Taking the shine off the golden handshake

Author Paula Meegan Published 5 October 2009

On Tuesday 30 September 2009 the Australian Government's Productivity Commission released its draft recommendations on termination payments for company executives.

The Productivity Commission is an independent research and advisory body that investigates a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed simply, is to help governments make better policies in the long-term interest of the Australian community.

In the wake of the Global Financial Crisis, the government asked the commission to examine the remuneration of company directors and executives.

After a six-month investigation, the commission arrived at 15 recommendations includes 10 changes to Corporations Law that will give greater power to shareholders. Interestingly the commission did not consider that the current system of pay-setting across Australia's 2000 listed companies had failed. Rather, the commission noted that some pay outcomes – especially some cases of 'reward for failure' – appeared to be inconsistent with an efficient executive labour market, which could reflect weak or complicit boards. [1]

The commission did not recommend that shareholder votes be made binding or executive pay to be capped. Allan Fels (former head of the ACCC) said the commission did not think that capping pay would work in a practical way, and that it could produce some bad side-effects.

If the government were to legislate the pay of individuals it would need to do so via its 'corporations power' – that is, the government has the power under the Australian Constitution to make laws in respect of corporations.

Prior to the commission’s recommendations the government had already begun the process of introducing legislation to cap termination payments of executives and some managers. (In some cases, executives have been sacked for not performing; their termination payments being generally perceived as insurance to avoid legal suits over being sacked.)

The proposed legislation is the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009. Much of the detail is in the accompanying Regulations. The final regulations and explanatory material were released on 3 September. The regulations stipulate the corporations provide a definition of 'base salary', clarify and expand the types of benefits that are (and are not) subject to shareholder approval, and prescribe circumstances in which a benefit is given in connection with a person's retirement. Under the new laws, termination benefits for directors and certain senior executives exceeding one year’s average base salary would require shareholder approval.

The proposals also include greater penalties for wrongdoing. Any unauthorised termination benefits must be repaid immediately by the director or executive to the company. They include increased penalties for a breach of legislative requirements. The penalties have been increased to $19,800 (up from $2750) for individuals, and $99,000 (up from $16,500) for corporations, and include the possibility of up to six months imprisonment.

The laws are not intended to have retrospective operation. Significantly, the new laws will only apply in relation to resignations of officers, or positions of employment held under agreements entered into or extended on or after the commencement of the new laws. Issues are likely to arise as to whether/when a variation of an existing contract creates a new contract.

Given the imminent introduction of the proposed new laws, (the proposals have already gone to a 2nd reading speech), all the major law firms are advising clients to finalise negotiations on executive packages without delay should they wish to avoid being subject to the laws.

[1] http://www.pc.gov.au/projects/inquiry/executive-remuneration/draft/media-release