Important highlights from upcoming meetings, provided by Glass Lewis’ global research team:
Australian Securities Exchange October 8
Despite the economic and operational impact of COVID-19, Brambles experienced a strong year. Executive pay decisions reflect that. The board elected not to make any remuneration-related adjustments to account for the pandemic and allowed its incentive schemes to playout as normal. As a result, Brambles’ CEO, Graham Chipchase, received 52% of his bonus opportunity (i.e. US$1.4 million) and 89% of share rights granted to him under Brambles’ 2018 long-term incentive (LTI) scheme, which was due for testing following completion of FY2020.
Bramble’s LTI scheme is based partially on relative total shareholder return (TSR) against two peer groups, and partially on a unique ‘matrix type’ hurdle reflecting sales revenue growth and return on capital invested (ROCI). Introduced in 2018, the board states that the matrix hurdle “is designed to drive profitable business growth, to maintain quality of earnings and to deliver a strong return on capital invested.”
How does the matrix hurdle work? Sales revenue growth appears to be the main performance driver, and ROCI is designed to underpin its performance. The two measures are dynamic: depending on Brambles’ performance on one of these hurdles over the three-year performance period, different vesting scenarios will take place for the other hurdle. For example, under the proposed LTI grant for FY2021, if Brambles’ achieves a ROCI of 16.5% over the three-year period, management can receive between 20% to 100% of share rights under the matrix for achieving sales revenue CAGR between 2% to 6%, respectively. However, if Brambles were to achieve a ROCI of 18.0, management would receive 60% of the share rights for the same threshold 2% sales revenue growth, and 100% of the award at just 4% growth. Given that Brambles’ ROCI has averaged 18.3% in the last four years, that may seem like the more likely vesting scenario, which may raise questions about whether the overall hurdle, set based on “prevailing and forecast economic and trading conditions”, is sufficiently challenging.
Commonwealth Bank of Australia
Australian Securities Exchange October 13
The remuneration committee at the Commonwealth Bank of Australia (“CBA”) are asking shareholders to consider some significant changes to the pay structure in future years. The changes include a modest increase in fixed remuneration and reduction in STI opportunity, but most interesting are the changes put forward regarding the LTI opportunity. The old opportunity, equal to 180% of fixed remuneration, was entirely subject to performance testing after four years. The new LTI opportunity is lower at 140% of fixed remuneration, however only half is subject to additional performance testing; the other half is issued as restricted shares that vest with the passage of time.
The trade-off largely boils down to a reduction in remuneration subject to performance testing against an increase in the proportion of remuneration paid in equity (i.e. less cash) that is subject to increased deferral periods. That’s a lot in and of itself, but it’s not the only notable remuneration decision for shareholders to weigh as they consider their vote.
CBA has also applied upward discretion to the CEO’s STI outcome, a turnabout from the past two years where STI has been reduced by discretion or otherwise forfeited entirely. This is bold move in a time that other Australian boardrooms are largely applying downward discretion in acknowledgement of COVID-19 and an Australian recession. Shareholders will need to consider the use of upward discretion, and the previous years’ conservatism over STI vesting.