What to expect in executive pay in the 2021 AGM season

That time of year has arrived – where boards face the music from investors over executive pay decisions made in the past 12 months. It’s AGM season.

While the financial performance of a number of companies took a significant hit in FY20, FY21 has generally seen an equally rapid rebound, resulting in a strong FY21 earnings season and positive investor sentiment in the ASX market.

It goes without saying that we have a long road ahead in the economy recovery. However, now that Australia is over the initial COVID-19 economic hump (with vaccination rates continuing to climb and some of the hardest hit states easing restrictions), will we see a return to a business-as-usual AGM season in FY21?

From an executive remuneration perspective, we expect the following to be key sticking points this AGM season:

As can be expected, large CEO fixed pay increases for FY22 will be closely scrutinised (particularly where they are perceived as ‘make-up’ increases for FY21). Given over 85 percent of ASX100 companies did not increase CEO fixed pay in FY21, mostly due to the uncertainty of COVID-19, we have observed that companies have adopted a more liberal approach towards FY22 increases with approximately 50 percent disclosing that their CEOs will receive an increase (at an average of 10 percent).

Given proxy advisor, ISS, has stated it will not support post-freeze ‘catch-up’ increases and that increases should align with the broader workforce, it will be interesting to see how much ‘airtime’ CEO fixed pay receives at 2021 AGMs. Anecdotally, salary increases for the broader workforce in FY22 have generally been 2-3 percent.

While JobKeeper recipients were heavily scrutinised in FY20 where they paid bonuses, many JobKeeper recipients displayed strong financial performance and increased dividends in FY21. How will these companies’ bonus outcomes be received this year?

In 2020, MP Andrew Leigh called for companies who received taxpayer subsidies not to provide their CEO with a bonus, nor issue dividends, viewing it as a misuse of public money. Accent Group and The Star Entertainment Group were two companies which earned the ire of investors in this respect, receiving ‘first strikes’ at their 2020 AGMs.

In FY21, companies which have fully or partially paid back JobKeeper (Mirvac, Harvey Norman, Domino’s) may attract less attention from investors. However, companies which received JobKeeper and paid out bonuses at healthy levels will be an area of focus externally, even where JobKeeper amounts were excluded in the calculation of financial measure outcomes.

CGI Glass Lewis has provided a more lenient outlook, stating that it will not give a blanket ‘no’ vote to companies which paid out bonuses and received JobKeeper, but that a holistic range of factors will be considered.

ESG (environmental, social and governance) measures are here, and here to stay. In response to growing pressure from investors and the community surrounding ESG issues and a heightened focus on these issues amongst government bodies internationally, the prevalence of ESG measures in incentive plans has come to the fore in 2021. While the jury is still out on ESG measures in long-term incentive (LTI) plans, Woolworths has introduced a reputation measure (20 percent), Endeavour Group has introduced a Leading in Responsibility measure (20 percent) and Goodman Group has introduced an environmental modifier (+/-20 percent) into their FY22 LTI plans.

It appears the greatest point of conjecture over non-financial measures is no longer whether they are important to a company’s long-term success, but more so ensuring robust measurement and selection. Historically, proxy advisors have been more supportive of non-financial measures where they have comprised of a smaller weighting than financial measures and have been linked to shareholder returns (e.g. Whitehaven Coal’s LTI strategic measure (15 percent) subject to an absolute TSR gateway meets both this criterion). It begs the bigger question of whether external stakeholders still focus too heavily on financial measures in the LTI in Australia, compared to the UK and US where non-financial measures feature more prominently in the LTI.

One-off equity arrangements subject only to service were popular in FY21 as a retention mechanism but may continue to attract unwanted attention from external stakeholders. While ‘retention’ has been the keyword on companies’ lips, some proxy advisors (such as ISS) have typically been unsupportive of any service-based awards, especially where they are seen to ‘make-up’ for ‘out-of-the-money’ on-foot awards or where recent LTI vesting outcomes have been poor.

This makes for interesting viewing as to how Dexus’ grant of retention awards to selected individuals (in addition to a 50 percent service-based component in its FY21 LTI) and Computershare’s grant of share appreciation rights (50 percent weighting in the LTI) will be received at its 2021 AGMs.

Companies which have introduced service-based equity on a permanent basis (e.g. CBA and Origin Energy), will also be ones to keep an eye on this AGM season.

How does this affect your company?

For June year-end companies:

  • Now is the time to prepare AGM Q&As for the Board, particularly in respect of the above topics; and
  • Engage with key institutional investors in relation to the key issues arising for your company in FY21 and the rationale for the Board’s remuneration decisions.

For December and March year-end companies:

  • Monitor AGM voting outcomes of your industry peers or companies with comparable remuneration structures; and/or
  • Start turning your mind to the messaging of remuneration decisions in your Remuneration Report and Notice of Meeting.

As we delve deeper into the AGM season, we expect that executive pay will continue to attract keen attention amongst investors, proxies and the public.

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