The global financial crisis has placed the nature and structure of executive remuneration under increased scrutiny. The combination of local and international events, particularly in the United States where executive pay is a central point of debate in the assistance being provided to that country's key financial institutions, means that there will be stricter rules around remuneration.

Proposal To Amend Corporations Act

The Federal Government has taken a first step in proposing to amend the Corporations Act 2001 (Cth) to reduce the threshold limit on termination payments before shareholder approval is required. The cap on termination payments will fall from up to seven times total annual pay to a threshold of just one year's average base salary. It is a significant reduction, although the approval for such payments remains with shareholders.

The Federal Government will also seek to widen the law from covering only company directors to covering all executives named in the company annual remuneration report. This includes broadening the definition of 'termination benefit' to catch all rewards and benefits.

The proposals would dramatically alter the current laws. Presently the exception in the Corporations Act allows an executive with three years' service or more to be paid an amount of up to seven times that executive's average annual remuneration over the past three years before shareholder approval is required.

Reducing the cap will likely lead to companies seeking shareholder approval more frequently. The timing when such approval is sought will be a matter for active consideration as will the wording of the termination entitlements in a contract.

Productivity Comission

A Productivity Commission inquiry into executive pay has also been announced. This inquiry will examine all issues relating to executive remuneration, including:

  • The role of equity based payments and incentive schemes as well as trends in executive remuneration in Australia.
  • The use of non-recourse loans.
  • Regulation of remuneration consultants.
  • Mechanisms that may better align the interests of a board and executive with shareholders and the wider community.

The Federal Government is already awaiting a report from the Australian Prudential Regulation Authority (APRA) on the framework for the remuneration of executives in financial institutions. However the Government's attention in this area appears to go beyond just financial institutions. APRA's review combined with that of the Productivity Commission, means this year will see a comprehensive analysis of all executive remuneration.

It seems likely that significant changes are on the way, and although the focus to date has been on the development of good policy rather than ceilings on remuneration, the form of the ultimate changes is not yet clear. What is clear is the increased complexity around remuneration and the likely increase in shareholder participation in the way a company remunerates its executives.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.