Whether or not you agree with the Government's arguably populist policy rationale, hefty legal question-marks hang over the new golden handshake legislation, writes Laura MacIntyre.
The former CEO of Pacific Brands, Paul Moore, received a $3.4 million "retirement payment" just as the company announced2000 local job cuts. Consolidated Media Holdings Limited (PBL) CEO John Alexander received $15 million dollars when he retired as CEO in September 2007. The figure was equivalent to 468 per cent of his annual salary.
Moore and Alexander were among those executives "named and shamed" by Federal Treasurer Wayne Swan at the press conference announcing the bill aimed at stamping out the practice of "golden handshakes". The Treasurer also announced an inquiry by the productivity commission into executive remuneration, headed by former ACCC chairman, Professor Allan Fels.
Lawyers are still awaiting clarification on key areas of the draft legislation, including the timing of contract formation, the status of superannuation payments, and its interaction with taxation law, especially as it relates to incentive schemes such as company share options.
Aside from the technical legal issues, the question remains -- will the new laws simply force executive remuneration practices underground, making the process even less transparent?
Where there's a will, there's a way
Freehills' employee relations partner Justine Turnbull says the verdict is already in, with clients implementing workarounds to avoid the golden handshake restrictions.
"It's not for the government to set limits, and it just becomes unnecessarily restrictive and results in perverse outcomes because people will find their way around these provisions," she says. "Some of the ways around the proposal that we are seeing are sign-on payments and bigger base salaries.
"Remuneration is a matter for boards, and community concern and interest about executive remuneration is irrelevant. If people in the community are shareholders then they have avenues they can pursue to get to directors and their decision making."
The proposed amendments to section 200F of the Corporations Act 2001 will put a cap on termination payouts, reducing the trigger threshold for shareholder approval from seven times the annual remuneration to one year's average base salary.
Under the proposed legislation, reaching a termination payment that exceeds the cap will trigger the new shareholder voting provisions. However, the shareholder meeting cannot be called for the "sole or dominant purpose" of passing the approval resolution.
Mallesons Stephen Jaques partner Diana Nicholson says this is an inefficient outcome for both exiting executives and their former employers. "Basically, that says you've got to wait for an annual general meeting (AGM), and I don't see how that's tenable, because people's rights will be triggered on termination," she explains. "What if the AGM was 10 or 11 months away?"
Australasian Compliance Institute CEO Martin Tolar believes it is paramount for companies to improve their own corporate accountability processes. The ACI submission to the Productivity Commission recommends an approach that ties executive bonus payments to effective corporate governance.
"It's a global market place, and how much people are being paid is a bit of a flat issue that will play out in the electorate. The most important thing really is not the dollar amount, but rather what behaviours those dollar amounts actually reward," says Tolar.
"That's where we've made suggestions around the need to actually include KPIs around risk management, compliance and governance.
Jumping the gun?
Freehills' Turnbull says the Government has jumped the gun by legislating before the Productivity Commission returns its findings. Turnbull also points out that the situation in Australia has not reached the disproportionate level of US executive payouts.
"We haven't had the excesses here that we've had in other jurisdictions. We haven't had the other general excessive executive remuneration and risk-taking behaviour that's been seen in other jurisdictions and nor have we had the government bail-out.".
The Bill, which will be introduced into Parliament during the Winter sittings, will be open for public consultation for a four-week exposure period ending on 2 June 2009.