CSR Limited – Strike One on Remuneration Report
CSR’s corporate governance states that the company seeks to maintain a board composed of directors that have a range of collective skills and experience to ensure corporate development. CSR also elaborates that it considers individuals that are highly-experienced in manufacturing, finance, law and other sectors that the company seeks to pursue in the future.
Using the Board Expertise functionality of CGLytics’ platform, we were able to gain insight on the current skills of the members of the board. The Skills Matrix functionality also aids companies to identify any skills gaps in its current matrix. For CSR, of the six directors currently sitting on the board, the graph shows that CSR’s strongest expertise is Finance. The second strongest suits of expertise include Corporate Development, Operations, Project Management and Sales. One area where the company is missing a director with specific expertise is in Governance. The company also lacks directors that have any relevant company Industry and Sector experience. However, the upcoming appointment of a new managing director on September 2019, Julie Coates, may be able to alleviate this missing element to the board’s skill set.
Another board resolution the company was seeking approval on was the remuneration report and financial report. CSR promotes consistency in the remuneration of senior executives by ensuring that the company and individual performance are aligned with their incentives. The company focuses on compensation that generates long-term value for senior executives. The company only uses two performance criteria in the determination of executive compensation: Total Shareholder Return (TSR) and Earnings Per Share (EPS) for the long-term incentive plan in which both have equal weight of 50 percent.
The board states that absolute TSR instead of relative TSR helps align shareholder interests by keeping senior executives focused on increasing earnings and share price. On the other hand, the EPS helps measure the continued growth in earnings of the company and is parallel to the interests of the shareholders.
The CGlytics Absolute Positioning tool allows insight into the relationship between the two performance conditions and the Managing Director’s granted compensation from 2013 to 2018. As indicated in the graph below, there exists significant volatility in the movements of all performance criteria used in the determination of executive pay: TSR and EPS. From 2015 to 2016, CEO pay, EPS and TSR increased. The latter especially increased by 91.6%. From 2017 to 2018, CEO pay increased by 48% and TSR fell by 46.5%.
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The CGLytics Relative Positioning Pay for Performance Evaluation tool compares CSR’s CEO compensation with that of the company’s own peer group against the peer group’s three-year TSR. The Pay for Performance evaluation demonstrates that CSR’s Total Realized Compensation appears misaligned compared to its peers. The company’s Total Realized Pay ranks above median at 69th percentile while three-year TSR ranks in the 15th percentile.
In the Annual report for the financial year ended March 31, 2019, CSR disclosed that it developed a performance-related pay which includes both the Short-Term Incentive (STI) and Long-Term Incentive (LTI) plans, both of which are measured against performance conditions.
The plan would utilize the same performance criteria as mentioned above: TSR and Earning Per Share (EPS) over a three-year performance period (April 1, 2019- March 31, 2022) in financial year-end 2020. The two performance conditions will be weighted at 50 per cent of the overall grant.
The board uses an annual growth rate of 14 percent for 75 percent vesting and an 18 percent stretch for a full vesting of rights for the TSR condition. The board also uses a compound growth rate of 5 percent target for a 50 percent vesting and 10 percent stretch for a 100 percent vesting for EPS condition. There was no change in the hurdles applied in 2017, 2018 and 2019.
The board is seeking for the granting of 360,241 performance rights for Julie Coates, the newly appointed managing director. The amount is pro-rata of her one-year long-term incentive remuneration based on her date of appointment on September 2, 2019. The board also proposes that Ms. Coates is entitled to a maximum LTI award of up to 120 percent of her total fixed remuneration.
At the AGM which took place on June 26, 2019, all the resolutions were passed as ordinary resolutions. However, as suggest in the potential Pay For Performance misalignment demonstrated above, the remuneration report received 34% of votes cast against which constitutes a first strike for the purposes of the corporations ACT 2001.
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