It Pays to Know

Arguably, in house remuneration expertise is more important to Australian listed public companies than ever. Successive changes to legislation, ASX guidelines, shareholder expectations and the views of professional bodies, proxy advisors and others have made it harder for directors to maintain the currency of their knowledge.

Simultaneously, the scrutiny of remuneration governance and outcomes by regulators and the market has increased dramatically. The ‘two-strike’ rule introduced in 2011 means that poor governance or design in relation to the remuneration of key management personnel (KMP) has the potential to change the control of the company via a compulsory spill motion (following a second consecutive strike).

The board has the ultimate responsibility for governing KMP remuneration, and the company secretary will typically be the custodian of the company’s policies at the board level. Yet in-house remuneration professionals play a significant role in working with the board and the company secretary to ensure that remuneration practices are not only reasonable but properly documented and governed, and are demonstrably appropriate to the changing circumstances of the entity. While it may take some time for a remuneration committee to recognise that internal practices are out of line with best-practices and the circumstances of the entity, a competent internal remuneration professional should be able to identify issues early and suggest they be considered for review or offer alternative approaches that may be more appropriate.

The role today combines administrative and advisory elements. It provides inputs to the development of policies, procedures and other relevant KMP remuneration documentation that form the remuneration governance framework, while assisting the board to ensure the framework is successfully applied internally. It provides advice and information to assist management in reviewing the remuneration of roles other than KMP roles. It acts as a liaison between the board’s remuneration committee and external remuneration consultants. To that end it provides external consultants with information relating to current remuneration practices, policies, procedures and rules. It also offers insights into internal issues that may need to be taken into account in making recommendations on KMP remuneration. Plus, it ensures that regulatory changes are acted upon promptly including obtaining legal and taxation advice and preparing submissions for management and/or the board as appropriate.

There is also a significant role for internal remuneration professionals to play in determining specific outcomes for KMP roles when consultants provide advice to the board. Generally speaking, a consultant will assess or recommend remuneration in the context of the role as it has been designed or is documented. Most consultants would provide scope for adjustments around their market-based recommendations to recognise individual differences such as the calibre of an incumbent, their time in role or other, exceptional factors. Consultants cannot account for such factors since making a judgement requires knowledge of the individual in the internal context of the entity. Therefore internal remuneration professionals can assist the board to take consultants’ advice and make adjustments to ensure that outcomes are appropriate to the internal context of the entity and those internal relativities and outcomes are considered.

The better performers build their personal credibility through deep technical and professional knowledge, exemplary customer service, attention to detail and clarity of expression. They are also very clear on who they serve on which matters. This entails being very clear on what constitutes information and what constitutes advice, especially in obtaining market information. It means being clear about who the in-house remuneration professional is representing when he or she appears before a remuneration committee. Any advice given in that context cannot be seen as independent of management, but that doesn’t mean it won’t be sought or it can’t add value to the deliberations of the committee.

High-performing internal remuneration professionals assist the company to improve remuneration governance, documentation and disclosure and make practical changes as the internal and external context changes from year to year. They have knowledge of emerging practices and can assist the board and the CEO to apply advice in a considered and sensitive manner.

As long as the governance of KMP remuneration remains of keen interest to various stakeholders and observers, the interactions between parties involved will be subject to scrutiny. Remuneration committees are responsible for ensuring that there is appropriate independence given and controls placed upon the various parties where necessary. Even if they become increasingly likely to seek independent advice, they will still experience a growing need for the support and guidance of credible in-house remuneration professionals who are able to manage their responsibilities to the CEO, the board and to shareholders. They will be able to add significant value to remuneration committees, which increasingly need to seek input from a large number of parties to identify approaches that are appropriate and effective.