision, and reliability of the content presented ensuring that the data, figures, calculations, and descriptions provided in the Remuneration Report are factual, up-to-date, and free from errors or misleading information. Over the past two years, whilst we have observed a slight improvement in the accuracy of Remuneration Reports we suggest there is room for improvement. A notable deficiency lies in accurately presenting the company’s remuneration policy and its alignment with strategic objectives, as many reports fail to clearly articulate this connection, leading to a lack of understanding among stakeholders. Additionally, the precise and correct usage of terminology in these reports, such as long service leave, long-term incentives, and post-employment benefits, is essential for clear communication of remuneration components and to prevent confusion. Another common issue is the reluctance of companies to deviate from standardised report formats, which often fails to address the unique context and circumstances of the company. It is crucial for companies to tailor their reports to reflect their specific needs, accurately representing their remuneration practices and alignment with company objectives.

But what about the number of pages?

We note the average number of report pages slightly decreased. In 2020 the average number of pages was 16, in 2021 it was 18, and in 2022 it was back to 16. In 2021, companies were expanding communication around their reactionary measures to COVID-19 which accounted for the greater lengths. Whilst we don’t necessarily think this holds a causal relationship with decreased quality this year, it is an interesting statistic.

What to include in your 2023 Remuneration Report – 3 must haves

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 are 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.

1. Providing a summary up front is critical

To open the Remuneration Report, companies should consider 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.

2. 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 conducted in December 2022 shows that the majority of companies planned to pay out STIs at 75% to 100% which should be commensurate with the company’s performance outcome. (See Figure 2 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. A growing trend to include ESG (Environmental, Social & Governance) targets in incentive programs 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 December 2022 (data from our December 2022 Remuneration Pulse Survey)

Again based on our December 2022 Remuneration Pulse Survey Report, some fixed remuneration changes were anticipated for company leaders this year (refer to Figure 3 below). To the extent there are increases above market expectations for 2023/24, details to support the increase will be important (e.g., external benchmarking, comparator group selection).

Figure 3: Anticipated increases in remuneration from Jan 2023 to December 2023 (data from our December 2022 Remuneration Pulse Survey)

3. Address “No” votes or weak support for last year’s Remuneration Report

In an unexpected turn, shareholder ‘no’ votes dropped in 2022 as compared to prior years, with 8% 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 2022 ASX Company Reporting review).

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). To address any remuneration contention from the previous year, we suggest that companies follow these steps.

1. Demonstrate an understanding of the drivers behind the negative outcome
2. Accept concerns as valid, then provide sound justification for the actions
3. Highlight any specific actions (and no actions) taken to address the concerns
4. Describe the ways in which shareholders were informed and engaged regarding this process

The Remuneration Report is a vital tool 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. Our team is well-equipped to provide valuable insights and guidance to enhance your Remuneration Reports, enabling you to effectively communicate your remuneration strategy and foster stakeholder confidence.

Contact us for a no obligation discussion to find out how we can assist with your disclosure requirements.

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