More than money: How companies might have to overhaul their pay systems
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Executive pay is a contentious point of discussion for shareholders, but it’s usually less of an issue for the directors of ASX small caps.
Of course there are exceptions to the rule.
Companies’ annual reports and AGMs disclose executive pay and shareholders sign off — if they’re happy. Remuneration is usually just base pay, bonuses as well as equity grants (in stock or options).
But back in July, the Australian Prudential Regulation Authority (APRA) put out a discussion paper which, among other things, proposed:
APRA deputy chair John Lonsdale said over-emphasis on short-term financial performance was a regular occurrence in cases of misconduct.
“This has contributed to a series of damaging incidents that have undermined trust in both individual institutions and the financial industry more broadly,” he said.
“Crucially from APRA’s perspective, these incidents have damaged not only institutions’ reputations, but also their financial positions.
“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance.
“APRA will not be determining how much employees get paid. Rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities.
“By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long-term.”
One EY Australia partner, Mark Phillips, argued earlier this week pay paradigm would have to change for executives and employees. In this context he was a fan of APRA’s proposals but also suggested ideas of his own.
“[Remuneration] models are evolving to encompass recognition (for employee effort, performance and service), performance (at an individual, team and group level), learning and growth, workplace environment and culture to enhance the employee experience and engagement,” he said.
“Bonuses are being removed, reduced or changed from being largely individual performance-focused to team- and organisational performance-focused – with less financial focus.”
Phillips argued payments based on performance resulted in the prioritisation of pay, not the other way around. Customising structures dependant on particular role requirements is another option.
Phillips also suggested recognition would boost employee engagement and hence company success.
Three specific areas of recognition have an impact: celebrating careers, rewarding results and encouraging effort. A study earlier this year by employee recognition company OC Tanner found most companies have one of these three. However, those with the full hat-trick were in the minority.
Nonetheless he warned against over complication. Even changing the status quo slightly would be tough let alone knowing if any changes were making any difference.
“The success of any change should be measured against organisational values and purpose, which must reflect the key interests and concerns of a broad range of stakeholders and, most notably, the customer,” Phillips said.