The regulatory and commercial environment affecting executive remuneration has been extensively transformed in recent years. A key aspect of this development is the manner in which remuneration consultants and clients interact. Consequently, at Mastertek we chose to formalise guidelines that aim to increase the value and quality of those interactions. This short guide provides a summary of the legislative requirements along with some general tips to consider when thinking about engaging remuneration consultants.
Engaging Remuneration Consultants
What is a Remuneration Consultant?
In essence, a Remuneration Consultant assists clients to set the level and mix of remuneration provided to executives, employees and directors.
Mastertek’s objective is to optimise the value of such services to the client receiving them. This is achieved by the application of appropriate methodologies and by reference to critical internal and external factors, such as the client’s remuneration framework and governance, as well as the regulatory and competitive environment.
In particular, executive remuneration management requires the application of special skills and knowledge. This applies to both senior executive and director remuneration.
Notably, the relevant legislation, and associated material, can impose significant obligations upon organisations, including those highlighted below.
- A ‘Remuneration Consultant’ means a person who makes a Remuneration Recommendation – a recommendation regarding the quantity and mix of remuneration for Key Management Personnel
- Such arrangements referred to as Remuneration Consultancy Contracts, create particular obligations for companies.
- Also, listed public companies must provide a detailed Remuneration Report within their Annual Report.
Roles and Repsoniblities
Prior to formalising any engagement, it is important to clearly establish the roles, responsibilities and expectations of potential Remuneration Consultants as the way in which they are engaged and manage projects can be materially impacted by the prevailing legislation based on the nature of their work.
It can also be very helpful to clarify how the client will operate in regard to managing the engagement to ensure that there are no misunderstandings along the way.
Example Consultant Responsibilities
- Analysis, benchmarking & provision of data
- Remuneration reviews and operational matters.
- Remuneration plan development.
- Advice and Remuneration Recommendations (as defined by statute – see Section 9b of the Corporations Act)
- Other services supporting the client’s decision-making environment and processes.
Example Client Responsibilities
- Provision of all necessary support and information required to enable the Remuneration Consultant to fulfil the requirements of the engagement (where the Remuneration Consultant commits to making known such requirements where necessary)
- It should be clearly acknowledged that it is the client who must actually make the decisions for its enterprise, and discharge its own governance and management responsibilities.
We recommend following a formal engagement process when hiring Remuneration Consultants to provide services to your organisation. As the client, we suggest first requesting the prospective consultants provide a detailed proposal document that can act as the main reference document for any engagement. Having decided which consultant to hire you should formalise the engagement in writing, confirming roles, responsibilities and expectations of all parties and referring to the accepted proposal document.
Key Engagement Considerations
- Identity of; the client, the individual instructing, and all other points of contact.
- Scope and context of the engagement, Mastertek’s role and expected outcomes.
- Nature, scope and frequency of disclosures by Mastertek to the client, including any required by law.
- Communication protocols, including the identity of any persons specifically excluded from communications.
- Document handling and records management.
- Quantification and calculation of costs
- Procedure and timing for settlement of fees.
Provision of Independent Advice
The Corporations Act – Section 206M (2) – requires that
“The remuneration consultant must include with the recommendation a declaration about whether the consultant’s recommendation is made free from undue influence by the member or members of the key management personnel to whom the recommendation relates.”
Your consultant’s processes, therefore, need to be based on the principle of maintaining independence, supporting the provision of objective service and advice and compliance with the statutory obligations. For example, you may request that your Remuneration Consultants are asked to refrain from undertaking work on behalf of management unless the work is specifically approved in advance and in writing by the Remuneration Committee.
When a ‘Remuneration Recommendation’ is to be made (as defined within the Act) the processes will also need to ensure that the recommendations will be provided directly to a non-executive director, and will not be provided to a person who is not a non-executive director.
A declaration should also be included as part of the recommendation confirming that the recommendation is made free from undue influence by the member or members of key management personnel to whom the recommendation relates.
Managing Third Parties
It is not uncommon for other persons (whether internal to the client or external) to be involved in matters related to the Remuneration Consultant’s services.
You will need to ensure that your consultants have a process for managing any 3rd party conformity assessment required within the terms of the engagement and/or by statute.
To ensure impartial and independent advice, you may also require your Remuneration Consultants to refrain from potential conflicts of interest without the prior approval of the Board and/or Remuneration Committee.
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