Going Against the Grain – Being Globally Competitive with an ASX Ticker
What’s the Issue?
For ASX-listed companies, the triple combination of:
Cash annual fixed pay;
An annual short-term incentive (STI) generally awarded based on performance against a scorecard of financial and non-financial measures and delivered part in cash and part in deferred equity; and
An equity long-term incentive (LTI) that only vests based on performance against vesting conditions (generally including relative total shareholder return (rTSR)) over a three or four-year performance period,
has historically ‘ticked the box’ with Australian proxy advisor and local investor preferences in terms of an executive remuneration structure. However, for those competing for talent globally or for global ASX-listed companies, this structure is often too one-dimensional and proving insufficient to compete against international peers beyond Australian shores. This has been exacerbated by the war for talent that broke out towards the end of the COVID-19 pandemic.
Is there a halfway house in designing a globally competitive remuneration framework that does not leave Boards fearing the Annual General Meeting (AGM) as their Waterloo?
For employees who are not members of Key Management Personnel (KMP) and ‘behind the curtain’ of disclosure, there is more flexibility and room for creativity in designing fit-for-purpose remuneration arrangements.
However, the situation is different for those executives whose remuneration must be disclosed in the Remuneration Report (referred to as KMP in the Corporations Act).
Typical Australian vs North American Remuneration Frameworks
In The Name of the Game, the loudest noise typically arises for ASX-listed companies with North American operations.
What makes the market standard Australian remuneration framework uncompetitive in the North American context? Yes, North American companies typically have higher STI and LTI opportunity levels than their Australian counterparts but there are other differences aside from quantum alone.
Whilst it may be tempting to simply align one’s framework to that of a typical North American company to increase its ability to compete for North American talent, increasing ‘Money, Money, Money’ alone would almost certainly earn the ire of Australian proxy advisors (and through them, investors).
Beyond quantum, the delivery of any incentives in cash and service-based equity for merely ‘sitting in the chair’, tends to create tension.
Finding a Halfway House
Simply increasing quantum seems out of the question unless companies are prepared to Take a Chance [on Me] and wear a ‘first strike’ on their Remuneration Report. So, what are the alternatives?
Fixed pay? In its back pocket, fixed pay levels in Australia are generally higher than their North American counterparts, providing Boards with a ‘leg up’, given the certainty of fixed pay against the uncertainty of variable pay. However, this is not a complete solution nor viable for those hiring out of North America where this is more likely to simply ratchet up overall pay levels.
What about STI? A number of global ASX companies have made the brave step of delivering STI wholly in cash (and for multiple years now) (e.g. CSL and Worley), to increase the cash competitiveness of remuneration packages. Some have made this change (to an all cash STI) once executives meet a minimum shareholding requirement.
The underlying reasons for Australian proxy advisors’ (and some investors’) preference for some STI to be delivered in deferred equity are to ensure:
Executives hold a meaningful level of skin in the game (to mirror the experience of shareholders);
There is something to exercise malus / clawback over should some form of financial misstatement, omission or misconduct arise in future years; and
There is a retention tool by deferring a part of the STI to future years (rather than Winner Takes it All at the end of the financial year).
In theory, service-based equity can meet each of the above proxy advisor preferences, in place of STI deferral.
The biggest qualm is how to address the perception that service-based equity is a reward for merely ‘sitting in the chair’.
The first factor in considering this issue is what you call this element of remuneration. In North America it is often referred to as part of the LTI because it is long dated. However, in Australia an LTI has, during recent decades, been a performance-tested item (i.e. it only vests if certain performance conditions are met). Service-based equity is, more truly, a part of variable remuneration as its value changes in line with share price performance. While it is an incentive to see the share price increase, it is not a ‘bonus’ for outperformance (which appears to be part of the expectation for STI and LTI). As such, it should probably be called out as its own element of remuneration (i.e. a fixed annual equity grant). This should minimise Boards and remuneration Committees being the Man in the Middle.
Domestically, CBA and Origin Energy have introduced a pre-grant and / or a pre-vest assessment to accompany their service-based equity grants, whilst global player Worley’s Deferred Equity Plan has evolved over the years and is currently assessed against strategic measures. These ‘adaptations’ seem to have progressively generated greater acceptance at each year’s AGM vote, whilst still providing a stronger perceived value for participants than a traditional STI or LTI, increasing the retention effect.
Last but not least, what about the LTI?
Given North American practice of significantly larger LTI grants than we see in Australia, plus an additional payout for outperformance, competing on quantum alone is a big ask.
Increasing certainty for executives increases the value executives place on the remuneration framework, countering the need to be reliant on matching North America on ‘the dollars’. Many companies have, over recent years, introduced a strategic vesting condition into LTI plans, tied to strategy, albeit as a small component (10-20% weighting). This tends to provide a stronger line-of-sight for executives (and therefore they place more value on it) than share price / a total shareholder return measure which can, as a point-to-point measure, be influenced by market factors beyond the company or simply depending on when the start and end point for measurement is.
Is the Battle Worth the Fight?
Below the KMP level, away from the prying eyes of the public, ASX companies have near limitless flexibility to design remuneration arrangements. Many incorporate retentive elements (e.g. service-based equity) which at the same time, ‘stack up’ to peers in the markets they compete for talent in.
Is it time to send out an SOS for those C-suite executives whose remuneration is disclosed in the Remuneration Report?
Whilst the Report will be scrutinised annually, a number of ASX companies have shown that a ‘halfway house’ can be attained. Any ASX Board would be brave to swiftly swing its remuneration framework from the Australian to North American end of the pendulum in a single year, however, a multi-year transition towards a fit-for-purpose framework, supported by a strong communications program to both external and internal stakeholders can have investors saying I Do, I Do, I Do, I Do, I Do come AGM time.
Designing a more globally competitive remuneration framework goes beyond having to go toe-to-toe with overseas peers on Money, Money, Money alone. Instead, there are other design features that can be tinkered with to appease the multiple stakeholders involved without it being seen as an exercise in Gimme! Gimme! Gimme!
Going against the grain from the traditional ASX framework, with no guarantee of mutuality from external stakeholders, is a bold move for any Board. However, When All is Said and Done, for companies whose ‘real market’ extends beyond the shores of Australia, does it not make sense for the remuneration framework to align closer to the market in which it seeks to attract and retain talent?
Rather than being constrained by the country its stock exchange ticker is located in?