Executive remuneration: a quick guide


13 September 2022

PDF version [531 KB]

Paula Pyburne and Jaan Murphy
Law and Bills Digest Section

 

This Quick Guide explains the requirement for certain corporations to have an Annual General Meeting; the rules which allow shareholders to vote against a motion to increase the remuneration of executives of the corporation; and the consequences for those executives if a ‘no’ vote occurs in two consecutive years.

What are companies/corporations?

The Corporations Act 2001 (Cth) defines a corporation as:

  • a company
  • any body corporate (whether incorporated in this jurisdiction or elsewhere)
  • an unincorporated body that under the law of its place of origin, may sue or be sued, or may hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose and
  • includes an Aboriginal and Torres Strait Islander corporation that has been incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 [section 57A].

The formation and registration of companies is fundamental to business in Australia and overseas. Importantly, a company has the legal capacity and powers of an individual. In addition, a company has all the powers of a body corporate, including the power to issue and cancel shares in the company [section 124].

Proprietary companies and public companies

A company may be, amongst other things, a proprietary company (large or small) [section 45A] or a public company [subsection 112(1)].

Proprietary companies

The Corporations Act provides that a proprietary company must be either:

  • a Proprietary Limited (Pty Ltd) company, limited by shares, where shareholders are afforded protection when it comes to the level of liability that they face for company debts [subsection 112(1) and subsection 148(2)].
  • an Unlimited Proprietary (Pty) company with a share capital, similar to its limited company (Ltd or Pty Ltd) counterpart, but where the members’ or shareholders’ liability is unlimited—even if they have paid for their shares in full [subsection 112(1) and subsection 148(3)]. Given the possible liability of the shareholders such companies are rare.

A proprietary company must have at least one shareholder but no more than 50 non-employee shareholders [subsection 113(1)]. It must have at least one director who ordinarily resides in Australia [subsection 201A(1)]—however, it is not mandatory that there is a company secretary [subsection 204A(1)]. A proprietary company can raise funds by offering its own shares to existing shareholders or its employees. In addition, a proprietary company may raise money by accessing credit from financial institutions or be funded by its directors [subsection 113(3)].

Public companies

A public company must have at least one shareholder but there is no upper limit to how many shareholders it can have. It must have at least three directors, two of whom must ordinarily reside in Australia [subsection 201A(2)] and at least one company secretary [subsection 204A(2)] who must also ordinarily reside in Australia. A public company, whether listed (for instance on the Australian Stock Exchange (ASX)) or unlisted, can raise capital by issuing shares to the public.

Under the Corporations Act, public companies with more than one member must hold an annual general meeting (AGM) at least once per calendar year [subsection 250N(2)]. Unless their constitution requires it, there is no requirement for proprietary companies (that is, private companies) to hold an AGM. However, they may choose to do so.

Business of an annual general meeting

The business of an AGM may include any of the following:

  • consideration of the annual financial report, directors’ report and auditor’s report
  • the election of directors
  • the appointment of the auditor and
  • the fixing of the auditor’s remuneration [subsection 250R(1)].

Reporting executive remuneration

Directors of a listed company are obliged to include, in a separate and clearly identified section of the annual report, specific information on the remuneration of key management personnel (that is, executive remuneration: [section 300A and section 2M.3.03 of the Corporations Regulations 2001]). Key management personnel is defined by reference to relevant Australian Accounting Standards, and is currently defined in AASB 124: Related Party Disclosures (p. 7) as:

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.

This therefore includes all directors and, generally, the most highly remunerated executives of the company. The relevant information that must be reported includes, amongst other things:

  • discussion of board policy for determining the nature and amount (or value, as appropriate) of remuneration of the key management personnel for the company
  • discussion of the relationship between that policy and the company’s performance
  • if an element of the remuneration of a member of the key management personnel for the company is dependent on the satisfaction of a performance condition:
    • a detailed summary of the performance condition and an explanation of why the performance condition was chosen
    • a summary of the methods used in assessing whether the performance condition is satisfied and
    • an explanation of why those methods were chosen [section 300A].

Two strikes

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 amended to Corporations Act to strengthen the accountability and transparency of Australia’s executive remuneration framework and give shareholders more power over the pay of company directors and executives by establishing the ‘two strikes’ rule. The rule means that boards face being spilled if they suffer shareholder votes of more than 25 per cent against their executive pay proposals at two consecutive company annual general meetings.

The ‘first strike’ occurs where a company’s remuneration report receives a ‘no’ vote of 25 per cent or more at its AGM (the first AGM) [section 250U]. Where this occurs, the company’s remuneration report put to the next year’s AGM must include an explanation of the board’s proposed action in response to the ‘no’ vote or an explanation of why no action has been taken [paragraph 300A(1)(g)].

The ‘second strike’ occurs where the company’s remuneration report to the next year’s AGM receives a ‘no’ vote of 25 per cent or more [section 250U].

In that case, shareholders will vote at that AGM to determine whether the directors will need to stand for re-election. If this spill resolution passes with a majority of  eligible votes cast, then a ‘spill’ meeting will take place within 90 days [section 250V]. A company will still need to provide the minimum notice period for holding a meeting, as required by the Corporations Act [section 250W]. A company will also need to comply with any minimum notice period set out in its constitution for the nomination of candidates for the board. This will ensure that shareholder nominated candidates can seek endorsement at the ‘spill’ meeting.

At the ‘spill’ meeting—current directors

At the spill meeting, those persons who were directors when the directors’ report was considered at the most recent AGM are required to stand for re-election (other than the managing director, who is permitted to hold office indefinitely without being re-elected to the office, in accordance with the Australian Securities Exchange (ASX) listing rules) [subsection 250V(1)]. These directors cease to hold office immediately before the end of the spill meeting.

Where none of the persons who were directors when the directors’ report was considered at the most recent AGM remain as directors of the company, then the company will not be required to hold the spill meeting [subsection 250W(4)]. This is the case whether or not those directors have been replaced by new directors.

At the ‘spill’ meeting—new directors

The Corporations Act requires that the statutory minimum of three directors remain after the spill meeting [subsection 201A(2)].

One of those will be the managing director who is not required to stand for re-election. The remaining positions will be filled by those with the highest percentages of votes favouring their appointment cast at the spill meeting on the resolution for their appointment (even if less than half the votes cast on the resolution were in favour of their appointment). If two or more individuals have the same percentage of votes, the remaining director/s can choose which individual is appointed as a director [section 250X].

Any new directors elected at the spill meeting automatically hold office at the end of the meeting [subsection 250W(9)].

A failure to hold the spill meeting within 90 days of the spill resolution being passed is a strict liability offence, as a failure to hold a spill meeting would be considered a serious breach of the requirements, particularly as it diminishes the ability of shareholders to hold directors accountable on remuneration issues [subsection 250W(6)].

Effectiveness of a ‘say on pay’ laws

In 2014 it was reported that company directors had warned that the ‘two strikes’ rule was being used by some activist investors to challenge management on a broad range of issues, well beyond its intended verdict on executive pay. Nevertheless, they also agreed the rule had encouraged more consultation by company boards, particularly company chairs, with major shareholders.

There is some evidence that the rule is having its intended effect, as illustrated in a recent paper, Australia’s ‘Two Strikes’ Rule and the Pay-Performance Link: Are Shareholders Judicious? The paper points to better links between pay and performance the year after a company earns its first strike.

Disclosure of executive remuneration in non-Corporations Act entities

Whilst not examined in detail in this quick guide, remuneration disclosure requirements similar to those discussed above are imposed on other types of entities. For example:

 

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