Shareholders are as likely to vote against remuneration resolutions if they consider disclosures to be incomplete as they are in the face of excessive pay.
“Clear and precise disclosure of reasons for remuneration decisions is essential for shareholders to decide their vote, and companies need to ensure that the required detail is available in simple terms,” advised Laurence Grubb at the annual conference of the South African Reward Association (SARA), held on 5 and 6 November at Vodacom World in Midrand.
Remuneration policies are created, inter alia, to attract and retain the best executive talent. Balancing this objective with shareholder demands requires a clear understanding of a number of factors considered by shareholders in determining their votes.
Grubb suggested solutions to address the key concerns voiced by shareholders following a recent study conducted with 40 JSE listed companies by Khokhela Consulting, of which Grubb is the CEO.
Be transparent in disclosure of performance targets and measures
Actual targets and measures for all incentive schemes need to be clearly defined and disclosed, and must be aligned with the financial strategy and budgets.
“We advise that thresholds should be achievable 75% of the time and targets achievable 50% of the time while requiring significant effort,” said Grubb. “Stretch targets should however be set at levels that require impressive effort with results that are achievable 15-25% of the time.”
Selection of peer or comparator groups
Grubb suggests selecting companies for comparing performance using factors such as revenue, market capitalisation, industry, magnitude and location of operations and reasons for shareholders investing in the company.
“Structured remuneration design should align with company strategy and shareholder values and be funded by the additional performance required,” said Grubb. “Incentives should drive performance and encourage retention; it should never be implemented as a stand-alone retention scheme without performance requirements attached.”
Report on clawback policy
Actions around retrieving monies already paid out due to over incentivising key personnel should be published as part of the remuneration report.
This clawback policy should include the detail of adequate procedures to retrieve any or all bonuses should conditions of misconduct, misrepresentation or malus exist.
Encourage minimum shareholder requirements for executives
Shareholders consider Minimum Shareholder Requirements (MSRs) desirable as it ensures alignment with shareholders’ objectives by having ‘skin in the game’. Through MSRs, executives are encouraged to invest a substantial part of their after-tax bonus in the company, as it reinforces executives’ commitment to the success of the company by sharing the same earnings risks as shareholders.
“Irrespective of the contents of a strategy driving a chosen remuneration policy, companies need to remember that timeous disclosures and an increased level of transparency are imperative,” concluded Grubb. Engagement with board members, shareholders and proxy advisors is recommended when key changes are made to remuneration policies.
“Timeous transparent disclosure, balanced with keeping competitive information confidential, will lead to an improvement in how shareholders make decisions.”
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