The global financial crisis has placed the nature and structure
of executive remuneration under increased scrutiny. The combination
of local and international events, particularly in the United
States where executive pay is a central point of debate in the
assistance being provided to that country's key financial
institutions, means that there will be stricter rules around
Proposal To Amend Corporations Act
The Federal Government has taken a first step in proposing to
amend the Corporations Act 2001 (Cth) to reduce the
threshold limit on termination payments before shareholder approval
is required. The cap on termination payments will fall from up to
seven times total annual pay to a threshold of just one year's
average base salary. It is a significant reduction, although the
approval for such payments remains with shareholders.
The Federal Government will also seek to widen the law from
covering only company directors to covering all executives named in
the company annual remuneration report. This includes broadening
the definition of 'termination benefit' to catch all
rewards and benefits.
The proposals would dramatically alter the current laws.
Presently the exception in the Corporations Act allows an executive
with three years' service or more to be paid an amount of up to
seven times that executive's average annual remuneration over
the past three years before shareholder approval is required.
Reducing the cap will likely lead to companies seeking
shareholder approval more frequently. The timing when such approval
is sought will be a matter for active consideration as will the
wording of the termination entitlements in a contract.
A Productivity Commission inquiry into executive pay has also
been announced. This inquiry will examine all issues relating to
executive remuneration, including:
The role of equity based payments and incentive schemes as well
as trends in executive remuneration in Australia.
The use of non-recourse loans.
Regulation of remuneration consultants.
Mechanisms that may better align the interests of a board and
executive with shareholders and the wider community.
The Federal Government is already awaiting a report from the
Australian Prudential Regulation Authority (APRA) on the framework
for the remuneration of executives in financial institutions.
However the Government's attention in this area appears to go
beyond just financial institutions. APRA's review combined with
that of the Productivity Commission, means this year will see a
comprehensive analysis of all executive remuneration.
It seems likely that significant changes are on the way, and
although the focus to date has been on the development of good
policy rather than ceilings on remuneration, the form of the
ultimate changes is not yet clear. What is clear is the increased
complexity around remuneration and the likely increase in
shareholder participation in the way a company remunerates its
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and should not be relied on as a substitute for professional
advice. Specialist legal advice should always be sought in relation
to any particular circumstances and no liability will be accepted
for any losses incurred by those relying solely on this
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