KMP remuneration disclosures in remuneration reports are required under the Corporations Act. However in recent years the number of executive roles reported has declined, in an apparent move away from transparent communication to minimalist compliance – perhaps to reduce exposure to criticism. We canvass the change in disclosure, its impact for boards seeking to benchmark remuneration, and explore the path to improved databases.
GRG Remuneration Insight 155
by Denis Godfrey & James Bourchier
23 January 2024
GRG was one of the first in 2001 to establish a database populated with Key Management Personnel (KMP) remuneration sourced from disclosures in Remuneration Reports of ASX listed companies. For some years after KMP remuneration disclosures in Remuneration Reports became a requirement under the Corporations Act, the disclosures covered most of the roles that comprised the board and the Senior Leadership Team (SLT) of each company. However, the number of executive roles being classified by companies as KMP has declined in recent years. This change in practice seems to have been underpinned by a move away from a transparent communication approach to a minimalist compliance approach. This change may have been pushed by accounting firms who audit Remuneration Reports and legal advisors seeking to minimise exposure to criticism by reducing transparency.
This Insight canvasses the degree of change in disclosure, its impact for boards seeking to benchmark remuneration, and explores the path to improved databases.
The Debate Around Application of the KMP Definition
The change in disclosure is driven by interpretation of the definition of “KMP”. While most Annual Report disclosures are governed by the Corporations Act and ASIC, surprisingly KMP is defined in the accounting standards under AASB 124 (“Related Party Disclosure”), as follows:
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
In the discussions that GRG has been witness to, the prevailing argument for reduced disclosure appears to be that executive roles that cannot direct or control the activities of the organisation in isolation are not deemed to be KMP. Therefore, the only roles that are universally disclosed at this time tend to be CEO, CFO and sometimes COO, if present. However, this ignores the requirement to disclose roles that can direct or control activities indirectly. Just as Non-Executive Directors of the Board are individuals without individual control, they are still part of a group that meet this criteria, along with each member of the SLT or executive committee, that make a contributory impact to directing and controlling the activities of the entity. These executive groups typically comprise all direct reports to the CEO, and this used to be the prevailing view that drove the more extensive disclosure observed in the past.
Meanwhile, most institutional investors and proxy advisors focus on the remuneration of the MD/CEO and are less concerned with the remuneration offered to other executives on the assumption that the MD/CEO treatment cascades down to others. GRG has observed that this is increasingly not the case, with “roles that need to be disclosed” subject to remuneration arrangements that are aligned with market expectations necessary to obtain shareholder support, and other roles enjoying quite different, often less rigorous arrangements such as lower LTI, shorter vesting periods, increased service-tested equity, and STI arrangements that are easier to achieve. In these cases, it is arguably a deliberate effort to obscure the use of executive remuneration practices that would not be acceptable, had they been disclosed, in order to make attraction and retention of executives easier.
The Degree of Change
To provide information demonstrating the degree of change in disclosures of executive remuneration in Remuneration Reports, GRG retrieved data from 2009 Remuneration Reports and compared it with comparable data in 2022 Remuneration Reports, for companies with market capitalisations of more than $100 million. It is interesting to note that the number of companies rose from 372 in 2009 to 629 in 2022, representing a 69% increase in the number of companies. Given that for most SLT roles there is only one incumbent, it would have been expected that the number of incumbents disclosed would have increased by around 69% between the two periods.
GRG only included data for roles where the incumbent filled the role for the full year. Between 15% and 20% of incumbents would on average be expected to be part-year incumbents for executive roles, which has a modest impact on the number of incumbents reported. In addition, the number of MD/CEO roles reported was also impacted by the incidence of Executive Chair roles which were treated as a separate role to the MD/CEO role; Executive Chair roles are now rarer than they used to be, as governance groups and external stakeholders successfully called for independence in the Board Chair roles of listed companies.
The following table presents the number of incumbent entries for the main roles disclosed as executive KMP, and the percentage change in the number reported (note: disclosure rates adjusted for the change in sample sizes is presented following).
All roles except for three showed significant reductions in the number of disclosures.
When the number of companies from which the disclosures were drawn is also considered, the situation is much worse as shown in the following table (which assumes one incumbent per company).
Except for the MD/CEO and CFO roles, all roles exhibited steep declines in disclosures. In addition, when data is filtered on an industry and company size level, which is the accepted basis for creating relevant benchmark comparisons, many of the sample sizes per role are too small to be of use in such exercises.
Implications and Responses
Remuneration Report disclosures remain robust reference sources for benchmarking the market competitiveness of remuneration for non-executive director, MD/CEO, and CFO roles. However, for other SLT roles, the decline in disclosures has meant that traditional peer-group-based remuneration benchmarking techniques are now of limited use. As such, more advanced, high-tech, and big-data-set analysis methods need to be used to provide benchmarks for other executive roles if ASX market data is to be used. (GRG has developed four such alternative approaches that allows our clients to still receive meaningful benchmarks for other executive roles). However, assuming the trend shown continues into the future, even these advanced big-data-driven methods may struggle to produce meaningful, market-related benchmarks. Accordingly, external remuneration consultants that are engaged by boards to provide executive remuneration data and recommendations will need to have access to data collected via reputable market surveys (the most preferred method where ASX data is either unavailable or not relevant). Hence, it will be necessary for boards to direct their human resources departments to participate in specialist executive remuneration surveys conducted by a reputable survey provider to obtain up-to-date, market-relevant information for the external remuneration consultants to utilise.
In addition to offering the most advanced benchmarking methods available in the market, GRG has recently invested heavily in expanding the current executive remuneration database to produce the GRG Executive Remuneration Survey (ERS). The ERS will cover more executive roles (60+, including the CEO-2 level), more granular data on remuneration elements, and details of performance metrics for incentive plans.
Traditional executive remuneration surveys lack the detail to make informed decisions. (A comparison of equity opportunities is a classic example of where existing traditional surveys struggle to provide meaningful analyses). The new GRG ERS is designed to provide that detail, by dealing with issues that other surveys have traditionally struggled with such as: the terms and conditions attached to various elements of executive remuneration; the difficulty of hurdles attached to variable remuneration; or the intent of the Board at a policy level regarding remuneration at target vs stretch/maximum. As experts in short and long term variable remuneration plan design, GRG knows what the key issues are that can make the same remuneration opportunity, expressed in dollars, more or less attractive, and what point in variable remuneration ranges to compare across companies.
The ERS database will be populated with data from GRG’s current clients in addition to any new clients ensuring the data set available stretches across industries and company size. To access ERS market data each company must first become a member of the ERS. Collections are open now… by contributing data early, companies will be poised to access data when they need it.
GRG anticipates that as more companies become aware of the limitations surrounding the use of disclosed data to assist with determining market-related remuneration for their entire SLT, demand for participation in executive remuneration surveys will increase. Companies will realise the need to join a reputable survey to obtain current actual market data, not information based on advanced, supplementary analysis methods.
GRG’s ERS is ideally placed to support the market’s needs, providing actual market remuneration data in addition to detailed analyses of variable remuneration policies to assist companies with their benchmarking exercises.