As we reach the end of the financial year, companies begin preparing their annual reports and one of the most widely read components is, of course, the Remuneration Report.
An effective Remuneration Report not only ensures compliance with relevant disclosure legislation, but should also function as a key communication tool between an organisation and its stakeholders. It’s an opportunity for companies to paint clear pictures of remuneration policies as they align with strategic business goals and explain the who, what, why, when and how of the remuneration backstory.
The past 12 months saw many companies make remuneration adjustments on the fly in response to pandemic related influences. Companies affected by COVID-19 are under scrutiny regarding government grants and support payments that may have then formed bonuses and incentive payouts. These are examples of factors that may cause unexpected remuneration related disparities in annual reports. Companies should be prepared to discuss the reasoning behind them.
So how effective are Remuneration Reports?
Each year, The Reward Practice evaluates the Remuneration Reports of 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). See our analysis below.
What did we find?
1. Report length does not necessarily equate to quality – Remuneration Reports of 10-20 pages tended to receive a similar rating to those with more than 20 pages.
2. Some sectors are better than others – overall, companies in the financial and real estate sectors produced higher quality Remuneration Reports than the other sectors
3. Company size is a factor – while small companies often have simpler remuneration structures, the remuneration disclosures and readability are often lacking.
Who were the best?
Based on our analysis, TRPs top 6 (excluding those we prepared!) were South32, Regis Resources Ltd, Commonwealth Bank, Aspen, Byron Energy and OFX.
Strategies to Improve Remuneration Reports
Here are 3 strategies you can use to improve your Remuneration Report.
1. Readability – one voice
Readability begins with a clear understanding of your target audience who may include:
- Internal stakeholders e.g., CFO who is particularly interested in compliance requirements;
- Investors both institutional and retail who are interested in transparency and ‘plain english’ which is simple to understand; and
- Proxy advisors who are interested in alignment with their guidelines on practices and disclosures.
Determining the right emphasis to place on a particular audience (end therefore what ‘voice’ will be most effective for the Remuneration Report narrative) can vary depending on the particular circumstances facing the Company at the time. For example if a Company is responding to a ‘strike’ the emphasis may be a balance between satisfying proxy advisor / institutional voting guidelines and the Corporations Act (Section 300A) which requires specific details on proposed actions, or, if the Board does not propose any action, the Board’s reasons for inaction. Alternatively if retail investors such as the Australian Shareholders Association (ASA) have previously expressed a lack of understanding regarding an incentive outcome this may require more explanation and perhaps use of illustrations to convey the information.Readability is also about using clear and appropriate language and tone when communicating the remuneration policy, including any technical language only where called for. Improved readability can be achieved by breaking up long paragraphs, avoiding run-on sentences and including things like numbered lists, bullet points, charts and graphs to articulate ideas.
2. Structure – simple navigation
Let’s face it, Remuneration Reports have become ‘overweight’. Whilst our 2020 analysis of TRP150 Remuneration Reports indicates an average length of 15 pages, length can vary from as little as 3 pages and as long as 38 pages! Whether the audience is an institutional investor, proxy advisor or a retail shareholder, they are unlikely to have the focus required to thoroughly comprehend the report from start to finish.
- Always start with a Table of Contents (TOC) to help investors quickly jump to the information they want within the Remuneration Report (use hyperlinks if possible)
- Present information in a logical order that supports your strategic direction and tells a story.
- Use an executive summary or letter to shareholders. Begin with a description of key themes or events during the year which influenced remuneration outcomes before delving into details of base pay, incentives and bonuses for company personnel.
- Bring to life the reward strategy and framework with illustrations including charts or graphs where appropriate.
3. Disclosure – tell the story
Many Remuneration Reports we have reviewed are dull and heavily focussed on compliance requirements. More progressive companies are producing documents that are marketing focussed, illustrative and provide a window into the organisational culture.
- Include any additional disclosures which go beyond the statutory tables and provide a greater level of understanding about not just what was paid but how and why. For example:
- Inclusion of cash tables showing what actual earnings for the period
- How an individual’s remuneration outcomes were achieved considering individual performance against target/stretch measures
- Provide clarification on any large differences (especially above market remuneration increases) from one year to the next. Give reasons for the variability.
- Consider disclosure of the type and outcome of STI and LTI performance conditions. Explain why they were selected and how they aligned with business strategy.
Other helpful tips for preparing your Remuneration Report
- Consult internal stakeholders regarding the strategic direction the company wishes to take with the report. Check in with the Remuneration Committee, CEO, CFO and Company Secretary regarding important themes that should be included prior to any other action.
- Demonstrate the links between business objectives and shareholder value and how the remuneration strategy supports them. This is the ultimate goal of your Remuneration Report.
- Put yourself in the shoes of external stakeholders. Ask yourself, “What extra information would I need in order to understand the data that is being presented here?” Acknowledge that they won’t have the same “view from the inside” that internal stakeholders do.
- Start drafting your report early! Allowing ample time for the input of key stakeholders and multiple revisions will provide you with a better outcome.
We advise companies to take a conscientious approach to 2021 remuneration reporting. While there were few changes to legislative requirements for remuneration disclosures this year, there are other factors to consider this year given the effect of the pandemic on remuneration outcomes.