Practical Advice for ASX-Listed Companies on How to Prepare a Remuneration Report

For an ASX-listed company, preparing the remuneration report can easily become an annual compliance exercise.

Last year's report is opened, dates and remuneration figures are updated, new incentive outcomes are inserted, Legal reviews the disclosures and the final document works its way through the Remuneration Committee and Board.

That process may produce a compliant report, but it does not necessarily produce a useful one.

A good remuneration report should allow a shareholder to understand how executives are paid, what they were expected to achieve, what they actually achieved and why the resulting remuneration outcome was reasonable.

The challenge is communicating that story without turning the report into 30 pages of technical remuneration language.

Here are some practical ways to approach it.

Start preparing well before year-end

One of the easiest improvements is to stop treating the remuneration report as a year-end project.

Much of the information required for the report is created throughout the year.

This includes executive remuneration changes, STI and LTI grants, performance measures, changes to employment arrangements, Board decisions, incentive outcomes and changes to the remuneration framework.

Keep a simple remuneration-report working file during the year.

For each KMP, record significant decisions as they happen.

For example:

By year-end, you should already know most of the remuneration story.

This is much easier than reconstructing 12 months of decisions from Board papers and emails several months later.

Begin with the remuneration story, not the statutory table

Before building detailed tables, ask what happened during the year.

Did the company perform strongly?

Did executives receive large incentive outcomes?

Were incentives reduced despite strong financial performance?

Was there a major acquisition?

Did the share price fall materially?

Were there significant safety, customer or conduct issues?

Did the company change its remuneration framework?

Were any executives appointed or terminated?

The answers determine what shareholders are likely to focus on.

If the company had a difficult year but the CEO received a substantial incentive payment, the report needs to explain why.

Simply showing that the formula produced the result will probably not be enough.

Make the first few pages do more work

Many remuneration reports contain the most useful information deep inside the document.

Consider putting a concise summary near the beginning showing:

• remuneration philosophy;
• executive remuneration structure;
• key changes during the year;
• company performance;
• STI outcomes;
• LTI outcomes; and
• major decisions made by the Board.

A shareholder should not need to read the entire report before understanding what happened.

A simple summary might show:

The detail can follow later.

Explain why the remuneration framework exists

Generic remuneration philosophy statements add very little.

Statements about "attracting, motivating and retaining high-calibre executives" appear in countless remuneration reports.

Instead, explain how the remuneration framework supports the company's actual strategy.

A growth company might place greater emphasis on revenue growth, customer acquisition and long-term shareholder value.

A mature infrastructure business might place greater emphasis on earnings, cash generation, capital management, safety and returns to shareholders.

A turnaround business may have different priorities again.

The reader should be able to see a connection between:

business strategy → executive accountability → performance measures → remuneration outcomes.

If that connection is difficult to explain in the report, it may also be worth asking whether it is sufficiently clear in the remuneration framework itself.

Explain fixed remuneration properly

Fixed remuneration often receives relatively little attention because the incentive arrangements are more interesting.

However, shareholders may still want to understand why an executive's fixed remuneration changed.

If the CEO receives a 12% increase while the broader employee remuneration budget is 4%, explain the reason.

Perhaps the CEO was materially below the relevant market.

Perhaps the role expanded following an acquisition.

Perhaps remuneration had not been reviewed for several years.

The explanation should be specific enough to be useful.

"Following a market review" is considerably less informative than explaining that the Board reviewed comparable roles and adjusted remuneration to reflect the increased scale and responsibilities of the position.

Make STI disclosure easy to follow

STI disclosure can become unnecessarily complicated.

A practical approach is to show the performance measures, weighting, actual result and resulting outcome in one place.

For example:

Then explain the important outcomes.

If EBITDA substantially exceeded target, say what happened.

If the customer measure was missed, explain why.

If the Board exercised discretion, explain the decision and its effect on remuneration.

The reader should not need to combine information from five different tables to work out how the STI payment was determined.

Be careful with vague non-financial measures

Measures such as "strategy", "leadership" and "people" may be appropriate, but they can become difficult to assess from outside the company.

If 20% of an executive's STI relates to strategic priorities and the executive receives 95% of that component, shareholders should have some understanding of what was delivered.

You do not necessarily need to disclose commercially sensitive information.

You should provide enough information to demonstrate that the outcome was based on meaningful performance rather than general Board judgement.

This becomes particularly important when financial performance has been weak but non-financial measures have generated a substantial incentive payment.

Explain Board discretion rather than hiding it

Discretion is not necessarily a problem.

Sometimes the mechanical incentive outcome does not appropriately reflect what happened during the year.

The Board may need to reduce an STI because of a significant risk event, customer issue or other outcome not adequately captured by the formula.

There may also be exceptional circumstances where upward discretion is considered appropriate.

If discretion has materially changed the result, explain it.

For example:

The formulaic STI outcome was 74% of maximum. The Board reduced the final outcome to 65% following consideration of customer service outcomes during the year.

That is much more useful than simply reporting the final 65%.

It demonstrates that the Board has actively considered whether the remuneration result reflects the broader performance of the company.

Make LTI disclosure understandable

Long-term incentives can be one of the hardest parts of a remuneration report for an ordinary shareholder to follow.

There may be several overlapping grants, different performance periods, multiple measures and different vesting outcomes.

A simple grant table can help.

Then explain the grant that actually reached the end of its performance period during the year.

What were the original targets?

What performance was achieved?

How much vested?

What happened to the remainder?

The remuneration report should make it possible to follow an LTI from grant through to vesting or lapse.

Distinguish accounting remuneration from what executives actually received

One of the most confusing parts of remuneration reporting is that the statutory remuneration table may not resemble the amount an executive actually received during the year.

Share-based payment accounting can produce remuneration expenses relating to awards granted in previous years, while an executive may receive no shares from those awards during the current year.

Where appropriate, companies can help readers understand the distinction between statutory remuneration and realised or actual remuneration, provided additional disclosures are clearly explained and do not create further confusion.

If you provide an alternative remuneration table, clearly define what is included.

Do not create another measure that shareholders need a remuneration specialist to decipher.

Reconcile every number

Remuneration reports contain the same information in multiple places.

The CEO's fixed remuneration may appear in the statutory table, remuneration summary, employment agreement section and incentive calculations.

A small inconsistency can undermine confidence in the whole report.

Before the report reaches the Board, perform a complete reconciliation.

Check:

• fixed remuneration;
• superannuation;
• cash bonuses;
• deferred STI;
• share-based payments;
• termination payments;
• opening and closing equity holdings;
• grants;
• vesting;
• lapses; and
• total statutory remuneration.

Someone who did not prepare the original calculations should ideally perform or review the reconciliation.

Keep a KMP movement schedule

Changes in KMP during the year create additional complexity.

Maintain a schedule showing:

This becomes the reference point for determining which remuneration needs to be disclosed and for what period.

Do not wait until the remuneration report is almost finished before trying to reconstruct KMP dates.

Review the report through the eyes of a shareholder

Once the first draft is complete, stop reading it as the person who prepared it.

Imagine you own shares in the company but were not involved in any of the remuneration decisions.

Can you work out what the CEO could earn?

Can you understand what the CEO actually earned?

Can you see what performance was required?

Can you understand why the STI paid what it did?

Can you work out what happened to the LTI?

Can you understand why remuneration increased or decreased?

Can you see whether the Board used discretion?

If those answers require several people to explain the report verbally, the disclosure probably needs more work.

Give the Remuneration Committee enough time

The Remuneration Committee should not see the remuneration report for the first time shortly before the annual report needs to be approved.

A practical timetable might include an early draft of the remuneration framework and key messages, followed by the completed performance outcomes, statutory disclosures and final reconciliation.

This gives directors time to challenge the story as well as the numbers.

The Committee should be asking whether the remuneration outcomes make sense in the context of company performance, shareholder experience and the decisions made during the year.

That discussion is much harder when the report is being approved against a publication deadline.

Keep an evidence file

For every material statement or number in the remuneration report, it should be possible to identify the supporting evidence.

The working file might contain:

Board-approved remuneration changes

STI scorecards

LTI calculations

market benchmarking

employment agreements

equity grant documentation

vesting calculations

KMP dates

Finance reconciliations

and relevant Board or Committee approvals.

This is particularly useful when auditors, directors or advisers ask where a number came from.

It also makes preparing the following year's report considerably easier.

Do a final consistency review

Before approval, read the remuneration report alongside the rest of the annual report.

If the Chair's letter says the company had an exceptionally difficult year but the remuneration report describes executive performance as outstanding, the inconsistency will be obvious.

Check the remuneration narrative against:

financial results

strategic achievements

shareholder returns

material risk events

safety outcomes

customer outcomes

and other significant matters discussed elsewhere in the annual report.

The remuneration report should tell the same underlying performance story as the rest of the annual report.

A practical year-end checklist

Before the remuneration report goes to the Board, confirm that the company can answer the following questions.

Have all KMP been identified correctly?

Do all remuneration figures reconcile to Finance and payroll records?

Are STI measures and outcomes clearly explained?

Are LTI grants and vesting outcomes understandable?

Have Board discretion and significant adjustments been disclosed clearly?

Are executive remuneration changes explained?

Do equity movements reconcile?

Are statutory and any voluntary remuneration measures clearly distinguished?

Does the remuneration story align with company performance?

Can a shareholder understand why executives received the remuneration they received?

Has Legal, Finance, remuneration and the external auditor reviewed the areas relevant to them?

The precise disclosure requirements should always be checked against the Corporations Act, applicable accounting standards, ASX requirements and the company's circumstances. The practical objective, however, should go beyond producing a report that technically satisfies the rules.

A strong remuneration report should make the Board's decisions understandable.

When a shareholder finishes reading it, they should be able to see what executives were rewarded for, whether the performance was actually delivered and how the remuneration outcome aligned with the experience of shareholders.

That is ultimately what makes a remuneration report useful rather than simply compliant.