Glossary

Board Fee Benchmarking

Board fee benchmarking is the process of assessing the market competitiveness of remuneration paid to non-executive directors. Such remuneration is typically composed of cash board and committee fees, company superannuation contributions and equity instruments such as rights and options. When assessing the market competitiveness of remuneration, the company’s practices are compared to both the practices of other similar companies and the company’s policies on market positioning of such remuneration.

Board of Directors

A Board of director is a group of individuals who collectively have responsibility for the overall governance, strategic direction and financial health of the organisation. This responsibility is usually set out in the organisation’s constitution or in the enabling legislation under which the organisation is registered or incorporated. The directors who constitute a board are usually elected, if they are non-executives and usually have terms of 3 years before they need to stand for re-election. Executive directors are appointed by the board for contracted periods or for indefinite periods that may be terminated by the director or the organisation.

CEO

This title refers to the most senior executive who is responsible for the overall management of an organisation. The CEO usually reports to the Board. Rarely the Board Chair is an executive and when this arises the CEO may report to the Board Chair rather than the Board.

CEO Incentive Plans

CEO incentive plans are remuneration arrangements designed to introduce variability into the remuneration for the CEO. The variability is designed to align the remuneration experience of the CEO with the financial experience of shareholders. The variability results in lower than target remuneration when performance goals are not achieved (this is often referred to as at-risk remuneration) and above target remuneration when performance goals are exceeded (this is often referred to as incentive remuneration). CEO incentive plans may be composed or short and/or long term variable remuneration plans.

Clawback Policy

A clawback policy is a provision that allows a company to recover under certain circumstances, variable remuneration paid to an executive. These circumstances may include discovery of significant errors in the company’s accounts that impacted prior variable remuneration outcomes, gross misconduct, misrepresentation, or violation of company policies or legal obligations. The policy aims to ensure that executives are held accountable for their actions and that the company's reputation and financial position are protected.

Employee Share Scheme / ESOP

An employee share scheme or employee share ownership plan (ESOP) is a program that facilitates the acquisition by employees of equity interests in the company for which they work. These schemes take many forms and may use shares, rights or options. They may also involve employee contributions from pre or post tax remuneration.

Executive Incentive Review

An executive incentive review is a process of reconsidering the appropriateness for the company of the types of variable remuneration plans that are used for executives and the terms and conditions of such plans. To inform the reconsideration information is usually gather on competitive market practice, legal and governance considerations, stakeholder attitudes and the past effectiveness of the plans in achieving their objectives.

Executive Pay Review

Executive pay review is a process by which an organisation reconsiders the quantum and components of remuneration provided to its senior executives. The review typically considers various factors such as data on competitor remuneration practices, the organisation’s policies regarding market positioning of Fixed Pay and target total remuneration packages, the organisation’s financial ability to absorb additional costs should increases be provided, external factors that may influence any changes to executive remuneration, the organisation’s risk expose to loss of key talent and individual performance.

Executive Remuneration Benchmarking

Executive remuneration benchmarking is the process of assessing the market competitiveness of remuneration paid to the organisation’s executives. Such remuneration is typically composed of Fixed Pay, short term variable remuneration and long term variable remuneration. When assessing the market competitiveness of remuneration, the company’s practices are compared to both the practices of other similar companies and the company’s policies on market positioning of such remuneration.

Indeterminate Rights

Within the context of remuneration packages, an Indeterminate Right is a derivative where the number of shares, if any, to be provided on exercise of the Right is not determined until the Right is exercised. This lack of certainty may arise because, for example, the Board has discretion as to whether to settle exercised Rights in cash or shares or the Right is to a number of shares that have a value equal to the growth achieved on a parcel of shares during the period the Right is held prior to exercise.

Key Management Personnel (KMP)

Key Management Personnel is a term that is defined in the Corporations Act. It includes all board members (including non-executive directors) and executives who have responsibility and authority for planning, directing and controlling the activities of the company, whether directly or indirectly.

Key Performance Indicator (KPI)

A KPI is a metric that is used to measure performance in relation to KRAs.

Key Result Area (KRA)

KRAs are internal and external strategic factors where strong results must be realised for the organization to achieve its strategic goal(s), and therefore, move toward realising the organization’s longer term vision of success. Therefore, KRAs are a critical element of implementing an organisation’s long term business strategy.

Long-Term Incentive (LTI)

LTIs are variable remuneration plans where performance is assessed over multi-year periods, typically 3 to 5 years. Most LTI plans in Australia involve annual grants of shares, rights, options or share appreciation rights which may vest at the end of a measurement period depending upon company performance in relation to performance metrics such as total shareholder return and growth in profitability.

Malus Provisions

Malus provisions allow companies to reduce future variable remuneration reward opportunities in response to unacceptable performance. They tend to be used when Clawback provisions are not seen as adequately addressing poor performance.

Non-Executive Director Remuneration Benchmarking (NED Remuneration Benchmarking)

See Board Fee Benchmarking.

Percentiles

Percentiles are statistics that are often referred to when benchmarking the market competitiveness of remuneration. The following illustrates three of the frequently referred to statistics.

Performance Right

A Performance Right is a Right that is subject to performance based vesting conditions.

Remuneration Committee

A Remuneration Committee is a board committee that is tasked with advising the board on matters relating to remuneration of the CEO, other senior executives and non-executive directors. Such matters include developing and updating policies and procedures that govern remuneration elements and periodic reviews of the market competitiveness of remuneration. Remuneration Committees may also advise the board on other matters such as those related to succession, human resources and culture. Particularly when the committee has a wider brief than just remuneration it is common practice for the committee to have a different name such as the HR Committee or the People and Culture Committee.

Remuneration Governance

Remuneration governance refers to the processes, policies, and frameworks that govern executive and non-executive director remuneration within an organisation. This includes the establishment of a clear and transparent framework for setting pay quantum and elements, as well as the implementation of appropriate controls and oversight mechanisms to ensure that remuneration is aligned with the company's strategy and objectives.

Remuneration governance also involves engagement with stakeholders, such as shareholders, proxy advisors and regulators, to ensure that remuneration is reasonable, and supports sustainable long-term performance.

Effective remuneration governance is particularly critical for ensuring that executive pay is aligned with company performance, minimising the risk of excessive or unjustified pay levels, and building trust and credibility with stakeholders.

Remuneration Strike

Each year Australian listed companies need to prepare Remuneration Reports that are included in Annual Reports and submitted to shareholders for approval at the annual general meeting. Voting on the resolution seeking shareholder approval of the Remuneration Report is not binding. However, if at least 25% of the cast votes are against the Remuneration Report resolution the company is said to have received a strike. Receiving a strike requires boards to report at the next AGM on how it has responded to matters of concern raised by shareholders. If two successive strikes are received then a resolution needs to be put to the shareholders for a spill of the board which could, if passed, lead to the appointment of new directors.

Restricted Rights

Restricted Rights are Rights which are fully vested but subject to disposal and exercise restrictions.

Retention or Service Rights

Retention Rights (also referred to as Service Rights) are Rights that are subject to service-based vesting conditions. They are not subject to performance-based vesting conditions.

Right

In relation to equity-based remuneration plans, a Right is a contractual entitlement to either a share in the employer company or its parent company or a cash payment equal to the value of such a share when the Rights is exercised following vesting and cessation of any exercise restrictions.

Share Appreciation Right (SAR)

A SAR is a derivative where on exercise the benefit received is the excess of the company’s share price over a notional exercise price. That benefit may be delivered in shares or cash, usually at the discretion of the board. Thus, SARs are like options but with a cashless exercise. They have advantages over options in that they involve the issue of fewer shares and relieve executives from needing the fund the exercise price.

Share Right

A Share Rights is a Right that may only be settled on exercise in the company’s or parent company’s shares.

Short Term Incentive or Short Term Variable Remuneration

Short Term Incentives (STIs) or short term variable remuneration (STVR) are different names for the same types of plan. It is a form of variable remuneration with the amount of the reward usually based on annual performance. STIs can be structured in various ways such as discretionary bonuses, profit shares or target-based plans using discrete weighted outcome metrics with attached reward opportunities or aggregated weighted outcome metrics leading to a single reward outcome. STI rewards have typically been paid in cash but for senior executives in larger companies it is now common for part of the STI rewards to be paid in cash and part in equity.

Short Term Incentive Deferral

Short-term incentive deferral arises when part of an STI reward is not paid in cash immediately following the assessment of performance outcomes. While the part not immediately paid could be retained by the company for later payment it is more usual for the deferred amount to be converted into a grant of Rights. Such Rights are generally not taxable until they are exercise thereby relieving pressure to exercise Rights and sell shares to pay tax on the deferred amount. This taxing outcome tends to encourage executives to retain Rights which provide an equity stake in the company for extended periods.

It is not uncommon for service vesting conditions and/or exercise restrictions to be attached to the deferred STI so as to encourage executives to remain with the company and to retain the Rights for longer periods. The purpose behind STI deferral into Rights is to expose the value of the deferred amount to subsequent performance as reflected in the company’s share price.

Stretch

This is a term that is commonly used in relation to variable remuneration plans. From the performance perspective it represents an outstanding level of performance which would be expected to occur rarely. From a reward perspective it tends to be used to designate the maximum reward opportunity under an STI plan or the maximum award opportunity under an LTI plan.

Strike or Exercise Price

Strike price and exercise price are different terms for the same aspect of an option. It is the amount that needs to be paid to exercise an option or the amount that in deducted from the share price to calculate the accrued benefit in a share appreciation right.

Target

In remuneration planning the term “target” refers to the expected outcome (performance or remuneration) when performance is consistent with challenging but achievable expectations.

Threshold

This is a term that is commonly used in relation to variable remuneration plans. From a performance perspective it represents a near miss of the target but nevertheless a performance level that would be recognised as an acceptable outcome. From a reward perspective it tends to be used to designate the reward opportunity available for threshold performance under an STI plan or the level of vesting from threshold performance under an LTI plan.

Total Remuneration Package (TRP)

A Total Remuneration Package (TRP) is the annualised total of all the elements of remuneration. For executives these elements are typically: Fixed Pay, STI and LTI.

Total Shareholder Return (TSR)

TSR is a percentage return received by shareholders over a specified period of time from share price movement and dividends, assuming they are reinvested into the company’s shares.

Volume Weighted Average Price

Volume weighted average price is the calculation often used to value shares when equity instruments are being offered to executives for STI deferral or LTI purposes. It is determined by adding up the dollars traded for every transaction over a period of time and then dividing by the total shares traded for that period, it can then be used to measure the average price at which a share was traded over a particular trading period.