CGI Glass Lewis assesses both executive remuneration structure and outcomes when considering our support for remuneration reports of ASX-listed entities.
Concepts of appropriate structure and appropriate outcomes are related, given that strong remuneration structures should result in appropriate remuneration outcomes. However, we have found that a) the complexity of remuneration structures, b) challenges in measuring performance, and c) a large degree of discretion built in to remuneration structures (whether visible or not) often stretch this relationship. To compensate, CGI Glass Lewis will often consider remuneration structure and remuneration outcomes independently so as to have each component act as a cross-check of the other.
A key element in an assessment of remuneration outcomes is the payout track record and payout variability over several years. Sophisticated remuneration structures should result in pay outcomes which vary in line with performance, and for the relationship between pay and performance that should present and persist over longer periods as a result of common short-term incentive and long-term incentive remuneration structures.
CGLytics data has allowed us to consider of the relationship between executive pay and company performance over a five-year period. This has been a useful consideration for our support of remuneration reports.
CGLytics in application
Sims Metal Management (“SGM”) buys and processes scrap metal from businesses, other recyclers and the general public with over 250 processing facilities in the United States, United Kingdom and Australasia.
CGLytics captures the total realizable pay of ASX300 CEO’s, including for SGM, where total realizable pay is the value of awards vested to the CEO in any given year. CGLytics tools have conveniently allowed the charting of realizable pay for the CEO of SGM against realizable pay for CEO’s of peer entities. CGLytics also captures the EBITDA performance for SGM and peers.
The CGLytics analysis, which is included in our Proxy Paper for the SGM 2019 AGM is presented below:
Looking at the charts, SGM has outperformed its peers on an EBITDA basis between 2015 and 2018 and the CEO’s realizable pay has risen to match. In FY2019, EBITDA has dipped, which is matched by a significant drop in the CEO’s take home pay—notwithstanding the payout persists above the peer groups.
We take comfort in this relationship and can easily see the variability in pay outcomes over time, which correspond to company performance as measured by EBITDA indexed back to 2015.
As SGM has no obvious direct peers listed on the ASX, a diversified approach to peer groups is used. The first peer group, Country, is a group of 10 peer entities which are similar to SGM in terms of market capitalisation, revenues and employee numbers. Similarly, the second peer group, Industry, is a group of 10 peer entities with similar size characterisitcs as with the Country peer group, but with the application of a further industry filter.
A common problem for ASX-listed entities is the sourcing of appropriate peers. The use of the two sets of companies addresses the shortcomings of using a single peer group and allows us to see if trends and patterns persist when moving from one peer group to another.
CGI Glass Lewis assessed SGM’s 2019 remuneration structure as Fair following application of our Good/Fair/Poor assessment options. This has historically been our assessment of SGM’s remuneration structure.
On review of remuneration outcomes, including CGLytics charts which enable us to see historic payout variation and an ongoing relationship between pay and performance, we were comfortable in supporting the remuneration report proposal at the 2019 AGM. In this case, using an assessment of remuneration outcomes has supported a Fair grading of remuneration structure and has given us confidence in SGM’s remuneration report.
Ultimately, the 2019 AGM held on November 14, 2019, SGM’s remuneration report proposal received support from 92.80% of votes cast.
Access Glass Lewis’ Say on Pay analysis – Available through CGLytics
For the 2020 proxy season, CGLytics data will provide the basis of Glass Lewis’ Say on Pay recommendations.