Internal assessment: an example scenario
In this fictitious example it is assumed that all directors and executives in a technology company, Exemplar Limited (market capitalisation of $480m at end of June 2022), are the subject of a remuneration review, however, we will focus on the Chief Financial Officer (CFO) only, to limit the scope of the discussion. In this scenario the Company is struggling to compete for talent in the technology sector, where peers are often offering equity as part of Fixed Pay. The Exemplary Limited CFO currently only makes a minimal strategic contribution because the CEO’s role includes financial strategy in this Company’s role and organisation design. The CFO is currently paid:
- $300,000 in Fixed Pay (Salary, Super, Allowances, Benefits, FBT and Fixed Pay Equity),
- 20% ($60,000) in Short Term Variable Remuneration (STVR) at Target (Stretch/maximum of $67,500) and
- 20% ($60,000) in Long Term Variable Remuneration (LTVR) at Target (Stretch/maximum of $60,000 valued at grant);
- the Target Total Remuneration Package (Target TRP or TTRP) of the incumbent is therefore $420,000.
- The Company’s remuneration policy, as per the Executive KMP Remuneration Policy & Procedure published on the Company website, is to pay Fixed Pay at P50 of the market, and Target TRP at P62.5, subject to adjustment for role design and incumbent specific factors.
The two first approaches display some markedly different features and may lead to very different outcomes with notably different costs to the Company:
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Indicated at a high level whether or not the current packages in “in-the-ballpark”. In this case, it showed that the incumbent was being paid substantially below the benchmarks (both the red and yellow circled values above) and should be the subject of a remuneration adjustment, to around $456,000 Fixed Pay and $835,000 TTRP, based on the Industrial & Service Sector data, which would appear to be most relevant (yellow circled values above).
Tailored market data
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This approach gave a much more precise indication of pay practices in the technology sector for comparably scaled businesses, including key peers, and showed that the broader Industrial & Services market data was overestimating the benchmark. Instead, it appears $383,000 Fixed Pay (P50 FP) and $690,000 Target TRP (P62.5 TRP) would appear appropriate, saving the Company around $73,000 in Fixed Pay and $145,000 in total cost in FY23 compared to using the broader market indicators.
Seek independent external advice: benchmarking advisory report
Tailored advice & recommendations
While the foregoing examples are “data only” and can be provided to anyone, recommendations can only be legally given to non-executive directors in listed companies. In this example, after the client sense-checked their remuneration with the Guide, and then obtained the bespoke data-only report, the Board decided to engage GRG to provide tailored advice in a benchmarking advisory report, which proceeded as follows:
- GRG built a tailored pay-banding model across the whole executive team, reflecting market-anchor points from the data-only report, and then built a customised model of the organisation design based on role descriptions, the organisation chart, and discussion.
- This resulted in “slotting” of roles relative to a) typical market positions and b) other executives inside the Company. In this case, the CFO role was identified as being “a step down” from a typical CFO role, because the CEO role had taken the financial strategy accountability from the CFO role, and was slotted one position below the typical CFO position.
- This led to a recommendation for the incumbent to receive $330,000 in Fixed Pay, alongside a 35% Short Term Variable Remuneration target, and a 35% Long Term Variable Remuneration target expectation (note: target is not stretch/maximum).
- The resultant total package of $561,000 fell low in the data range, but represented a significant increase on the current package, which retained the incumbent, and was appropriate to industry, company scale, the company’s specific role design and role relativities.
- Further, GRG recommended that the 10% Fixed Pay increase be delivered in the form of 12-month-tested Service Rights (as part of Fixed Pay), to reduce cash-flow impact, support retention, and to compete with peers offering additional equity in the technology space.
- Similarly, it was recommended 50% of the STVR be settled in Restricted Rights (no “risk of forfeiture” but subject to clawback and favourable tax treatment) to reduce the cash-flow impact of variable remuneration increases, while increasing “skin-in-the-game”.
There will be times when each of the available benchmarking approaches will be appropriate to your circumstances. Typically, tailored advice is only sought every 2–3 years or if circumstances have changed substantially e.g. >25% change in market capitalisation, major change in organisation design or role design, or critical feedback from stakeholders is received. In between major reviews, off-the-shelf solutions like the Guide can tell you which way the wind is blowing, and if you might be materially out-of-the-market.
While tailored advice can help get you to the right outcome faster and more efficiently than interpreting market data yourself, you may prefer not to receive recommendations or perhaps a data-only check give you the comfort you need. In this case data-only or off-the-shelf reports will be the best solution for you.