Why execs can now expect big bonuses no matter what
C-suite leaders in major banks and insurers may be able to receive up to half their long-term pay boosts without meeting strict performance criteria.
Senior executives in big banks and insurers may be able to receive up to half their long-term bonuses with no need to meet strict performance criteria, as boards grapple with new remuneration rules from the prudential regulator.
If nothing goes wrong, executives will be able to collect the full time-based stock grant, says business management consultant Michael Robinson, director of Guerdon Associates. Michael Quelch
The new pay schemes are designed to prevent executives from receiving large share parcels in the event their actions inflict catastrophic damage on the company, and to bring Australian remuneration practices in line with international practice.
But Michael Robinson, director of Guerdon Associates, a business management consultant, says that because “time-vested remuneration” is not subject to specific performance hurdles, there is a greater chance executives will receive the full benefit of this element of long-term variable pay than the element based on relative total shareholder returns.
From this year, large banks and insurers must apply a “material weight” to non-financial measures in pay arrangements for executives under a new standard from the Australian Prudential Regulation Authority.
In response to this requirement, more financial services companies are expected to introduce share grants into executive remuneration packages that will vest over time, but which are not subject to individual performance hurdles, predicts Robinson.
“They’ve got no choice,” Robinson says. “A material weight has to be on non-financials. That has resulted in many of them putting in place time-vested pay, not particularly subject to performance. That is a significant development.”
A typical long-term executive equity grant may contain three elements: a traditional equity grant based on relative total shareholder return; an equity grant based on non-financial measures, such as reputation and customer satisfaction; and a third share grant that executives can cash in over time.
The shares might vest gradually over a three- or five-year period, regardless of whether the executive has stayed or left the company.
Executives are likely to receive the full value of the grant unless their actions have led to a catastrophic problem.
“If nothing went terribly wrong, you will get the stock,” Robinson says.
It is important that executives are awarded shares that cannot be cashed in for many years, says Elizabeth Sheedy. Louie Douvis
Commonwealth Bank and ANZ Bank have already introduced these arrangements, as have several other companies including Resmed, WiseTech Global, Origin Energy and Breville Group.
In most cases, the shares can be sold in annual blocks over a four-year period.
Performance assessment
In the case of CBA, the so-called long-term alignment plan (LTAR) accounts for half of the long-term bonuses available to CEO Matt Comyn and group executives. Under the scheme, the bonus is awarded in stock, known as restricted share units, half of which can be sold after four years and the other half after five years.
Before the shares vest, the CBA board will conduct an assessment of an executive’s “leadership and strategy performance” and adjustments will be made for “significant failures resulting in adverse material impacts and the participants’ actions or response to any matters identified”.
The board has the discretion to determine that some or all of the award will lapse in certain circumstances, including a significant failure of financial or non‑financial risk management, breach of accountability, or when a “significant unexpected or unintended consequence or outcome has occurred which impacts the group”.
The other element of CBAs’ long-term bonus is known as the long-term variable remuneration (LTVR) and is based on performance measures, “with a focus on relative shareholder returns to support sustainable long‑term shareholder value”.
In the case of Origin Energy, half of the share rights that form the long-term incentive scheme are subject to a relative total shareholder return performance.
The other half of the share rights is subject to board discretion and is designed to vest in full, unless there is a “material deviation from board expectations” of performance across 30 key metrics, which take into account the underlying health, performance and sustainability of the company.
The latter tranche vests, subject to board discretion, progressively after three, four and five years.
‘It takes time for risks to emerge’
Elizabeth Sheedy, a researcher at Macquarie University who specialises in financial risk management, welcomed the move by the banks. She said it was important that executives were awarded shares that could not be cashed in for many years, giving the board an opportunity to use its discretion in the event of a serious event.
Shares granted as part of time-vested pay structures should not be allowed to vest for five to seven years, Professor Sheedy said, to ensure enough time had passed for directors to be confident management had not caused any serious problems.
“Very often it takes time for risks to emerge,” Professor Sheedy said.
“[These schemes] protect against executives not managing properly and causing serious problems. The key thing is that the board has discretion to use its judgment.”
Professor Sheedy noted the case of former Qantas chief executive Alan Joyce, who was able to cash in shares awarded as part of his bonus after three years – a timeframe she argued was too short.
Introducing your Newsfeed
Follow the topics, people and companies that matter to you.
Find out moreRead More
Latest In Management
Fetching latest articles