FY22 Remuneration Cycle – First You Learn, Then You Earn
As the Easter bunny calls time on another year and we count the cost of over-indulging in hot cross buns and chocolate, Remuneration Committees and Reward teams in June year-end companies start to seriously consider the upcoming remuneration cycle – making decisions for the year that has been (FY22) and the year that will be (FY23).
So, how will the FY22 remuneration cycle differ from others?
As we learn our lessons from the FY21 AGM season, supplemented with FY21 remuneration report releases for September and December year-end companies, a picture has started to form on the big-ticket items we expect some focus on and how to approach these issues:
1) Retention, retention, retention
What has happened?
The word on everyone’s lips.
The Great Resignation that wasn’t (in Australia at least) has not meant that some industries have not been hotly competing for talent. That competition has not been limited to executives, it has been an issue for the broader labour market.
At the executive level, one off time-based equity awards were made during the height of the COVID-19 pandemic to ensure the right management remained in place to lead the recovery (e.g. Vicinity Centres, Scentre, Aristocrat Leisure, Sydney Airport) with mixed reaction from proxy advisors. As COVID-19’s impact wears off and Australia experiences its Great Reshuffle, a number of companies have introduced awards which aim to guard against the competitive market for talent (e.g. Charter Hall, Adbri). Others have made such grants a fixture of their remuneration frameworks (e.g. CBA, Origin Energy).
Below the executive level, companies have brought forward fixed pay reviews, introduced retention awards out-of-cycle and / or provided a larger incentive pool for this group, to ensure the broader workforce is rewarded even where financial performance was below target (e.g. GPT Group, AMP).
What to consider in the upcoming remuneration cycle?
While retention doesn’t come cheap, nor does turnover and the disruption it brings. While working for a high performing team, job and educational opportunities and employer brand are all important factors in the attraction and retention of employees, in the current market cash can be king with anecdotal evidence indicating companies hungry for good talent are offering remuneration at a 10%-30% premium to current packages.
It is important to remember that one off, out-of-cycle grants outside of the key management personnel (KMP) group are not required to be disclosed in the remuneration report and so unlikely to attract attention. Acting quickly and decisively in relation to key people will provide you with the best protection against poaching (and waiting for the full revolution of the normal remuneration cycle may put you at risk).
Now that we have seen some of the design features that make retention payments more palatable to external stakeholders, if you are looking to retain KMP level talent, how are you designing your retention grants? How are you going to sell them to the market? Who is participating (who is key to your strategy in the next 2-3 years and are they KMP)? Before you get to that point, have you recently analysed the competitiveness of your remuneration not only against historical benchmarking data (which is going to be well out-of-date based on June and December reporting) but also data available from your regular search firm about what is being offered in the market today for certain roles to provide more comfort that your remuneration packages will ward off approaches from competitors?
2) The environment requires a long-term solution
What has happened?
Environmental measures in LTI plans make sense – for many companies, these changes are not overnight fixes and require long-term strategies.
Overseas, companies have recognised this and practice is certainly more advanced than in Australia – with Shell, BP and HSBC all having environmental measures linked to carbon emissions / sustainable financing in their LTI, with a weighting of 10-25%.
In Australia, AGL was seen as the first mover for environmental metrics in LTI plans in FY21, but since then a plethora of companies have announced the introduction of ESG measures into their incentive plans, partly explained by many December year-end companies operating in the Energy / Materials sectors. Whilst AGL received a “first strike” against its FY20 remuneration report, with its new environmental measure being criticised by some proxy advisers as being “day job”, the world seems to have moved on in the intervening two years and companies have continued to introduce such measures in the LTI (e.g. OzMinerals, South32), with (now) strong external support.
Currently, environmental measures are common in STI plans (e.g. Ampol, Incitec Pivot, Woodside). However, as a leading indicator, we expect Australian practice to mirror overseas practice, with a greater prevalence of ESG measures in the LTI.
What to consider in the upcoming remuneration cycle?
So is ESG the “new black”? The question to be asked is whether it is something you should be considering for your incentive programs? While it is all the rage, is it in fact your style? Or will it be your style next season? Or the next?
Rushing into ESG measures without a solid foundation on which to base plans and measures is fraught with danger.
However, if you have your organisational act together, sticking your neck out on ESG matters is no longer as dangerous as you thought it might be. Especially for the STI, but more and more so for the LTI. As with everything, the “sell” is the most important part. If you are considering incorporating such a metric, what will the goals be? How wide will the vesting range need to be (i.e. how much uncertainty is implicit in the target)? How does it align with your strategic objectives?
If you operate outside the Energy / Materials sector, where ESG measures have been focused on the “e”, the time is approaching where you need to give serious consideration to these matters (even if only to explain why not or why not now).
In the UK, it is common for financial services (FS) sector companies to incorporate “e” metrics in their LTI (e.g. Barclay’s, HSBC), a practice currently less common in Australia.
3) Bespoke incentive design and broader permeation of FS incentive design requirements
What has happened?
In the FS world, some companies have taken a pre-emptive approach to meeting the more onerous deferral periods required by legislation and APRA standards – by increasing STI deferral periods up to a market leading 4 years (e.g. QBE, AMP), aligning more closely with their LTI.
Beyond FS, whilst toeing the line was a safer bet in the past 2 years, companies are more willing to proactively explore incentive plan changes for FY23. Is relative total shareholder return still right for the LTI? Should the LTI only comprise of financial measures?
Whilst there has been much coverage of FS companies moving towards a material weighting towards non-financial measures to comply with APRA’s CPS 511 regulation, newly introduced strategic measures continue to gain popularity outside of the FS sector (e.g. Viva Energy, Atlas Arteria).
Historically earning the ire of external stakeholders for being “soft metrics” which are hard to quantify, it will be interesting to see how these measures are received in the wrap-up of December year-end AGMs.
What to consider in the upcoming remuneration cycle?
Where there has been a change to your company’s long-term strategy, is now the time to introduce non-financial measures to link executive reward to the achievement of this strategy? What is the appropriate mix between financial vs non-financial measures, or the pay mix between STI and LTI?
4) Putting up guard rails for the use of Board discretion
What has happened?
As the COVID-19 economic impact wears off, FY21 saw less use of Board discretion than the preceding year. However, more companies have turned their minds to introducing Board discretion frameworks to guide (not bind) the Board’s use of their discretion on incentive outcomes (e.g. Rio Tinto, AMP). Laying the groundwork now ensures that when the need arises for discretion to be exercised, an existing framework is in place to allow for its disclosure transparently and consistently.
What to consider in the upcoming remuneration cycle?
Introduction of a Board discretion framework as a guide. Whilst not intended to be prescriptive, to ensure the fair and consistent application of Board discretion and to ensure a shared understanding between the Board and management, is now the time to pre-emptively put in place some guard rails?
Whilst we expect a less tumultuous remuneration cycle this year as the economic impact of COVID-19 dissipates, if you haven’t already, now is the time for June year-end companies to pre-empt the key remuneration issues for your company and begin these conversations.
It’s time to put the pedal to the metal.