Executive termination payments - amendments introduced into Parliament

The Federal Government has introduced legislation into Parliament to reform laws relating to termination payments made by companies to executives. Introduced into Parliament on 24 June 2009, the proposed changes bring us one step closer to the Government implementing its policy of improving the accountability of executive remuneration.

The introduction of the bill into Parliament comes notwithstanding the release of guidelines on executive termination payments by the Australian Institute of Company Directors in February 2009, and well before the release of a draft report by the Productivity Commission on the public inquiry into executive remuneration headed by former ACCC Chairman Allan Fels, due to be finalised in December 2009.

What are the key changes?

Currently, termination benefits of up to seven times a director’s total annual remuneration may be paid without shareholder approval. The threshold for shareholder approval for payment of termination benefits would be reduced to benefits exceeding 1 year’s base salary under the proposed reform.

Not only would there be a reduction in the multiple of annual pay from seven years to one year, there would also be a change to the basis upon which that multiple will be calculated. A director’s pay is currently assessed on their annual “total remuneration” (currently defined as remuneration which is required to be disclosed in the financial report in accordance with the relevant accounting standard). A director’s pay would be assessed on their “base salary” which is yet to be defined in the regulations under the proposed reforms. Given that many directors are paid a combination of salary and other non-cash benefits, the change to the concept of base salary could significantly limit the quantum of termination payments that may be made without shareholder approval unless regulations prove to be more robust than is currently intended.

Who do the changes apply to?

Under the proposed reform, the restrictions on termination payments would apply to a broader range of personnel for entities that are required to prepare a director’s report as part of their financial reporting obligations pursuant to the Corporations Act. For these entities, the termination payment provisions will apply to key management personnel as well as the 5 highest paid executives.

What constitutes a benefit?

The changes will see the definition of a termination benefit broaden from the current definition to include legal and equitable rights, as well as other yet to be determined prescribed items.

Shareholder approval

The proposed reform would prohibit retiring personnel from voting in any resolution to obtain shareholder approval, changing the current position and bringing the law into line with other parts of the Corporations Act which restrict interested persons from casting votes on resolutions in which they stand to benefit.

When would the changes take effect?

The proposed reform would apply to contracts entered into or renewed after the commencement of the legislation. Although the changes would not apply to existing contracts, parties should be wary that if a variation is not minor or a variation affects an essential term of a contract, this may result in the new laws applying to that existing contract.

The proposed changes are another item to be taken into consideration when looking at a company’s overall corporate governance. As the proposed changes are prescriptive, companies should monitor the progress of these laws and consider investing time to ensure compliance.

The proposed reform may not be the last we see in this area; much of the detail is yet to be included in the regulations which may come after the Government has finalised its review of the legislation, and following the release of the final report by the Productivity Commission in December 2009.

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