Corporate Governance
& Head Office Advisory

Increase text sizeDecrease text sizeDefault text size

Focus: Productivity Commission's Final Report on executive remuneration in Australia

20 January 2010

In brief: In the midst of the traditional new year holiday period, the Federal Government released the Productivity Commission's final report on executive remuneration in Australia. Allens Executive Partner Paul Quinn (view CV) and Lawyer Ben Ferguson summarise the findings of the Productivity Commission and analyse its recommendations on the reporting of executive remuneration.

How does it affect you?

  • The Productivity Commission has concluded its review of executive remuneration in Australia and has made 17 recommendations aimed at reducing inappropriate remuneration outcomes. In particular, the Productivity Commission recommends that:
    • boards would be required to provide an accurate picture of what their key management personnel actually received as opposed to the accounting value of their remuneration, whilst also reporting on qualitative remuneration factors such as the link between remuneration policy and the company's strategic directions, desired risk profile and shareholder interests; and
    • a vote of more than 25 per cent of shareholders against the adoption of a remuneration report at two successive annual meetings would force a company to put a resolution to shareholders which, if supported by a majority, would force those directors who signed the directors' report to face re-election at an extraordinary meeting within 90 days.
  • The Federal Government has indicated that it will respond to the Productivity Commission's report in the first quarter of 2010.


The Productivity Commission's final report, Executive Remuneration in Australia, represents the culmination of the Federal Government's request for an examination of the existing regulatory arrangements that apply to executive remuneration, and international trends and responses to the problems of excessive risk-taking and corporate greed.

The final report was issued following the release of an Issues Paper in April 2009, a Discussion Draft Report in September 2009 and a period of public hearings and industry consultation.

Summary of recommendations

The Productivity Commission's Final Report makes 17 recommendations, to be implemented in a variety of ways, including via amendment to the Corporations Act 2001 (Cth) and ASX Listing Rules.

Some of the key recommendations include:

  • where a company's remuneration report receives a 'no' vote of 25 per cent or more of eligible shareholder votes cast at an annual general meeting (AGM), the board be required to explain in its subsequent report how shareholder concerns were addressed and, if they have not been, the reasons why. Where the subsequent remuneration report receives a 'no' vote of 25 per cent or more of eligible shareholder votes cast at the next AGM, a resolution be put that the elected directors who signed the directors' report for that meeting stand for re-election at an extraordinary general meeting (EGM). Notice of the re-election resolution would be contained in the meeting papers for that AGM. If it were carried by more than 50 per cent of eligible votes cast, the board would be required to give notice that such an EGM will be held within 90 days. Key management personnel would be ineligible to vote their own shares, or undirected proxies held by them, in relation to remuneration reports or the re-election resolution.
    This is a watered down version of the Productivity Commission's original 'two strikes' rule contained in their Discussion Draft Report, which stated that successive votes of 25 per cent or more at annual meetings against adoption of the remuneration report would trigger a spill of the entire board;
  • for the election of directors at a general meeting, where the board seeks to declare no vacancies and the number of directors is less than the constitutional maximum, approval should be sought from shareholders by way of an ordinary resolution at that general meeting. Boards would retain their powers to appoint directors and fill or leave vacant casual vacancies throughout the year;
  • the ASX Corporate Governance Council should introduce an 'if not, why not' recommendation specifying that remuneration committees:
    • have at least three members;
    • comprise non-executive directors, a majority of whom are independent;
    • be chaired by an independent director; and
    • have a charter setting out procedures for non-committee members attending meetings;
  • all ASX300 companies have a remuneration committee comprised solely of non-executive directors;
  • key management personnel and all directors be prohibited from voting their shares on remuneration reports and any resolutions related to those reports;
  • executives should be prohibited from hedging unvested equity remuneration or vested equity subject to holding locks;
  • company executives identified as key management personnel and all directors be prohibited from voting undirected proxies on remuneration reports and any resolutions related to those reports;
  • proxy holders must, except in exceptional circumstances, cast all of their directed proxies on remuneration reports and any resolutions related to those reports;
  • individual remuneration disclosures be confined to key management personnel;
  • companies must disclose the expert advisers they have used in relation to the remuneration of directors and key management personnel, who appointed them, who they reported to and the nature of other work undertaken for the company by those advisers; and
  • institutional investors should disclose, at least on an annual basis, how they have voted on remuneration reports and other remuneration-related issues.

A shift in approach for remuneration reports

While most media commentary has focused on the watering down of the 'two strikes' rule, the Productivity Commission's recommendations around remuneration reports are important as, if adopted, they would involve a fundamental overhaul of the way in which executive remuneration is reported.

The Productivity Commission argues that the current reporting regime produces 'boiler plating' ie the use of standard terms to describe remuneration arrangements which are not illuminating for shareholders and do not illustrate the link between remuneration policy and company performance. They also argue that the usefulness of remuneration reports is diminished by their length, detail and complexity.

The Productivity Commission recommends a simplification of remuneration reporting that would include a plain English summary of remuneration policies, and reporting of the total shareholding and realised pay of each member of the key management personnel. They have also formulated a remuneration checklist setting out information that they believe should by addressed by remuneration reports. Some of this information includes:

  • how the remuneration policy aligns with the company's strategic directions, its desired risk profile and with shareholder interests;
  • how the mix of base pay and incentives relates to remuneration policy;
  • how comparator groups for benchmarking executive remuneration and setting performance hurdles and metrics were selected, and how such benchmarks have been applied; and
  • whether employment contracts have been designed to the degree allowable by law, to inoculate against the possibility of having to 'buy out' poorly performing executives in order to avoid litigation.

These recommendations are significant as they highlight the importance of qualitative factors in executive remuneration whilst also recognising the importance of the quantity of remuneration that executives actually receive. If these recommendations were implemented, boards would be required to give an accurate picture of their key management personnel's realisable remuneration as opposed to the accounting value of that remuneration, whilst also reporting on the 'how' and the 'why', such as the link between remuneration policy and shareholder interests. This is a serious attempt at providing greater transparency in executive remuneration and will test the Federal Government's resolve in this area.

Where to from here

The Productivity Commission recommends that the Federal Government should establish an expert panel under the auspices of the Australian Securities and Investments Commission to advise it on how best to revise the architecture of the remuneration reporting regime to support their proposed changes. The convened expert panel would take account of the Productivity Commission's detailed guidance on the requirements for remuneration reports and the checklist of information which should be reflected in remuneration reports.

In terms of the broader recommendations made by the Productivity Commission, the Federal Government has indicated that it are considering the report and will respond in the first quarter of 2010.

We will keep you updated on the developments in this area. If you have any queries about this or any other corporate governance issue please feel free to contact us.

For further information, please contact:

Share or Save for later

What are these?


To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.



You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.

Comment Box is loading comments...