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.
“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.
“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:
the release of a deferred bonus from a restriction due to death or incapacity
the investment of the deferred bonus, or
another change to the value of the deferred bonus.
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).
Parliamentary debate on the Bill is set to resume today.
To view documents click on the links below.
Minister’s press release
Who does this affect? All corporations, directors, executives, remuneration committee members and their advisers.
What do you need to do? Consider the implications of the Regulations for executive employment contracts and remuneration arrangements.