The Federal Government's legislation on executive pay has passed through both houses of Parliament and is expected to take effect next week. These changes were announced by the Government in March 2009 in response to shareholder backlash against termination benefits paid to senior executives, particularly during the GFC when share prices were falling.

The intention of the Bill is to strengthen the regulatory framework relating to the payment on termination of benefits to company directors and key managers. The Bill caps executive and managerial retirement/termination benefits at the equivalent of 12 months base salary unless shareholder approval is given.

In summary the Bill:

  • restricts the payment of termination benefits in excess of 12 months base salary to directors and executives without shareholder approval;
  • broadens the scope of affected persons beyond directors and officers of the company to include senior executives and key management personnel. If the company is one to whom Section 300A of the Corporations Act 2001 applies, the restrictions apply to the termination benefits for key management personnel and the five most highly remunerated officers (if different) of the entity, that is those who would normally be disclosed in the company's remuneration report;
  • clarifies the definition of what is a termination benefit and provides for a regulation making power to specify whether certain types of payment are a termination benefit or not;
  • provides that if termination benefits exceed the cap and are not authorised by shareholders they must be re-paid immediately;
  • prevents a person entitled to a termination benefit who is also a shareholder from participating in a shareholder vote on their termination benefits unless acting as a proxy;
  • increases the penalties for breach to up to $19,800 for natural persons, $99,000 for a body corporate and the option of a 6 month imprisonment term;
  • provides that for the purposes of calculating base salary it is the average salary received during the last three years of service. Where a person has held office for less than a year, then the threshold will be adjusted on a pro-rata basis. The Explanatory Memorandum to the Bill gives the example that where a director has served for three months the threshold would be 1/4 of the annual base salary and any benefit above this amount would require shareholder approval.

These amendments apply in relation to a retirement from an office or position of employment held under an agreement;

  • entered into;
  • renewed or extended; or
  • varied;

after the day on which the Bill commences.

What should Employers do?

We recommend that employers:

  • concerned about the impact of the changes made by the Bill on the termination payments that are payable to their executives or concerned whether their executive contracts will comply with the requirements of the Bill, should seek advice prior to the commencement of the Bill;
  • seek advice prior to amending, extending or varying any existing executive employee contracts;
  • seek advice prior to making or agreeing to make any payments to directors, officers or senior executives on termination of employment or resignation from office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.