Every KMP remuneration program has its bugs, and managing the unintended outcomes and exceptions consumes time that could be spent on valuable strategic work. We explore some of the most common bugs in remuneration frameworks and governance, and how to avoid or patch them.
GRG Remuneration Insight 180
28 August 2025
KMP Remuneration Framework Bugbears Drive Stakeholder Tensions
Every KMP remuneration program has its bugs; no matter how much documentation, consideration or good governance goes into a framework, the dynamic environment it operates in means that there will always be unintended outcomes and exceptions that need to be managed. This can manifest internally as unhappy executives or undesirable turnover, or externally as criticism from shareholders or even strikes against the board. Some are more common than others but managing these bugs can take up a lot of the remuneration committee’s or board’s valuable time that may be better spent on more strategic work. In this Insight we explore some of the most common bugs in remuneration frameworks and governance that drive stakeholder tensions, and how to avoid or patch them.
This Insight is inspired by an article published by Philip Foo of Glass Lewis & Co Australia, a leading proxy advisor. The article focused on some of the key issues in governing and setting variable remuneration, both short and long term, from the perspective of a proxy advisor. We include a consultant’s view on some of these, as well as other key areas of misunderstanding and tensions between stakeholders on remuneration related matters.
Executive Fixed Pay: A Deceptively Simple Risk
Most boards think they have a handle on Fixed Pay; the amount executives get paid to “turn up at work”. Errors in Fixed Pay are particularly high risk because they are very hard to unwind; Fixed Pay reductions are typically impractical. Usually there is a simple policy of paying at the median/P50 benchmark, which is cut-and-dry. What is more opaque is the policy (often absent) for how to determine that benchmark, and what is being benchmarked. Here are three ways that boards most commonly get Fixed Pay wrong:
- Conflating comparators – there are often two competing views on how pay benchmarks should be established: internally there tends to be a focus on direct competitors for customers and talent, while externally the focus tends to be upon job/organisation size or scale (usually market capitalisation for listed companies). The internal view can lead boards to accepting comparator groups that include often much larger companies with revenues and profits that can support much higher salaries, or even USA-market data, in the same group as similarly sized ASX peers. This results in invalid statistical benchmark outcomes often skewed towards incomparable market practices. It is better to isolate each variable to its own group and then make an informed judgement on any differences observed.
- Piqued by a peak – most well-supported comparator groups are sensitive to scale, usually market capitalisation or revenue. As a consultant, it is common for clients to approach us when there has been a peak in the share price or revenue. This leads to higher benchmarks which will later be criticised as excessive if the peak is not sustained. While it is essential to obtain new benchmarks when organisation circumstances shift significantly, ensuring the assessed market position is sustainable will be key to long term support from shareholders.
- Benchmarking Bob, not the job – too often boards think about benchmarking the individual/talent, not the role. Individual/incumbent factors should be managed within policy ranges that should be disclosed as part of the framework, with the benchmarking focus being job design/content.
When notable increases in Fixed Pay appear in the remuneration report, shareholders want to know why, what changed to explain it, and how market references were established. Most boards will happily disclose this when asked, but fail to include it in their disclosures until it becomes a problem.
In many cases, potential concerns can be addressed before they are raised by including some simple disclosures around how benchmarking is undertaken, how individual factors are addressed beyond simple benchmarking, and how these practices flow through to changes in Fixed Pay.
Executive Variable Remuneration: When Incentives Aren’t Variable
Perhaps the greatest area of confusion between stakeholders, even in the boardroom itself, is how variable remuneration is intended to be calibrated, and how this links to benchmarking. Short Term Variable Remuneration (STVR/STI) and Long Term Variable Remuneration (LTVR/LTI) in a modern governance framework. These are intended to have a component that is at-risk so that it is lost when expectations are not met, and a component that is an incentive, so that additional remuneration flows when expectations are exceeded. The gap from minimum outcomes/reward (Threshold) to expected outcomes and reward (Target) is the at-risk component, while the excess of goals and rewards over Target (up to Stretch) are the incentive. Clearly the “expected outcome” is the key aspect to calibrate around and should be clearly identified as “Target” which is benchmarked against target in the market. Target should be a “challenging but achievable” outcome, most often associated with budget/plans where rigorous budget setting culture exists. However, this is rarely properly defined in policies; as a result, there is no clarity regarding how much performance and/or reward is expected, and often no clarity regarding how benchmarking flows through to setting these opportunities.
Since variable remuneration tends to be the focus of governance considerations or tensions and is the driver of alignment between reward and stakeholder outcomes, this is arguably the primary failing of most remuneration frameworks. Some companies try to ignore this calibration problem by benchmarking “maximum against maximum”, however, this is obviously the worst solution: maximum or stretch challenges and rewards are the most variable aspect of remuneration frameworks when comparing between companies, since the elasticity of outcomes, in both performance and reward, varies significantly between companies in different circumstances.
The most comparable goal across companies is clearly Target, and this should therefore be the focus of both expectation setting for executives, and benchmarking processes, since it compares “the expected outcome with the expected outcome”. ‘Unders and overs’ can then be calibrated to be organisation specific around this, however, typically Threshold represents around half the Target reward with a probability of around 80% achievement, being a near miss of expectations, and Stretch/maximum tends to represent up to doubling of the reward with a probability of around 10% to 20% of achievement. When this is not clearly articulated, executives feel hard-done by and come to expect maximum outcomes regularly, and shareholders see variable remuneration frameworks that are not variable enough. Even if only 50% of the maximum is expected, if this is the level of outcome that is benchmarked to the market, shareholders and executives can both expect outcomes in a typical year that are aligned to market benchmarks, with clear variations linked to performance forming around these expectations.
Unchecked Hygiene Factors in Short Term Reward Leave a Bad Taste
For entry level employees, rewarding effort and conduct to reinforce culture and values may have strategic value and support sustainability, but the same cannot be said for executives. It is expected that executives are competent in their jobs and receive Fixed Pay that rewards them for being high-calibre individuals who manage risk while being subject to high standards of conduct and leadership. If they preside over a collapse in organisational culture, risk management, injuries, deaths, employee engagement, customer satisfaction or other outcomes of “mismanagement” their jobs should be at-risk.
The most common criticism of STVR/STI is when it rewards executives for maintaining the hygiene of the organisation, or “making a good effort without results” instead of the actual outcomes and value for stakeholders. As the custodians of stakeholder value, executives carry primary accountability for outcomes, and yes, also organisational hygiene. A modern STVR/STI framework allows for risk, conduct or ESG modifiers to link performance management at the hygiene level, to a downward-only modifier on reward. This sends a strong message to all stakeholders that hygiene factors, risk, conduct and/or ESG are so important to the organisation that additional remuneration will be reduced or completely cancelled if not managed within tolerances, while also ensuring that shareholders do not pay extra for basic standards being maintained. The exception of course when there has been a historical failing in one of these factors that becomes a strategic imperative for a defined period, such as when the reputation of the company with customers represents an existential risk and requires drastic investment/change in order to return to a hygiene level.
Once the hygiene level is restored, maintenance no longer justifies strategic rewards, and the focus should return to other indicators of stakeholder value creation. Perhaps at the heart of this matter is mistaking variable remuneration for performance management; variable remuneration cannot and should not be relied upon to manage performance, only to align with it. Performance management requires much more sophisticated measurement, feedback and development mechanisms which should of course address hygiene and strategic factors.
Short Term Incentive Deferral Considerations
STVR/STI deferral was intended to address the short-termism and risk inherent when short term outcomes are linked to significant reward, particularly when the focus of STVR/STI tends to be upon annual financial outcomes. Using equity was the obvious and logical way to expose short term rewards to longer term outcomes in the market to recognise shareholder interests, as well as malus and clawback policies that recognise a wider range of stakeholder interests. Unfortunately, at the time it evolved into a standard component of executive remuneration governance, the tax and legal frameworks effectively required that deferral into equity was “at-risk” so standard market practice became to subject around 50% of the STVR/STI to “double jeopardy”; fulfilling further conditions after it had already been earned through performance. To recognise that this was inherently unfair for a remuneration component that had been “earned” and simply needed to be held to align to sustainability, service testing became the standard form of deferral.
However, executives facing a likely loss of realisable value due to ever-shrinking tenure and increasing talent mobility, logically argued that this was tantamount to a package reduction. Therefore, the only logical result of these market forces was that LTVR/LTI was partly cannibalised to fund the increased risk of forfeiture in STVR/STI. Of course, the overall effect was reducing long term performance and outcome alignment, which was the opposite of the intention. Since then, tax, legal and modernised equity frameworks have modernised to allow for deferral into equity without risk of forfeiture in a way that offers up to 15% years of 100% CGT discount equivalent tax treatment (see our separate modelling articles for mathematical proof of this aspect) and a doubling of dividends. However, the majority of companies still have archaic equity plans and deferral practices that penalise executives, undermine long term performance/reward alignment, provide a logical basis for reducing the value placed on LTVR/LTI and minimise the exceptional benefits of long term Rights holdings. If the right approach is taken to deferral, executives should be excited to access financial and tax benefits and there is no reason to reduce focus on LTVR/LTI to compensate. With many companies still weighing up whether to adopt deferral, there remains ample opportunity to correct the market trends driving stakeholder concerns in this area.
Long Term Incentives: Unlocking Their True Value
Long Term Variable Remuneration or LTI/LTVR should be the most exciting and attractive component of executive remuneration. Not only because it has the primary purpose of aligning with long term, sustainable stakeholder value creation which is the primary accountability and purpose of any executive team, but because modern legal, tax and equity frameworks can offer the most attractive tax and financial benefits of any remuneration component. Where else can 100% capital gains discount be expected other than in one’s own home, and what other opportunity is there to double an income stream for no outlay?
In successful international markets, equity is often identified as the key tool in stakeholder alignment that drives success. However, in Australia, for very good reasons, LTVR/LTI often has the lowest perceived/psychological value and may be described as having no value at all for many executives. Even ignoring all of the issues that apply to variable remuneration benchmarking, calibration and goal setting noted in the STVR/STI discussion above, which equally apply to LTVR/LTI, there are a raft of other problems that cause it to fundamentally fail to achieve its purpose.
To be clear, GRG has no sympathy for executives that shirk accountability for stakeholder outcomes in fickle markets; that is the job they chose, and they receive significant remuneration premiums for taking on that accountability, which flows through each and all remuneration elements. However, we do sympathise with those struggling to find inspiration in antiquated plans and practices that fail to recognise the opportunities sliding off the table. For example, despite annual grants of LTVR/LTI becoming standard practice, and the myth that service testing works as a retention tool for mobile, high calibre talent being thoroughly busted, 3-year service testing remains majority practice for ASX listed companies (note: service tests need not match 3+ year performance tests for LTVR). Given that the typical tenure of any executive on the ASX has fallen to around 5 years, executives are forced to do the following maths: out of 4 or 5 grants they might be offered, only one or two will even have a chance of vesting before they move on. Therefore, a minimum 50% psychological discount applies before performance and other risk of forfeiture has even been considered, perhaps even more. Add to that the poor tax optimisation, lack of access to dividend streams usually associated with older plans, and perceived low probability of vesting, and it is little wonder that executives tend to focus on short term rewards (and therefore performance).
These matters can be easily resolved by modernising the rules, design, calibration and benchmarking of LTI/LTVR so that this component of remuneration becomes the most compelling wealth achievement opportunity of all. The prevalence of ranked relative Total Shareholder Return (TSR) assessment, which is mathematically provably a lottery in all but the most exceptional edge cases, as opposed to other forms of TSR (including other forms of relative TSR), certainly does nothing to help the case. However, this can be addressed by refining the approach to TSR assessment, expanding the number of metrics to 3 to drive down the weighting on relative TSR, and including metrics that are better correlated with executive performance.
Holding Policies: Hostages Without Leverage
Holding policies are an increasingly hot topic. With markets recognising that executives do not value LTVR/LTI, and that deferred STVR/STI tends to be disposed of immediately because of poorly designed equity terms that incentivise disposal, the emerging response has been to simply require executives to hold specified amounts of equity. These approaches have typically been ham-fisted and simply punish executives further for errors in remuneration design and governance noted above.
In response, the periods to comply with holding policies have gotten so long that they now match typical tenures, meaning they rarely have to be complied with. Worse, most holding policies include little if any consequence or powers of enforcement if compliance is not achieved i.e. the policies are nearly as toothless and inactive as most malus and clawback policies. Worst of all, most holding policies are in fact self-defeating: they require executives to hold shares, and do not count fully vested rights that are otherwise equivalent to shares. Therefore, executives typically must exercise their rights, sell half to pay tax, and end up holding a fraction of the skin-in-the game.
GRG’s concerns on this matter have recently been reflected in some updated proxy guidelines which now accept vested nil priced rights as equivalent to shares held, which of course they are. Holding policies should be updated to recognise this also, while including clear powers of enforcement. Further, companies with holding policies should be taking advantage of new equity frameworks that allow for executives to access double the dividend income stream and 15 year tax deferral with substantial capital gains tax benefits, and allow both NEDs and executives to voluntarily invest Fixed Pay, STVR/STI or board fees into equity interests so that there are real incentives to fulfil the purpose of these policies.
Conclusion
A lack of agility and responsiveness among key players in the remuneration governance arena, as well as a fear of leadership to depart from established norms to fix the obvious problems in remuneration governance and practices that dominate the ASX, are leading to a critical failure in executive remuneration. While substantial improvement has been made to regulatory and tax frameworks to raise Australia’s competitiveness internationally and restore long term alignment between stakeholders, the effort has largely fallen flat with boards of listed companies not picking up the batten. Executives are not to blame for the lack of performance, alignment and motivation that is the demonstrable result of maintaining the status-quo. The good news is that a few small, targeted changes, can change everything.
