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EvaluatingPayforPerformanceAlignmentImplementingaPayforPerformanceModelforAustralia
Authors:VasiliKolesnikoffSarahGallard
Published:August2017
EvaluatingPayforPerformanceAlignment
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TABLEOFCONTENTS
EXECUTIVESUMMARY..................................................................................................................................................3
INTRODUCTION............................................................................................................................................................4TheISSPFPquantitativemethodologydeliversacommon,globalapproach........................................................4WhatWeMeasure--Pay.....................................................................................................................................4
CalculatingAustralianTotalPay..............................................................................................................................5WhatWeMeasure--Performance.......................................................................................................................5WhatWeMeasure--RelativeandAbsoluteAlignmentOverTime.......................................................................6
ISS'QUANTITATIVEEVALUATIONOFPAY-FOR-PERFORMANCEALIGNMENT................................................................7MeasuresofPay-for-PerformanceAlignment......................................................................................................7MeasuresofRelativeAlignment..........................................................................................................................7
RelativeDegreeofAlignment(RDA).......................................................................................................................7MultipleofMedian(MoM).....................................................................................................................................8
MeasureofAbsoluteAlignment...........................................................................................................................8Pay-TSRAlignment(PTA)........................................................................................................................................8
THEAUSTRALIANAPPROACHTOPEERGROUPCONSTRUCTION...................................................................................9NumberofPeers.....................................................................................................................................................9RemunerationDataandIndustryClassification......................................................................................................9PeerGroupConstruction........................................................................................................................................9Company-DisclosedPeers.....................................................................................................................................10
NOTESONIMPLEMENTATION....................................................................................................................................11PresentationWithintheResearchReports...........................................................................................................11
APPENDIX:BACK-TESTINGTHEMODEL.......................................................................................................................14RelativeDegreeofAlignment...............................................................................................................................14MultipleofMedian...............................................................................................................................................14Pay-TSRAlignment................................................................................................................................................14
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EXECUTIVESUMMARY
Inthe2017annualmeetingseason,ISSisintroducingaquantitativepay-for-performance(PFP)assessmentcoveringthelargestAustraliancompanies.WehavesoughttoleveragethecommonfeaturesoftheISSpay-for-performancemodelsimplementedintheU.S.,Canada,andEuropewhereappropriate.Inaddition,theapproachhasbeenadaptedasnecessarytofittheAustraliancontext,notablyinrelationtotheconstructionofpeergroupsandthepaycalculationmethodology.
TheISSAustralianPFPmodelusesavariationofthegrant-day(orgranted)definitionofpaythatissimilartotheonecurrentlyusedintheISSPFPmodelsfortheUSandCanada,adaptedtothedisclosurepracticesinAustralia.Andsimilartootherglobalpay-for-performancemodels,themeasureofperformanceinthequantitativetestistotalshareholderreturn(TSR).AnISSPeerGroupisconstructedforeachsubjectcompanytomakearelativecomparisonofpayandperformancebetweenthesubjectcompanyandthelistofcomparablepeercompanies.Additionaldetailsoneachofthesetopicsisprovidedlaterinthisdocument.
ForISSbenchmarkvotingpolicy,assessmentofremunerationforAustraliancompaniesfollowstheISSGlobalPrinciplesonExecutiveandDirectorRemunerationwhicharedetailedbelow.Thesetakeintoaccountglobalcorporategovernancebestpracticeprinciples.
TheISSGlobalPrinciplesonRemuneration
Companiesshould:
1.Provideshareholderswithclear,comprehensiveremunerationdisclosures;
2.Maintainappropriatepay-for-performancealignmentwithemphasisonlong-termshareholdervalue;
3.Avoidarrangementsthatrisk“payforfailure;”
4.Maintainanindependentandeffectiveremunerationcommittee;
5.Avoidinappropriatepaytonon-executivedirectors.
TheISSAustralianPFPmodelwillprovidequantitativeelements,whichconsiderbothrelativePFPalignmentcomparedwithpeergroupsandabsolutePFPalignment.Themethodologyisdescribedinthispaper,and,likeourPFPmethodologyforothermarkets,itincorporatesmodelsforRDA(RelativeDegreeofAlignment,)MoM(MultipleofMedian)andPTA(Pay-TSRAlignment).
ItisimportanttoemphasisethattheadditionoftheAustralianpay-for-performancemodeltoISSbenchmarkresearchreportswillbeadditiveandisintendedtoprovideadditionaldatapointsforcomparability.Therefore,whilethePFPmodelreviewstotalpayversusTSRperformance,thequalitativereviewbyISSresearchanalystswillcontinuetotakeintoaccountvariouspayelements,suchasawardopportunities,servicecontracts,performancemeasuresandachievements,andactualawardpayouts,amongotherfactors.ThequalitativefactorsthatISSconsidersinitsholisticanalysisofpayarediscussedintheseparateISSAustralianbenchmarkpolicy.
TheinitialAustralianPFPcoverageuniversewillcomprisecompaniesintheS&P/ASX3001thatfallunderISS’Australiapolicycoverage.Forthe2017introductionofthemodel,theuniverseofconstituentswassetinJune2017.Indexconstituentswillbereviewedannuallygoingforward.ISSresearchreportsoncompaniescoveredbyAustralianPFP
----------------------1https://us.spindices.com/indices/equity/sp-asx-300
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assessmentwillincludethepay-for-performanceassessmentformeetingsonorafter1October2017.
FurtherinformationwillbeavailablefromtheISSPFPhelpdesk,whichshouldbecontactedinthefirstinstanceforanyqueries.TheHelpdeskcanbecontactedusingthefollowingemailaddress:[email protected].
INTRODUCTION
ThecurrentISSpay-for-performance(PFP)modelfortheU.S.waslaunchedin2012,andsimilarmodelswereimplementedforCanadain2013andEuropein2016.Feedbackfrominstitutionalinvestorshasidentifiedsignificantinterestinaquantitativepay-for-performancemodelforAustraliaaspartofacommonframeworkofmeasuringpayandperformancealignmentinglobalmarkets.
However,ISSrecognisesthatremunerationdisclosureswithintheAustralianmarketdifferfromthoseoftheU.S.,Canada,andEurope;therefore,quantitativemethodologiesneedtobeadaptedtobeappropriatefortheAustraliancontext.ThepaydefinitionadoptedforISS’AustralianPFPmodelthereforetakesintoaccountthevariouselementsofpaycommonwithinthemarketandaccountsforAustralia-specificdisclosurepracticesinordertouseastandarddefinitionthatcanbeusedinrelativecomparisonsbetweenAustraliancompanies.
ThepurposeofISS'pay-for-performanceevaluationistomeasurethealignmentbetweenpayandperformanceoverasustainedperiod,andidentifycompanieswherethereappearstobeamisalignment..TheISSPFPquantitativeassessmentisdesignedtoidentifysuchmisalignments,basedonbothrelativeandabsolutepay-performanceevaluations,aswellastoidentifyapparentgoodorsatisfactoryalignmentthatinvestorsalsoappreciatebeingawareof.
TheISSPFPquantitativemethodologydeliversacommon,globalapproach
Thequantitativemethodologyutilisestwocomponents:
› Arelativeevaluation–rankingsofCEOpayandperformancerelativetopeercompanies.› Anabsoluteevaluation–CEOpayrelativetoshareholderreturnforthesubjectcompany.
Bothareconsideredfromaninvestor'sperspectiveinevaluatingtheefficacyoftopexecutivepaypackagesovertime.Fortherelativeevaluation,ISSpeergroupsaredesignednotforpaybenchmarkingorstock-pickingbutrathertocomparepayandcompanyperformancewithinagroupofcompaniesthatarereasonablysimilarintermsofindustryprofileandsize.
Theevaluationfocusesonthetotalpayfortheleadexecutive,typicallytheCEO,fortheperiodunderconsideration,althoughitisimportanttonotethatthethreedifferentmodelsmeasurepayoverthreedifferenttimeperiods(typicallyone,threeandfiveyearsfortheMOM,RDAandPTAmodelsrespectively.)Tokeepthingssimple,fortherestofthedocument,wewillrefertothisastotalCEOpay,asthisiswhatwillbeanalysedinthevastmajorityofcases.
WhatWeMeasure--Pay
AllfiguresintheAustralianPFPmodelarebasedonavariationofgrant-day(orgranted)pay.TheCEO’stotalremunerationincludesbasesalary,benefits,actualcashincentivesreceived(paidout),andthegrantedorgrant-datevalueofanysharerights(stock)oroptionawards.
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Duringthedevelopmentofthemodel,theISSAustralianResearchteamreviewedtypicalpaydisclosuresinthemarketandtheoutcomewasthatamodelbasedongrantedpaywasdeterminedtobethebestfitandismostcloselyassociatedwiththemandateddisclosuresinthemarket.
CalculatingAustralianTotalPay
TheAustralianPFPmodelcalculatestotalpaybasedontheCEO’searnedcashandgrantedequityfortheyearsunderreview.Wherecompanydisclosureisconsideredtoolimitedtopermitthiscalculation,acompanymaybeexcludedfromthemodelforinsufficientpayinformation.Ifacompanywishestoseehowitstotalpayfigurewascalculated,itcanrequestthisinformationfromtheISSPFPhelpdeskviaAustralianP4PSupport@issgovernance.com.
BelowisabreakdownofthepaycomponentscoveredbytheAustralianPFPmodelalongwithadescriptionofeachcomponent:
Figure1.AustralianPFPTotalPayComponents
Item Description
TotalPay
FixedPay
Basesalary Theannualbasesalaryreceivedforthefiscalyear.Thisfigureisannualisedincasesofpartial-yearCEOs.
Non-monetarybenefits
Anynon-cashbenefitsandmiscellaneousamountsgiventotheindividual.Examplesarelifeinsurance,fringebenefitstax,andcommercialinterestonemployeeloans.
Superannuation Thestatutorypaymentforretirementtotheexecutivebythecompany(companycontribution).
RetirementAccrual Thenon-statutorybenefitsforretirementpaidtotheexecutivebythecompany.
Expatbenefits Thenon-cashbenefitsormiscellaneousamountinrelationtorelocationcostsgiventotheexecutive.
Otherbenefits Allotherpaymentsthatdonotfitintoanyothercategory,suchasclubmembershipfees,securitypayments,andhousingallowances.
Sign-onpayment
Thesign-onbenefitsamountthatanindividualreceiveduponjoiningthecompany.
Short-Term
Incentives
CashBonus Theearnedcashcomponentoftheshort-termincentives(paidoutanddeferred).DeferredShareBonus
Theearnedvalueoftheequitycomponentoftheshort-termincentivesthatanindividualearnedinrelationtothefiscalyear.
One-TimeSTI Thevalueoftheone-timeSTIawardthattheindividualreceivedduringthefiscalyear.Thiscaneitherbecashorequity.
Long-Term
Incentives
OptionAwardsThecompanydisclosedoptionawardfairvalue(companydisclosedgrant-datefairvalue)foreachLTIoptionawardgrantedwithinthefiscalyear.Includestime-based,performance-based,andretentionawards.
StockAwards
ThegrantdatevalueofLTIstockawardsgrantedwithinthefiscalyear,ascalculatedbyISS.ThestockawardsvaluesarecalculatedbyISSbytakingthetargetnumberofsharesgrantedandvaluingthematthegrantdateshareprice.Includestime-based,performance-based,andretentionawards.
WhatWeMeasure--Performance
Therearemanywaystomeasurecorporateperformance,andkeymetricsmayvaryconsiderablyfromindustrytoindustryandfromcompanytocompanydependingontheirparticularbusinessstrategyatanygiventime.Investorsgenerallyexpectincentiveplanmetricstostemfromthatstrategyandbedesignedtomotivatethebehaviorandexecutivedecisionsthatwillleadtoitssuccessfulexecution,buttheonekeycommonmeasureforinvestorsinthecontextofalong-termpay-for-performanceevaluationistotalshareholderreturn(TSR).
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WewouldnotethatthisdoesnotimplythatISSadvocatesforcompaniestouseTSRasthesinglemetricunderlyingtheirincentiveprograms;manycompaniesandshareholdersmaypreferthatincentiveawardsbetiedtothecompany'sbusinessgoalsmorebroadlythanTSR.However,ifacompany’sbusinessstrategyissoundandwellexecuted,theexpectationisthatitwillcreatevalueforshareownersovertime,andthiswillgenerallybereflectedinlong-termtotalshareholderreturns.TSRisthereforetheprimarymeasureusedinISS'quantitativepay-for-performancealignmentmodels.VariousotherfinancialandoperationalmetricsarealsoconsideredwhencompanypracticesandremunerationdecisionsareanalysedaspartofthequalitativereviewundertakenforISSproxyresearchreports.
TheTSRdatausedintheAustralianpay-for-performancemodelisprovidedbythesamedatavendor(S&P/CompustatXpressFeed)usingthesameTSRmethodology(S&P’sstandardTSRmethodology)astheTSRdataalreadyincludedintheISSproxyresearchreports.
WhatWeMeasure--RelativeandAbsoluteAlignmentOverTime
In2011,asubstantialmajorityofinstitutionalinvestorrespondentstoISS'globalpolicysurveyconfirmedtwofactorsasimportantindeterminingpay-for-performancealignment:payrelativetopeers(consideredveryrelevantby62percentofinvestorrespondents),andpayincreasesthataredisproportionatetothecompany'sperformancetrend(consideredveryrelevantby88percentofinvestorrespondents).Amajorityofcompany(issuer)respondentsalsoindicatedthesefactorsasatleastsomewhatrelevanttoapay-for-performanceevaluation.
Inlightofthisandsimilarfeedbackfromroundtablesandotherdiscussionforumsoveranumberofyears,ISSincorporatedbothperspectivesintothequantitativecomponentofitspay-for-performanceanalysiswhendevelopingtheUSpay-for-performanceapproachwhichwaslaunchedin2012followedbythePFPmodelsforCanadain2013andEuropeinin2016.Thisensuresabalancedevaluationfrombothrelativeandabsolutepay-for-performanceperspectives.
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ISS'QUANTITATIVEEVALUATIONOFPAY-FOR-PERFORMANCEALIGNMENT
MeasuresofPay-for-PerformanceAlignment
Atthecoreofthequantitativemethodologyarethreemeasuresofalignmentbetweenexecutivepayandcompanyperformance:tworelativemeasureswhereacompany’spay-for-performancealignmentisevaluatedinreferencetoagroupofcomparablecompanies,andoneabsolutemeasure,wherealignmentisevaluatedindependentlyofothercompanies’performance.
Thethreemeasuresare:
› RelativeDegreeofAlignment.Thisrelativemeasurecomparesthepercentileranksofacompany’sCEOpayandTSRperformance,relativetoanindustry-and-sizederivedcomparisongroup(i.e.,ISSPeerGroup),overathree-yearperiod.
› MultipleofMedian.Thisrelativemeasureexpressestheprioryear’sCEOpayasamultipleofthemedianpayofitscomparisongroupforthesameperiod.
› Pay-TSRAlignment.ThisabsolutemeasurecomparesthetrendsoftheCEO’sannualpayandthevalueofaninvestmentinthecompanyoverthepriorfive-yearperiod.
MeasuresofRelativeAlignment
RelativeDegreeofAlignment(RDA)
Thismeasureaddressesthequestion:IsthepaytheCEOhasreceivedfortheperiodunderreviewcommensuratewiththeperformanceachievedbythecompanyinthesameperiod,relativetoacomparablegroup?Themeasurecomparesthepercentileranksofacompany’sCEOpayandTSRperformance,relativetoacomparisongroupofatleast11companiesselectedbyISSonthebasisofsizeandindustryoverathree-yearperiod.
Todeterminethismeasure,thesubjectcompany’spercentileranksforpayandperformancearecalculatedforthethree-yearperiod.BecauseofthesensitivityofTSRtooverallmarketperformance,annualisedTSRperformanceforallcompanieswillbemeasuredforthesameperiod.
Combinedpercentileranksforpayandforperformancearecalculated,andtheRelativeDegreeofAlignmentisequaltothedifferencebetweentheranks:thecombinedperformancerankminusthecombinedpayrank.
Figure2.ExampleofcalculatingRDAscore
Performance Pay Difference
3-yearpercentile
rank32 59 -27
ValuesfortheRelativeDegreeofAlignmentmeasurerangebetween-100and+100,with-100representingthehighpayforlowperformance(i.e.,100thpercentilepaycombinedwith0thpercentileperformance),zerorepresentingahighdegreeofalignment(thepayrankisequaltotheperformancerank),andpositivevaluesrepresentingarelativeperformancerankabovetherelativepayrank.
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Ifasubjectcompanydoesnothave3years’worthofpayorTSRdata,thenRDAwillberunusinga2-yearscope.Ifasubjectcompanydoesnothave2yearsofpayorTSRdataasofthemeasurementdate,theRDAtestwillbeexcludedfromthePFPassessment.
MultipleofMedian(MoM)
ThisrelativemeasureidentifiesinstanceswhereCEOpaymagnitudeissignificantlyhigherthanamountstypicalforitscomparisongroup,independentofcompanyperformance.
Calculatingisstraightforward:thecompany’sone-yearCEOtotalpayisdividedbythemedianpayforthecomparisonISSpeergroup.
Valuescanthereforerangefromzero(ifthesubjectcompanypaiditsCEOnothing)toanypositivevalue,withnoupperlimit.AMOMvalueof1.00indicatesthatCEOpayinthelastfiscalyearisequivalenttotheISSpeermedian.
MeasureofAbsoluteAlignment
TheabsolutealignmenttestisintendedtocomparepayandTSRtrendstodeterminewhethershareholders’andexecutives’experiencesaredirectionallyaligned.
Pay-TSRAlignment(PTA)
PTAisalong-termmeasureofdirectionalalignment.ItisimportanttonotethatitisnotdesignedtomeasurethesensitivityofCEOpaytoperformance–i.e.whetherpayandperformancegoupanddowntogetheronayear-over-yearbasis.
Themeasureiscalculatedasthedifferencebetweentheslopesofweightedlinearregressionsforpayandforshareholderreturnsoverafive-yearperiod.ThisdifferenceindicatesthedegreetowhichCEOpayhaschangedmoreorlessrapidlythanshareholderreturnsoverthatperiod.Fortechnicalinformationonhowtheregressionsarecalculated,pleaseseetheUSpay-for-performancewhitepaper,Pay-for-PerformanceMechanics,publishedinDecember2016.
Thetrendlinescalculatedbytheseregressionsareanalogoustoa5-year“trendrate”forpayandperformance,weightedtoplaceagreateremphasisonmorerecenthistory.ThefinalPay-TSRAlignmentmeasureissimplyequaltothedifference:performanceslopeminusthepayslope.
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THEAUSTRALIANAPPROACHTOPEERGROUPCONSTRUCTION
TheapproachtopeergroupsintheAustralianpay-for-performancemodelmirrorsthatofothermarketsbybuildingpeergroupsbasedonacompany’sindustryandsize.Unlikeothermarkets,theAustralianISSpeergroupconstructionprocessdoesnotincludeacompany’sownself-disclosedpeergroup,andinanycase,manycompaniesinthismarketdonotdisclosetheirpeersgroups.Additionally,theAustralianconstructionprocessincludesareviewofeachsubjectcompany’sISSpeergroupbytheISSResearchteamtoensureanappropriatefitofpeercompanies,whichisparticularlyimportantgiventhesmallersizeoftheAustralianmarketandtheavailablepoolofpeercompaniesrelativetootherlargermarketssuchastheUSandEurope.
NumberofPeers
TheAustralianmodeltypicallyhasaminimumof11peers.TherelativePFPtests(RDAandMoM)requireaminimumof11peerswithsufficientdatatorun.
RemunerationDataandIndustryClassification
ISS’remunerationdatasamplecoversabout600Australiancompanies'totalremunerationforthepast3to5years–roughly300subjectcompaniesintheASX300androughlyanother300publiccompaniesintheAustralianmarketforuseaspeers-only.Allmonetaryamountsareconvertedtothedisclosurecurrencyofthesubjectcompany.
TheindustryclassificationusedistheGlobalIndustryClassificationStandard(GICS)2code,whichisafour-tiered,hierarchicalindustryclassificationsystemconsistingof11sectors(GICS2),24industrygroups(GICS4),68industries(GICS6)and157sub-industries(GICS8).Eachcompanyhasan8-digitGICScodebasedonitsprincipallineofbusinessactivity.
ISSPeerGroupConstruction
ISSconstructsacomparisongroupofaminimumof11AustralianpeercompaniesforeachsubjectcompanycoveredbythePFPmethodology.Peergroupsforallsubjectcompaniesanalyzedunderthismethodologyareconstructedonceperyear,basedondataprovidedbyanindependentsource(S&PXpressFeedQuarterlyDataDownload[QDD]).Thefollowingcriteriaareusedtodeterminepeercompanies:
› theGICSindustryclassificationofthesubjectcompany› Sizeconstrainsforforbothrevenue(orassetsforcertainfinancialcompanies)andmarketvalue,utilizingfour
marketcap"buckets"(micro,small,mid,andlarge)
Subjecttothesizeconstraints,andwhilechoosingcompaniesthatpushthesubjectcompany'ssizeclosertothemedianofthepeergroup,peersareselectedfromapotentialpeeruniverseinthefollowingorder:
1. fromthesubject'sown8-digitGICSgroup2. fromthesubject'sown6-digitGICSgroup3. fromthesubject'sown4-digitGICSgroup4. fromthesubject’sown2-digitGICSgroup5. fromthesubject’s“SuperGICS”group(describedfurtherbelow)
If11comparatorgroupmembersarenotselectedfromthecompaniesintheuniversethatsharethesubjectcompany’seight-digitGICScategory,theprocessisrepeatedwithcompaniesinthecomparisonuniversethatsharethecompany’ssix-digitGICScategory,maintainingthecompanyatthemedianpositionwherepossible,until11ormorecomparison
----------------------2https://www.msci.com/gics
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companiesareselected;if11comparisoncompaniescannotbeselectedusingthepeers’six-digitGICScategory,thentheprocessisrepeatedusingthenextuniversesetlistedabove(i.e.,thesubject’sfour-digitGICSgroup),until11ormorecompaniesareselected;andsoon.
Insomecaseswherelessthan11peershavebeenidentifiedusingthestandardmethodology,theindustrygrouptowhichthesubjectcompanybelongsisexpandedtoincludecompaniesthatareotherwisecomparabletothesubjectcompanyoperationally.Todothis,ISScreatesa“SuperGICS”group,whichcombinescloselyrelatedtwo-digitGICSgroupstocreatealargerpeeruniverseforcompaniesthathavefewerthan11peers.TheSuperGICSgroupsusedbyISSare:
SuperGICSCategory Two-DigitGICSIncluded NamesofIncludedSectorsA 10,15,20,55 Materials,Industrials,EnergyandUtilitiesB 25,30,35 ConsumerDiscretionary,ConsumerStaples,andHealthCareC 45,50 TechnologyandTelecom
QualitativePeerGroupReview
Aspartofpeergroupselectionprocess,ISSalsoincludesaaqualitativereviewofthecompanycomparatorgroupsbytheISSAustraliaResearchteamtoensurethatthecomparisoncompaniesareconsideredappropriate.ISShasandwillcontinuetoadjustcomparatorgroupswherethequantitatively-constructedcomparatorcompaniesaredeemedinappropriate.
Ifacompanydoesnotagreewiththepeerswhichhavebeenallocatedbythemodel,orconsiderstheyhavebeenwronglyallocated,itcanprovidethisfeedbacktotheISSPFPhelpdeskviaAustralianP4PSupport@issgovernance.com.
Company-DisclosedPeers
IntheUSandCanada,mostcompaniesincludetheirchosenpeersforpaybenchmarkingpurposesintheirdisclosedmeetingmaterials.InAustralia,itisstillveryraretoseecompaniessystematicallyincludeself-selectedpeersintheannualreportorothermaterials,withtheexceptionofsomelargercompaniesincertainmarkets.
AsthisisnotawidespreadpracticeintheAustralianmarket,thedecisionwasmadeforthe2017seasontoonlyuseISS-selectedpeersintheAustralianpay-for-performancemodel.However,ifovertimemoreAustraliancompaniesbegintodisclosetheircompany-selectedpeers,thisdecisionmaybereviewedagaininfuture,inlinewithdevelopmentsinmarketpractice.
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NOTESONIMPLEMENTATION
ItisimportanttoemphasisetheadditionoftheAustralianpay-for-performancemodeltotheISSbenchmarkresearchreportswillbeadditiveandisintendedtoprovideourclientswithadditionaldatapointsforcomparability.Also,whilethemodelisbasedonananalysisofCEOpayandTSR,thequalitativereviewsbyISSresearchanalystswillcontinuetotakeaholisticviewoftheentiretyoftheremunerationreport,includingnumerouselementsofthepayprogramfortheCEO,namedexecutiveofficers,anddirectors.
Therestofthissectionwilldiscusshowthepay-for-performancechartswillbepresentedintheISSbenchmarkresearchreports,andhowfrequentlythemodelwillbeupdated.
PresentationWithintheResearchReports
BeginningwithISSreportsformeetingsonorafter1October2017,therelevantISSAustralianproxyresearchreportsforthecompaniesincludedintheAustralianPFPmodelwillincludepay-for-performancegraphssimilartothoseseeninothermarkets.
Withintheanalysisfortheagendaitempertainingtotheremunerationreport,aComponentsofPaytablewillbepresentedtoillustratehowthetotalpaynumberwasreached(Figure4);thisisfollowedbythethreemodelsunderthePayforPerformanceassessment–theRDA,MoMandPTAcharts(Figure5).Alongwiththethreetestsandtheirscores,anoveralllevelofconcernispresentedasLow,Medium,orHigh,indicatingthestrengthofCEOpayforTSRperformancealignmentasdeterminedbyatriageassessmentofthreetests.
Figure4.RemunerationProfile–ComponentsofPay
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WithintheISSresearchreports:
› TheRelativeAlignment(RDA)chartcomparestheperformanceandpayrankingsofthesubjectcompanyanditspeersover(typically)threeyears.
› TheMagnitudeofPay(MoM)chartshowstheCEOpayforthemostrecentyearcomparedwiththatofitspeers.› TheAbsoluteAlignment(PTA)chartcomparesthesubjectcompany’sCEOpaywithindexedTSRover(typically)
fiveyears.› ThePay-For-PerformanceQuantitativeScreensummarisestheoveralllevelofconcern.
Figure5.PayforPerformanceEvaluation
Immediatelyfollowingthepayforperformancetests,asummaryfortheISSpeersusedintherelativeassessmentsisdisplayed(Figure6),withalistofthepeersandchartdisplayingtheirsizerelativetothesubjectcompany.Aspreviouslydiscussed,therewillbenocompany-selectedpeersintheAustralianmodelsotheelementsofothermarkets’reportswhichdisplaythisISSvs.disclosedpeercomparisonwillnotbepresentintheAustralianreports.
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Figure6.PayforPerformancePeerGroup
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APPENDIX:BACK-TESTINGTHEMODEL
Thedistributionofscoreshasbeentestedforthethreemodels,RDA,MOMandPTA,andwasbroadlyinlinewiththatseenfortheNorthAmericanandEuropeanmodels.
RelativeDegreeofAlignment
Figure7.DistributionofRDAScores
MultipleofMedian
Figure8.DistributionofMOMScores
Pay-TSRAlignment
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Figure9.DistributionofPTAScores
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