2021 ASX Company Reporting Season

2021 ASX Company Reporting Season

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With AGMs now wrapped up for the calendar year 2021 we look back on executive remuneration, the key takeaways and perhaps some clues for what’s ahead in 2022.


Key takeaways

 

  • Shareholder ‘no’ votes on Remuneration Reports close to long term trend – a total of 10% of ASX300 companies recorded a ‘strike’ on their Remuneration Report in 2021 (see Fig 1 below). This outcome is relatively consistent with the long term trend of 9% of companies per year since the ‘two strikes rule’ was introduced back in 2010. Reasons for shareholder concerns this year range from performance measures not challenging enough (e.g., Whitehaven Coal), poor disclosure (e.g., Scentre) and of course protest votes relating to broader company issues (e.g., Westpac)
  • Total remuneration above pre-covid levels with boost from incentives – whilst fixed remuneration generally regained what was lost over the last couple of years, short term incentive (STI) payouts were plentiful and long term incentives (LTI’s) values benefited from rebounding share prices. Our analysis of a sample of 150 ASX company CEO’s (all sectors all sizes) noted a median increase in total remuneration of 28% (fixed + STI + LTI).
  • Exercising discretion having mixed results – shareholders seemingly welcoming ‘negative’ discretion reducing payouts for executives (FMG removed STIs for management following Ironbridge project issues; Ansell (adjusting STI payouts downwards following windfall gains). Those companies that exercised ‘positive’ discretion resulting in favourable outcomes for executives included Dexus (expected adjustment to recognise impact of increased funds from operations).
  • ESG featuring in incentives – now moving beyond just a ‘fad’, economic social governance (ESG) is now featuring in more executive remuneration programs. This year we have seen a number of companies across industry sectors feature ESG metrics in short and long term incentives including South32 (safety, community and climate change), Champion Iron (GHG emissions), Endeavour (responsible sale of alcohol), Goodman Group (environmental and sustainability hurdles).
  • Executive retention awards on the radar – a topic of great interest this year as companies looked to shore up their key talent. Our analysis of a sample of 150 ASX companies (all sectors all sizes) noted approximately one quarter made a retention award this year with most in equity which vested over 2-3 years. Examples included Stockland, Webcentral, Energy Resources of Australia and Ampol.

As companies now shoulder into a more positive short-term outlook with boarders re-opening (albeit with some navigation required through supply chain disruptions) what seems apparent for executive remuneration is likely heightened scrutiny where payments are not aligned with shareholder and community expectations.

Rem Report Voting Outcomes

As the AGM season marches on, we continue to track shareholder voting on the Remuneration Report for ASX300 companies. To date there has been 169 ASX300 companies who have had shareholders vote on their Remuneration Report.

 

The percentage of companies (from the ASX 300) which have received “strikes” (greater than 25% of eligible shareholders vote against) or “near misses” (between 15% to 25% of eligible shareholders vote against) on their Remuneration Report voting is trending slightly lower than 2020.  Figure 1 illustrates voting outcomes in 2021 to date compared to prior years.

 

Fig 1.
graph of AGM voting outcomes from 2018 to 2021

 

So what are the themes surrounding the voting?

 

  • Performance and pay misalignment – the payment of incentives despite the company making a loss or not performing as well as expected
      • Whitehaven: Executives awarded STI payments despite company receiving three production downgrades.
      • Transurban: Bonuses and sign-on grants were seen as excessive given the decline in income over the 12 month period.
      • Insurance Australia Group Limited: Paying of bonuses despite management errors that cost the company more than $1.5 billion.
  • Protest votes – more about company performance than just remuneration
      • Crown Resorts: Lingering governance issues.
      • Rio Tinto: Investor concerns over last year’s destruction of ancient rock shelters in Western Australia.

Some other unique company circumstances:

  • Technology One: Disapproval of Board discretion of LTI vesting despite targets not being achieved.
  • Transurban: ‘Executive-specific’ measures for STI’s deemed inappropriate and as part of their job.

With 30 June year end annual reports now released, our latest analysis of the ASX300 provides insights on the various measures taken (or not) by those companies who received a ‘strike’ on their previous remuneration report.  Though the response details did vary based on company’s individual context, some interesting themes emerged.

Most companies responded with several changes

While ‘changes to variable pay structure’ and ‘enhancing disclosure’ were the responses most used, the majority of companies (approx. 75%) used a combination of responses. Almost 60% of companies implementing a change in pay structure also had a change in quantum as part of their response. We noted only two companies responded with a change in pay structure only.

Some companies didn’t respond at all

Although an acknowledgement of (and response to) the strike is a requirement under the Corporations Act, three companies failed to disclose changes in response to their strike. Whilst a legislative requirement should provide reason enough for companies to take action, the broader implications of a ‘strike’ on the remuneration report for boards and executives can be profound including reputational damage and the potential of loss in enterprise value.

 

 

Plenty of changes in variable pay structures

With pay and performance misalignment being shareholders’ top concern from our research last year approximately six in ten companies responded to their strike by changing elements within their variable pay structure. For example, AMP  increased the deferral component of their STI from 40% to 60% while Carnarvon Petroleum, Lendlease Group and Sigma Health also introduced deferral components ranging from 25% – 50%. STI performance measures were also tweaked in response to shareholder concerns with Bapcor increasing the emphasis on ESG metrics and AP Eagers and Accent both restructuring their incentive plans with a balance of financial and non-financial metrics.

Increasing transparency and enhancing disclosure

Enhancing communication of remuneration details is also a key concern of shareholders and was the second most popular response, with a third of the companies pledging to provide a more detailed disclosure. There are various aspects to remuneration transparency and disclosure may have different points of focus for individual organisations. For example Inghams Group aims to improve its transparency through disclosure of LTI targets retrospectively; Clinuvel Pharmaceuticals has decided to provide transparency to measures not market sensitive whilst Ive Group and Mount Gibson Iron have also disclosed more detail relating to their incentive payments.

 

Though increasing disclosure of remuneration components is a popular reaction among those who have received a strike, interestingly TRP analysis of ASX300 Remuneration Reports shows the level of disclosure has not changed substantially in relation to previous years.  The level of disclosure in FY21 is almost at an identical level to what it was in FY20, perhaps indicating some boards’ reluctancy to change unless ‘poked’ by some aggrieved shareholders.

Metals & Mining CEO Remuneration Updates

 

As company reports continue to roll in, we ran some early analysis to understand remuneration changes for CEOs of Metals & Mining Sector companies who have been in the same role for the last two years.

 

What is the data is telling us?

 

  • Fixed pay increases on average 7% – with the backdrop of some catch up footy from little to no pay increase in 2020, and most commodities having a sterling run over the last year (which has been largely translated into significant TSR movements), many CEOs in our sample have seen substantive increases. Estimates from our May 2021 Pulse Survey indicated 2-3% which is well below the actual data from the sample to date
  • Reduced number of maximum Short term incentive payouts – 17% of companies from the sample awarded the CEO 100% of maximum STI, well short of the 28% we saw from the same group of companies last year. Given the strong performance of the sector, this was a surprising outcome and may reflect boards exercising downward discretion in consideration of factors beyond the scheme mechanics
  • Increased LTI grant value – the overall levels of LTIs awarded were higher than the previous year. When looking at the value of LTI grants as a percentage of base salary, there is a noticeable increase in the average, from 82% in 2020 to 98% in 2021.

More detailed breakdown of the TRP database will be provided later in the year and upon the completion of the reporting season. This will include analysis of TRP 150 (comprising all sectors) and the ASX300 Metals and Mining Index.

YTD Remuneration Report Voting Outcomes

As at 10 September 2021

Below we’ve charted the Remuneration Report voting outcomes of 43 ASX300 companies for the 2021 AGM season to date. So far we have noted slightly higher instances of strikes and near misses than in previous years. We will provide another update as results come to hand.

Remuneration Report Voting for ASX300 companies

Our observations of responses to ‘strikes’ indicate most companies (20 out of 23) have made changes ranging from significant structural redesign to enhancing the disclosure and transparency (particularly with hurdles relating to incentive plans). Some specific actions companies have taken include:

  • Enhanced disclosure – in addition to greater supporting rationale for ‘why’ remuneration approaches have been adopted. ING, for example has included disclosing targets for past STI awards.
  • Governance – a growing trend to introduce a minimum shareholding requirement for executives and NEDs typically around 100% of fixed remuneration (Bapcor, ING, Sigma)
  • LTI – increasing performance periods from 3 years to 4 years (AP Eagers, Northern Star, Sandfire).
  • STI – introducing deferral (LendLease, Sigma Health) and gateways (Carnarvon Petroleum – share price, QUBE – safety)

Strike Responses Tracker

A total of 28 ASX300 companies recorded a ‘strike’ against their Remuneration Report in 2020. We have grouped responses to the ‘strike’ into 6 main categories which are illustrated in the chart below.

Main response categories

  1. No changes in response to shareholder concerns
  2. Change to variable pay structure (E.g.,changes to measures, weighting, performance period or vesting schedule)
  3. Change to quantum (E.g., reduced fixed remuneration or STI/LTI opportunity or max. opportunity, NED fees)
  4. Formalising use of discretion (E.g., framework or formal approach disclosed)
  5. Disclosure/communication enhanced (E.g., improvement in disclosure of STI outcomes from prior year)
  6. Other
*What is a strike?

If a company’s remuneration report outlining salary and incentives of key management personnel (KMP) receives a ‘no’ vote of 25% or greater from shareholders at the annual general meeting, the company receives a first ‘strike’.

If the following year’s remuneration report also receives a ‘no’ vote of 25% or more, the company receives a second ‘strike’. When a second ‘strike’ occurs, shareholders vote then and there to decide whether company directors must stand for re-election. This is known as a ‘spill’ vote. If the spill vote passes (i.e., 50% or more of eligible votes cast), a spill meeting is held within 90 days and the directors stand for re-election.

See our blog “10 Years On Does The 2 Strikes Law Really Matter?” for more information.

About this resource

Leveraging data and tools from our research platform, The Reward Practice has developed this resource for the 2021 ASX reporting season to keep you updated on key ASX300 executive remuneration and governance insights as they happen.

Data is gathered from the most recent 2021 Remuneration Reports, and translated into our weekly commentary including insights relating to:

  • Remuneration structures – how prevalent will companies use retention grants to manage an uncertain future? Is deferring some/all of STI growing in prevalence as companies seek to manage unforeseen events?
  • Fixed remuneration – with many companies restraining pay last year, some industries now experiencing growth and retention concerns, will we see material fixed pay increases?
  • Incentive measures – will non-financial measures adopt greater weighting in STI and LTI plans? Environmental, Social, Governance (ESG) is a key consideration but how will it feature within executive incentive plans?

We have also developed an ASX300 Remuneration Report tracking tool to provide insights on:

  • Rem ‘strike’ responses – company responses on remuneration matters since receiving a ‘strike’ last year
  • Shareholder voting outcomes – how shareholders have responded to 2021 Remuneration Reports including ‘strikes’ and near misses
  • Remuneration Report quality – who is doing it better than others? Our assessment of the 2021 Remuneration Report readability, accuracy and disclosure

The aim is to monitor and consolidate remuneration concerns, trends and actions and have this page serve as an informational reference for our readers as the 2021 reporting season progresses.