Composing an effective remuneration report in 2024 is about more than addressing the laundry list of regulations in the Corporations Act1. The remuneration report serves as a window into a public company’s principles regarding pay and performance. Not only should it comply with Corporations Act disclosure requirements, but it should also serve as an important means of communication between an organisation and its stakeholders.
To offer some context, the conclusion of the 2023 AGM season in Australia showed an unprecedented surge in shareholder ‘no votes’ and resulting ‘strikes’ on remuneration reports – a whopping 13% strikes and 13% near-misses. This was an increase of 6% from 2022 and the highest recorded instance of strikes since the introduction of the ‘Two strikes’ rule in 2011. While a range of varying investor concerns may influence voting outcomes each year in the form of ‘protest’, those tasked with composing the company remuneration report will want to be duly certain that the quality of the report itself doesn’t become a point of failure. We classify 15% to 25% ‘no’ votes as a ‘near miss’.
The ‘two strikes’ ruleIf a company’s remuneration report receives ‘no’ votes of 25% or greater from shareholders at the annual general meeting, the company receives a ‘first strike’. If the same occurs the following year and a company receives a ‘second strike’, shareholders vote then and there to decide whether company directors must stand for re-election. (Known as a ‘spill’ vote.) |
Fig. 1 View a short clip from our February 2024 client event where we discuss the dramatic spike in votes against ASX300 companies’ remuneration reports.
Helpful tips for preparing your Remuneration Report
To make sure your remuneration report not only meets Corporations Act requirements, but also meets proxy advisor and shareholder expectations, here are our top tips.
Internal consultation
Before you begin writing, consult internal stakeholders regarding the strategic direction the company wishes to take with the remuneration report. Check in with the Remuneration Committee, CEO, CFO and Company Secretary regarding important themes that should be included. Flag any unusual or contentious pay and performance metrics and provide clear guidance on intended future changes.
External consultation
Engaging with external stakeholders (large shareholders, proxy advisors) throughout the year and leading up to AGM season can help garner support for remuneration decisions and the resulting report. Communication should be an ongoing and consultative process. Drafting a more effective remuneration report with peer insights will help communicate the reasoning behind your executive pay policy.
Include an Executive Summary
While it’s not mandated, we note that companies receive positive feedback for opening with an Executive Summary or a “Letter from the Remuneration Committee Chair” to shareholders. This summary typically includes key company performance outcomes, Key Management Personnel (KMP) remuneration for the year, and significant changes to structures like KMP, STI, or LTI structures. This concise disclosure makes the key messages easier to digest.
Explain Benchmarking Methodology
When using a peer group or industry survey to benchmark Key Management Personnel (KMP) remuneration, companies must disclose the criteria used to select the peer group. This disclosure, required under section 300A of the Corporations Act, should cover both objective and subjective factors like company size, geographical reach, and industry category. For companies setting KMP remuneration at a specific percentile of the market, such as market median or above-market rates, the disclosure should clearly explain why this approach is suitable and appropriate.
Detail Performance Measures and Goals
According to section 300A(1)(ba) of the Corporations Act, if a portion of the remuneration depends on meeting performance conditions, companies need to provide several disclosures. This includes summarising the performance condition, explaining its purpose, and outlining the method used to assess whether it was met. Additionally, it’s considered good practice to clarify the threshold, target, and maximum levels for performance goals, allowing shareholders to understand the benchmarks used.
Tie it all together
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. 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.
And……start early!
Start drafting your report early! Allowing ample time for the input of key stakeholders and multiple revisions will provide you with a better outcome.
Contact us
The Reward Practice offers remuneration report writing services for companies, as well as “health checks” with high level review commentary considering style, structure and areas which may require attention. For an assessment of your company’s Remuneration Report and how it may be improved, contact us today.
1 Section 300A and Regulation 2M.3.03 are applicable to companies which are disclosing entities