Alert

Who does this affect?

Directors, executives, remuneration committee members and their advisers.

What do you need to do?

Review current remuneration program and seek independent advice when implementing new executive remuneration arrangements or amending director or executive remuneration arrangements. Watch for further updates and release of legislation.

Authors
Diana Nicholson  
Partner

Joseph Muraca  
Senior Associate

Hannah Jones  
Solicitor

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Diana Nicholson  
Partner
T +61 3 9643 4229

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Sydney
Tim Bednall  
Andrew Gray  
Brian Murphy  

Melbourne
Murray Kellock  
Alison Lansley  

Perth
Nigel Hunt  

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The issue of executive remuneration is the subject of intense public debate and the reforms announced yesterday by the Rudd Government aimed at curbing “golden handshakes” are the first steps of government intervention to override the free market. It will be interesting to see the response of the business community to what is a populist measure.

Reforms to “golden handshakes”

Yesterday’s announcement flagged reforms aimed at decreasing the quantum of termination payments made to company executives.

Under the proposed reforms, shareholder approval will be required for any termination payment made to an executive exceeding one year's average base salary. Currently, the threshold is up to 7 times total annual remuneration (section 200F of the Corporations Act 2001(Cth)).

Not only do the proposed reforms severely reduce the threshold, the reference to “base pay” may also signal a further limit given base pay typically comprises only a proportion of total executive remuneration.

The reforms will also:

• extend approval requirements to cover all executives named in a company’s remuneration report, and

• broaden the definition of “termination benefit” to catch all types of payments and rewards at termination.

The proposed reforms will not affect existing contracts or termination payments.

Draft legislation is not yet available.

Productivity Commission review into executive remuneration

The Rudd Government also announced yesterday that the Productivity Commission (“Commission”), with the assistance of Associate Commissioner Allan Fels AO, will conduct a review into the regulation of director and executive remuneration in Australia (“Review”). The Review will complement the work already being undertaken by the Australian Prudential and Regulatory Authority on executive remuneration in financial institutions.

The Commission will examine the existing regulatory framework under the Corporations Act 2001, including shareholder voting, disclosure and reporting practices.

The Review will also consider:

• the trends in director and executive remuneration in Australia and internationally (including growth in levels of remuneration, type of remuneration being paid and the relationship between remuneration packages and company performance),

• the effectiveness of the existing framework for oversight, accountability and transparency of remuneration practices,

• the role of large local institutional shareholders in the development, setting, reporting and consideration of remuneration practices,

• any mechanisms that would better align the interests of boards and executives with shareholders and the wider community (eg role and approval of equity-based payments/schemes and tax treatment of these schemes), and

• the effectiveness of international responses to remuneration issues arising from the global financial crisis and their potential application domestically.

The Review will include a public consultation process under which interested parties may make submissions to the Commission.

The Commission is to deliver a report within 9 months and will make recommendations on improvements to the existing executive remuneration framework.

We will keep you updated with further alerts.