A Practical Guide to Testing Executive Pay Against Performance, Risk and Shareholder Value

Executive remuneration should never be assessed by formula alone.

A scorecard may say the STI outcome is 78%.

An LTI plan may say 62% of rights should vest.

A benchmarking report may say the CEO is paid around market median.

But the real board question is more important:

Do the remuneration outcomes make sense in light of company performance, risk management and shareholder value?

For ASX-listed companies, this question is central to remuneration governance. Investors do not only ask whether an incentive formula was applied correctly. They ask whether the outcome was fair. They ask whether executives were rewarded for genuine performance. They ask whether poor risk, conduct, safety, customer or shareholder outcomes were properly reflected. They ask whether pay outcomes match the experience of shareholders and other stakeholders.

A good Remuneration Committee should therefore test executive remuneration outcomes through three lenses:

1. Company performance: Did the company achieve what it said it would achieve?
2. Risk management: Were results delivered in the right way?
3. Shareholder value: Did shareholders benefit from the performance being rewarded?

This article provides a practical guide for making that assessment.

1. Start with the principle: formula is not enough

Incentive plans need rules. They need performance measures, weightings, targets and vesting schedules. Without structure, remuneration becomes too discretionary and difficult to explain.

But formula alone is not enough.

A formula may produce a high STI outcome because earnings exceeded target, even though safety performance deteriorated. An LTI may vest because relative TSR exceeded peers, even though underlying business performance was weak. A strategic milestone may be marked as achieved, even though the project was delayed, over budget or delivered with unresolved risk.

That is why boards need to apply judgement.

The practical test is:

Would a reasonable shareholder look at the company’s performance and agree that the remuneration outcome was earned?

If the answer is uncertain, the board should pause before approving the outcome.

2. Define what “alignment” means

Alignment is often used as a vague phrase in remuneration reports. It needs to be made practical.

For an ASX-listed company, remuneration outcomes are aligned when:

• executives are rewarded for outcomes that support strategy;
• financial performance is genuine and sustainable;
• risk, safety, conduct and customer outcomes are considered;
• shareholder returns are reflected;
• incentive outcomes are not excessive compared with performance;
• poor outcomes have consequences;
• discretion is used where formulaic outcomes are inappropriate;
• executive rewards do not appear disconnected from employee or shareholder experience; and
• the rationale can be explained clearly in the remuneration report.

Alignment does not mean executives only get paid when the share price rises. Share prices can be affected by market conditions outside management control. But it does mean the board should test whether the pay outcome is reasonable in the full context of performance and shareholder experience.

3. Build a practical alignment framework

A useful assessment can be built around three questions.

The performance question

What did the company achieve?

This includes financial performance, operational performance, strategic delivery and individual executive contribution.

The risk question

How were the results achieved?

This includes safety, conduct, compliance, customer outcomes, culture, cyber, sustainability, regulatory issues and quality of earnings.

The shareholder value question

Did shareholders benefit?

This includes total shareholder return, share price movement, dividends, capital management, earnings growth, return on capital and long-term value creation.

A practical committee paper should include all three lenses, not only the incentive calculation.

Practical alignment table

Lens	Key question	Evidence to consider	Possible remuneration impact
Company performance	Did the company deliver against plan?	Revenue, EBITDA, NPAT, cash flow, project delivery, strategy milestones	Supports STI/LTI outcomes if performance is strong
Risk management	Were outcomes delivered responsibly?	Safety, conduct, compliance, customer, cyber, audit, risk events	May reduce or override incentive outcomes
Shareholder value	Did shareholders benefit?	TSR, share price, dividends, EPS, return on capital	Tests whether outcomes feel fair to investors

This table helps the Remuneration Committee move beyond a narrow formulaic review.

4. Review company performance honestly

Start with the company’s actual performance for the year.

Do not look only at the incentive scorecard. Look at the full performance picture.

Consider:

• revenue growth;
• EBITDA or EBIT;
• NPAT;
• cash conversion;
• free cash flow;
• return on capital;
• margin performance;
• cost control;
• debt and leverage;
• capital expenditure discipline;
• project delivery;
• customer outcomes;
• market share;
• strategy execution;
• guidance delivery;
• acquisition integration;
• sustainability progress;
• safety performance;
• employee engagement;
• regulatory outcomes; and
• cyber or operational resilience.

The committee should ask whether the incentive outcome reflects the whole performance story, not just selected metrics.

For example, if EBITDA exceeded target but cash flow was weak, the board may question whether the STI outcome should be moderated. If revenue grew strongly but margins declined, the quality of growth should be tested. If strategic milestones were achieved but implementation risks remain unresolved, full payment may not be appropriate.

Practical performance assessment table

Area	Result	Assessment	Remuneration implication
Revenue	Above target	Strong top-line growth	Supports STI outcome
EBITDA	At target	Solid earnings delivery	Supports partial payout
Cash flow	Below target	Working capital deterioration	Consider moderation
Strategic milestones	Mostly achieved	Integration delayed in one division	Partial outcome appropriate
Customer outcomes	Below expectation	Complaints increased	Consider downward discretion
Safety	Below threshold	Serious incident occurred	Gateway or discretion may apply

This approach helps the committee see where the formula may need adjustment.

5. Test the quality of earnings

Not all earnings are equal.

A company may meet an earnings target because of cost deferrals, one-off gains, accounting adjustments, favourable commodity prices, currency movements or market conditions. That does not necessarily mean management did not perform well, but the board should understand the drivers.

Ask:

• Were earnings driven by underlying operational performance?
• Were results supported by sustainable revenue and margin improvement?
• Were there significant one-off gains?
• Were costs deferred into future periods?
• Were maintenance, technology, risk or compliance investments delayed?
• Did management benefit from favourable external conditions?
• Were targets adjusted during the year?
• Were acquisitions or divestments included or excluded consistently?
• Did the result depend on accounting judgements?

The aim is not to punish executives for favourable conditions. The aim is to avoid rewarding outcomes that do not reflect sustainable performance.

Practical quality of earnings test

Question	Why it matters
Was the result underlying or statutory?	Incentives may exclude or include significant items
Were adjustments approved in advance?	Prevents retrospective target management
Were gains repeatable?	Tests sustainability
Were costs deferred?	Avoids rewarding short-termism
Did risk investment suffer?	Connects performance to long-term resilience
Did the result align with cash flow?	Tests earnings quality

A strong Remuneration Committee should understand not only whether the number was achieved, but how it was achieved.

6. Review risk management before approving incentives

Risk should not be reviewed after the incentive outcome is approved. It should be part of the approval process.

Before approving STI or LTI outcomes, the committee should seek input from the Audit and Risk Committee, risk function, internal audit, legal, compliance, safety and people teams where relevant.

Risk matters may include:

• safety incidents;
• regulatory breaches;
• customer harm;
• misconduct;
• material control failures;
• cyber incidents;
• audit issues;
• environmental breaches;
• underinvestment in resilience;
• litigation;
• whistleblower matters;
• culture concerns;
• employee underpayment;
• data privacy failures;
• product quality failures;
• breach of risk appetite; and
• reputational damage.

The board should ask:

Were financial results achieved within the company’s risk appetite?

If not, incentive outcomes may need to be reduced, deferred, withheld or subject to malus or clawback.

7. Use risk gateways where appropriate

A risk gateway is a condition that must be satisfied before incentives are paid or vested.

For example, the company may decide that no STI can be paid, or that the board may reduce STI, if there is:

• a fatality or serious safety event;
• a material regulatory breach;
• a material financial misstatement;
• a major customer harm event;
• a significant cyber incident caused by control failure;
• a severe risk appetite breach;
• serious misconduct by an executive;
• a major environmental incident; or
• a material failure of internal controls.

Gateways should not be used casually. They should be clearly defined and applied consistently.

Practical gateway table

Gateway	Trigger	Consequence
Safety gateway	Fatality or serious preventable safety incident	Board may reduce or cancel STI
Conduct gateway	Material misconduct or regulatory breach	Individual or group outcome may be reduced
Financial integrity gateway	Material misstatement or control failure	Incentives may be withheld or adjusted
Risk appetite gateway	Material breach of board-approved risk appetite	Board discretion applies

The key is to ensure the company does not reward performance that was achieved by taking unacceptable risk.

8. Assess shareholder experience

Shareholder value should be tested over more than one period.

A one-year share price movement may be noisy. But shareholders still expect the board to consider whether remuneration outcomes are reasonable compared with investor experience.

Consider:

• one-year TSR;
• three-year TSR;
• five-year TSR;
• relative TSR against peers;
• share price movement;
• dividends paid;
• earnings per share;
• return on capital;
• capital raisings;
• dilution;
• guidance upgrades or downgrades;
• market confidence;
• analyst sentiment;
• shareholder feedback; and
• remuneration report voting history.

The committee should ask:

If shareholders lost value, why is the proposed remuneration outcome still appropriate?

There may be a good answer. For example, executives may have delivered a major turnaround, protected cash, stabilised operations or achieved milestones in a difficult market. But the answer should be explicit.

Practical shareholder experience table

Measure	Outcome	Implication for remuneration
One-year TSR	Negative	Requires careful explanation if STI is high
Three-year TSR	Above peer median	Supports LTI vesting if aligned with plan
Dividends	Increased	Supports shareholder value narrative
EPS	Declined	May challenge incentive outcomes tied to earnings
Capital raising	Dilutive	Consider shareholder experience and use of capital
Remuneration vote	24% against last year	Heightened sensitivity this year

This type of analysis helps avoid remuneration outcomes that look disconnected from investors’ experience.

9. Compare formulaic outcome with board judgement

The Remuneration Committee should always compare:

1. the formulaic incentive outcome; and
2. the outcome the board believes is appropriate.

If they are the same, say so.

If they are different, explain why.

Practical discretion table

Item	Formulaic outcome	Board-adjusted outcome	Reason
CEO STI	78% of maximum	65% of maximum	Downward discretion for safety and customer outcomes
CFO STI	70% of maximum	70% of maximum	Formulaic outcome considered appropriate
COO STI	74% of maximum	55% of maximum	Reduced due to operational control issues
LTI vesting	62%	62%	Outcome aligned with relative TSR and EPS performance

Discretion should not be mysterious. It should be evidence-based and documented.

10. Consider individual accountability

Group performance may be strong, but individual accountability still matters.

For each executive, ask:

• Did they deliver their personal objectives?
• Did they manage risk in their area?
• Were there control failures under their leadership?
• Did they act consistently with company values?
• Did they contribute to long-term capability?
• Did they collaborate across the executive team?
• Did they respond effectively to issues?
• Were there conduct or culture concerns?
• Did they retain and develop key talent?
• Did they support board transparency?

An executive should not receive a strong incentive outcome simply because the company performed well if their own area materially underperformed or created risk.

Practical individual accountability table

Executive	Group scorecard outcome	Individual assessment	Recommended adjustment
CEO	70%	Strong strategy execution; customer issue requires moderation	-5%
CFO	70%	Strong cash discipline and controls	No adjustment
COO	70%	Safety and operational issues in division	-15%
CCO	70%	Revenue growth achieved but margin quality mixed	-5%

Individual accountability makes remuneration more credible.

11. Check for unintended incentives

Before approving outcomes, consider what behaviour the incentive plan rewarded.

Ask:

• Did the plan reward short-term earnings at the expense of long-term investment?
• Did executives defer necessary spending to meet targets?
• Did growth targets encourage poor-quality revenue?
• Did cost targets encourage underinvestment in people, safety or systems?
• Did individual metrics discourage collaboration?
• Did project milestones reward activity rather than value?
• Did customer targets measure volume but not quality?
• Did ESG measures have enough substance?
• Did executives benefit from windfall gains?
• Did the plan encourage risk outside appetite?

If the incentive plan encouraged the wrong behaviour, the board should consider discretion and redesign the plan for future years.

12. Consider whether malus or clawback applies

Malus and clawback provisions are important risk management tools.

Malus usually allows the company to reduce or cancel unvested awards before payment or vesting. Clawback usually allows the company to recover amounts already paid or vested in certain circumstances.

Triggers may include:

• serious misconduct;
• material misstatement;
• fraud;
• gross negligence;
• serious reputational damage;
• breach of risk policies;
• serious safety failure;
• regulatory breach;
• material financial restatement; or
• awards based on incorrect information.

The committee should ask each year:

• Have any malus or clawback triggers occurred?
• Are there unresolved matters that justify delaying vesting or payment?
• Should awards be reduced or withheld pending investigation?
• Are the plan rules strong enough?
• Has legal advice been obtained where required?

Even if malus or clawback is not applied, the committee should document that it considered the issue.

13. Use a pre-approval checklist

Before approving executive remuneration outcomes, use a practical checklist.

Performance

• Were financial targets achieved?
• Were results sustainable?
• Was cash flow consistent with earnings?
• Were strategic milestones genuinely delivered?
• Were any targets adjusted during the year?
• Were one-off gains or external factors considered?

Risk

• Were results delivered within risk appetite?
• Were there material safety, conduct, customer, cyber or compliance issues?
• Did internal audit raise significant concerns?
• Did any executive have accountability for a risk failure?
• Should a gateway, malus or clawback provision apply?

Shareholder value

• How did TSR compare with peers?
• What was the share price movement?
• Were dividends paid or reduced?
• Did EPS and return on capital improve?
• Was there shareholder or proxy adviser concern?
• Is the outcome consistent with investor experience?

Fairness and explainability

• Would the outcome make sense to shareholders?
• Would employees consider the outcome reasonable?
• Does the outcome align with company values?
• Can the board explain the decision in plain English?
• Is the annual report narrative strong enough?

If the answer to any question is uncomfortable, the outcome needs more analysis.

14. Prepare a clear committee paper

The Remuneration Committee paper should not simply include the incentive calculation. It should include a full alignment assessment.

A practical paper structure is:

1. Purpose and recommendation
2. Executive summary
3. Formulaic incentive outcomes
4. Company performance overview
5. Risk and conduct assessment
6. Shareholder value assessment
7. Individual accountability assessment
8. Board discretion considerations
9. Malus and clawback assessment
10. Disclosure implications
11. Recommendation and next steps

This structure helps the committee make a decision, not just check a calculation.

15. Document the rationale carefully

If the board approves the formulaic outcome, document why it was appropriate.

If the board applies discretion, document:

• the original formulaic outcome;
• the adjusted outcome;
• the reasons for adjustment;
• evidence considered;
• executives affected;
• whether the adjustment was upward or downward;
• whether risk matters were considered;
• whether shareholder experience was considered;
• whether conflicts were managed; and
• how the decision will be disclosed.

This documentation is important for governance, audit support, annual report drafting and shareholder engagement.

16. Reflect the assessment in the remuneration report

The annual report should explain the link between pay and performance clearly.

Avoid generic wording such as:

“Remuneration outcomes were aligned with performance.”

Instead, explain the actual alignment.

Better wording:

“STI outcomes were below the formulaic scorecard result because the Board applied downward discretion to reflect safety and customer outcomes that were below expectations. The Board considered this adjustment appropriate notwithstanding above-target financial performance.”

Or:

“The FY2024 LTI award vested at 45% of maximum. This reflected relative TSR performance above threshold but below stretch, and EPS growth below target. The Board considered the vesting outcome aligned with shareholder experience over the three-year performance period.”

Clear disclosure builds trust.

17. Watch for red flags

The following situations should trigger closer review:

• high STI payout after weak shareholder returns;
• LTI vesting despite poor underlying performance;
• financial targets achieved but cash flow weak;
• strong executive bonuses after safety or conduct failures;
• large pay outcomes after a major regulatory breach;
• incentive payments after a capital raising at a depressed share price;
• high executive rewards during workforce reductions;
• targets lowered during the year without clear rationale;
• excessive reliance on discretion;
• unclear strategic milestone assessment;
• positive remuneration outcomes despite a first strike;
• large retention awards without strong explanation; and
• outcomes that are difficult to explain in the annual report.

A red flag does not automatically mean the outcome is wrong. It means the board should investigate and document its judgement.

18. Practical worked example

Assume an ASX-listed company delivered the following results:

• revenue above target;
• EBITDA above target;
• cash flow below target;
• one serious safety incident;
• customer complaints increased;
• one-year TSR negative;
• three-year TSR above peer median;
• strategic transformation milestones partly achieved.

The STI formula produces a 76% outcome.

A practical committee assessment might conclude:

Lens	Assessment	Impact
Financial performance	Strong revenue and EBITDA	Supports payout
Cash flow	Below target due to working capital issues	Moderates payout
Safety	Serious incident occurred	Requires downward discretion
Customer	Complaints increased	Moderates payout
Shareholder experience	One-year TSR negative	Requires careful explanation
Strategic milestones	Partly achieved	Partial score appropriate

The committee may recommend reducing the STI outcome from 76% to 58% of maximum.

The rationale could be:

“While financial performance was above target, the Committee considered that the formulaic STI outcome did not sufficiently reflect safety, customer and cash flow outcomes. The Committee therefore recommended downward discretion to reduce the STI outcome to 58% of maximum.”

This is practical, defensible and easy to explain.

19. Common mistakes to avoid

Do not approve incentive outcomes by formula only.

Do not ignore risk events because financial targets were met.

Do not treat shareholder value as irrelevant to STI.

Do not use discretion without documenting why.

Do not reward strategic milestones without evidence of delivery.

Do not allow one-off gains to inflate incentive outcomes without review.

Do not overlook individual accountability.

Do not apply gateways inconsistently.

Do not forget to consider malus and clawback.

Do not make the annual report say “alignment” if the evidence is weak.

20. Final board questions

Before approving remuneration outcomes, the board should ask:

• Did executives deliver real performance?
• Was the performance sustainable?
• Were results achieved within risk appetite?
• Were any stakeholders harmed in the process?
• Did shareholders benefit?
• Does the outcome reflect individual accountability?
• Should discretion be applied?
• Should malus or clawback be considered?
• Can we explain this outcome clearly in the remuneration report?
• Would we be comfortable defending this decision at the AGM?

These questions bring discipline to the approval process.

Final thought

Assessing remuneration outcomes is not just about checking whether targets were met.

It is about asking whether the reward is deserved.

For ASX-listed companies, the strongest remuneration governance comes from combining formula, evidence and judgement. The formula provides structure. The evidence shows what actually happened. The judgement ensures the outcome is fair, responsible and aligned with long-term value.

A good Remuneration Committee does not simply ask:

What does the plan pay?

It asks:

Given performance, risk and shareholder experience, what should the plan pay?

That is the difference between incentive administration and true remuneration governance.