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What do you need to do?Consider the implications of the Regulations for executive employment contracts and remuneration arrangements.
Kate Johnson
Solicitor
Alison Lansley
Partner
T +61 3 9643 4187
Diana Nicholson
Partner
T +61 3 9643 4229
Sydney
Tim Bednall
Andrew Gray
Brian Murphy
Melbourne
Murray Kellock
Alison Lansley
Diana Nicholson
Perth
Nigel Hunt
On 3 September 2009, the Government released the final regulations and explanatory material relating to the proposed reforms to termination payments (Regulations), which define “base salary”, clarify and expand the types of benefits that are (and are not) subject to shareholder approval and prescribe circumstances in which a benefit is given in connection with a person’s retirement.
Regulations
The key changes proposed by the Government to restrict director and executive termination payments are summarised in our previous alert. The Regulations accompany the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 (Bill). This is the third iteration of the Regulations.
Meaning of “base salary”
“Base salary” is essentially defined under the Regulations as fixed remuneration. Its components are important as no more than one times their annual aggregate can be paid as a termination benefit without shareholder approval. The components are defined as:
- short-term employee benefits (such as cash salary, fees, short-term compensated absences, non-monetary benefits and other short-term employee benefits)
- superannuation contributions, and
- share-based payments (including equity and cash settled share-based payments and all other forms of share-based payment compensation)
where those benefits or payments are not dependent on the satisfaction of a performance condition and are paid during the relevant period (generally the last 12 months of service).
Base salary also includes a liability or prospective liability to pay fringe benefits tax on the above amounts.
Meaning of “benefit”
“Benefit” is defined broadly in the Bill to include most valuable consideration. The Regulations then prescribe certain payments that also constitute a “benefit”.
What is a benefit?
The benefits prescribed in the Regulations - in addition to the broad list included in the Bill - include:
- payments from any kind of pension (other than from a superannuation fund or superannuation annuity (including both Australian and foreign funds)
- amounts paid as a voluntary out of court settlement in connection with the termination of employment (not including other types of actions such as those relating to unfair dismissal, harassment or discrimination), and
- payments made as part of a restrictive covenant, restraint of trade or non-compete clause.
What is not a benefit?
The Regulations also prescribe that certain “things” are not benefits. However, importantly, the provision of one of these “things”, called a deferred bonus, is nevertheless restricted in some cases - this is discussed below. The “things” that are not benefits include:
- payments from a defined benefits superannuation scheme already in existence
- genuine accrued benefits that are payable under law (eg annual leave or long service leave)
- reasonable payments made in accordance with a policy that applies to all employees as a result of a genuine redundancy having regard to the person’s length of service
- payments required by law of a foreign country
- payments from a prescribed superannuation fund due to death or incapacity, and
- a deferred bonus (such as cash or securities earned, allocated or accrued before termination but not paid or provided at the time they are earned, allocated or accrued) including one attributable to:
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Special treatment of some share-based deferred bonuses and payments in lieu
The Bill provides that a benefit will be given “in connection with a person’s retirement from an office or position” in a broad set of circumstances. In addition to these circumstances, the Regulations also deem a benefit to be given “in connection with retirement from an office or position” where it is:
- the accelerated or automatic vesting of share-based payments at or due to retirement, or
- a payment made in lieu of giving a notice of termination.
Despite stating that a deferred bonus is not a benefit, the Regulations nevertheless require shareholder approval for the accelerated or automatic vesting of share-based payments including deferred bonuses if they exceed the statutory limit (other than where the benefit is attributable to death or incapacity).
Timing
Parliamentary debate on the Bill is set to resume today.
Documents
To view documents click on the links below.