Contributions to this article by Jasmine Sprange
Key Points:
ASIC identified its key concerns for 2011 remuneration reports.
As companies prepare for the release of their 30 June 2011 financial reports, ASIC has identified three areas for improvement in this year's remuneration reports:
- the board's policy on the nature and amount of remuneration of the key management personnel[1] (KMP);
- performance conditions in incentive plans;
- the terms and conditions of incentive plans.
This follows the Commission's review of 60 remuneration reports from 2010.
As well as identifying where reports could be improved, ASIC has provided real-life extracts from reports which have, in its view, provided "better disclosure". The underlying objective is to enable shareholders to understand the nature of KMP remuneration (including performance hurdles) and the relationship between performance and remuneration.
Remuneration of key management personnel
The remuneration report must disclose the board's policy for determining the nature and amount of KMP remuneration.
The main failing here, in ASIC's view, is that many companies outline the policy in very broad terms and do not distinguish between the nature and the amount of the remuneration.
Going further, it lauded reports which provided information on:
- factors considered by the board when setting the amount and/or the nature of remuneration
- the level at which remuneration is set, relative to the market or a comparator group (along with information on that comparator group).
Non-financial performance conditions
ASIC identified three problems in the disclosure of non-financial performance conditions in short-term incentive plans:
- where the incentive was subject to both financial and non-financial performance conditions, there was often less information about the non-financial than the financial conditions;
- non-financial performance conditions were sometimes identified in such broad terms that it was difficult to see what outcomes they were intended to achieve;
- targets were not always disclosed (for both financial and non-financial conditions).
Another disparity between financial and non-financial performance conditions was that, although companies generally explained why particular financial conditions had been chosen, they sometimes did not explain why non-financial conditions had been chosen.
Incentive plans
ASIC had two areas of concern in relation to the disclosure of the terms and conditions attaching to cash bonuses, performance bonuses and share-based compensation.
The first was that, although the Corporations Regulations provide a list of disclosable terms and conditions, that list is not exhaustive. ASIC cautions that terms and conditions which are material to a shareholder's understanding of the remuneration arrangements should be disclosed even if they are not on the list.
The second concern related to benefits that are subject to the discretion of the board. ASIC says that companies should consider disclosing any conditions which govern the discretion (such as a change of control or termination of employment).
The report and examples
The report – incorporating the best practice examples chosen by ASIC – is available here.
1. "Key management personnel" is defined in AASB 124 as "those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity."
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