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Curbing the Golden Handshake - Pay Restrictions for Executive Terminations - June 2009

Treasurer, Wayne Swan, and Minister for Superannuation and Corporate Law, Senator Nick Sherry, have announced new laws regulating executive termination payments.

Under the proposed new laws, termination benefits for directors and certain senior executive employees exceeding one year’s average base salary will require shareholder approval.

 

The Federal Government, according to its explanatory memorandum for the proposed amendments, hopes the changes will curb "excessive" termination payments to company executives, so that executive pay "keeps pace with community expectations".

The exposure draft of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 has been released for public consultation for a 4 week exposure period which ended yesterday.

The Bill’s key changes intended to be introduced during Parliament's winter sittings, proposes to:

Require Shareholder Approval

Shareholder approval will be required for termination payments exceeding one year's base salary (down from the current seven times base salary).

Any vote of shareholders required to approve the termination benefits must be held after the director or executive has departed the company and the shareholders meeting must not have been called for the sole or dominant purpose of passing the approval resolution. Effectively, this will mean executives will have no guarantee when negotiating their remuneration packages of the amount of the termination payment they will be entitled to (beyond one year's salary).

Extend the Definition of Termination Benefit

The definition of termination benefit which requires approval will be expanded to close perceived “loop holes” in the current law. It is proposed that a termination benefit will include:

  • any kind of pension;
  • any payment made in lieu of notice of termination of employment;
  • any amount paid as a voluntary out of court settlement;
  • superannuation contributions in excess of the minimum statutory requirement; and
  • options which automatically vest or the accelerated vesting of options on retirement from the office.

Deferred bonuses, benefits paid in respect of leave of absence and payments from a defined benefit superannuation scheme have been excluded.

Apply to Key Management Personnel

It is intended that the new laws will apply not only to directors but also to senior executives and key management personnel extending the present laws so they apply to persons holding a “managerial or executive office” with a company.

This will include:

  • persons named in the companies’ remuneration report for listed companies; and
  • persons who are directors of non-listed companies.

The provisions will also apply where the person has at any time in the previous three years held a “managerial or executive office” in a company or a related body corporate.

Require Repayment

Any unauthorised termination benefits must be repaid immediately by the director or executive to the company. require unauthorised termination benefits to be repaid immediately (no express requirement to repay an unauthorised benefit currently exists).

Increase Penalties for Non-Compliance

Penalties for non-compliance will be increased to $19,800 (up from $2,750) for individuals, and $99,000 (up from $16,500) for corporations. The proposed laws retain the existing option of up to six months imprisonment.

Not Apply Retrospectively

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 Bill commences.

Implications

These proposed new laws will have significant implications for the remuneration arrangements and termination entitlements of directors and senior executives of listed companies.

The Government has asked the Productivity Commission to examine the issue of executive remuneration.

Submissions to the inquiry have now closed with public hearings expected in mid-June.

To obtain further information about this article or discuss how it might impact on your business, please contact Andrew Bland at This email address is being protected from spambots. You need JavaScript enabled to view it.

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