Alignment of pay and performance for executives was put into sharp focus with a third of S&P/ASX 100 stocks cutting dividends and directly impacting shareholder value during the height of the COVID-19 pandemic. Alongside employee pay cuts, company restructures and dilutive equity raisings, excessive remuneration to executives was viewed poorly by shareholders and proxy advisors alike.
It was, of course, a tale of two economies and shareholders were happy to support remuneration packages that adequately reflected company performance and held executives accountable to long-term shareholder value creation.
The use and disclosure of non-financial performance criteria in remuneration structures remains contentious. Following significant industry consultation, the Australian Prudential Regulation Authority (APRA) backed away from requiring APRA-regulated entities to have a 50% cap on financial measures for variable remuneration. It now seeks to require that a “material weight” be assigned to non-financial measures in order to embed governance, culture and risk into remuneration incentive frameworks.
This pursuit is noble, but it should be acknowledged that non-financial metrics can be opaque and obscure a shareholder’s ability to clearly assess executive outperformance. Strong disclosures, transparent targets (threshold, target and maximum) and demonstration that the variable remuneration is truly at-risk will be required to satisfy proxy advisors and shareholders.