The Federal Government's legislation on executive pay has
passed through both houses of Parliament and is expected to take
effect next week. These changes were announced by the Government in
March 2009 in response to shareholder backlash against termination
benefits paid to senior executives, particularly during the GFC
when share prices were falling.
The intention of the Bill is to strengthen the regulatory
framework relating to the payment on termination of benefits to
company directors and key managers. The Bill caps executive and
managerial retirement/termination benefits at the equivalent of 12
months base salary unless shareholder approval is given.
In summary the Bill:
restricts the payment of termination benefits in excess of 12
months base salary to directors and executives without shareholder
broadens the scope of affected persons beyond directors and
officers of the company to include senior executives and key
management personnel. If the company is one to whom Section 300A of
the Corporations Act2001 applies, the
restrictions apply to the termination benefits for key management
personnel and the five most highly remunerated officers (if
different) of the entity, that is those who would normally be
disclosed in the company's remuneration report;
clarifies the definition of what is a termination benefit and
provides for a regulation making power to specify whether certain
types of payment are a termination benefit or not;
provides that if termination benefits exceed the cap and are
not authorised by shareholders they must be re-paid
prevents a person entitled to a termination benefit who is also
a shareholder from participating in a shareholder vote on their
termination benefits unless acting as a proxy;
increases the penalties for breach to up to $19,800 for natural
persons, $99,000 for a body corporate and the option of a 6 month
provides that for the purposes of calculating base salary it is
the average salary received during the last three years of service.
Where a person has held office for less than a year, then the
threshold will be adjusted on a pro-rata basis. The Explanatory
Memorandum to the Bill gives the example that where a director has
served for three months the threshold would be 1/4 of the annual
base salary and any benefit above this amount would require
These amendments apply in relation to a retirement from an
office or position of employment held under an agreement;
renewed or extended; or
after the day on which the Bill commences.
What should Employers do?
We recommend that employers:
concerned about the impact of the changes made by the Bill on
the termination payments that are payable to their executives or
concerned whether their executive contracts will comply with the
requirements of the Bill, should seek advice prior to the
commencement of the Bill;
seek advice prior to amending, extending or varying any
existing executive employee contracts;
seek advice prior to making or agreeing to make any payments to
directors, officers or senior executives on termination of
employment or resignation from office.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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