5

5               Determination of Remuneration

5.1           Remuneration is any money, consideration or benefit paid, payable, provided or otherwise made available, directly or indirectly, to directors or executives (including personally-related entities) by the disclosing entity or any related party in connection with the management of the affairs of the entity and its subsidiaries, and:

(a)      includes, but is not limited to, salaries, bonuses, fees, commissions, expense allowances, perquisites, personal benefits, equity instruments and post-employment benefits; but

(b)     excludes reimbursement for expenses incurred for the benefit of the entity or any of its subsidiaries.

5.1.1      Remuneration includes all benefits received, receivable or otherwise made available as a consequence of the position held.  Appendix 1 provides additional guidance on items that comprise remuneration of directors and executives in accordance with this Standard.

5.1.2      The phrase “directly or indirectly”, as used in this Standard with reference to remuneration, has the effect of including all amounts paid, payable, provided or otherwise made available to specified individuals in connection with the management of the entity and its subsidiaries, whether directly to them or indirectly through an intermediary or through their personally-related entities (including relatives).  In some cases it may be difficult to determine whether an amount concerned is remuneration or an “other transaction” required to be disclosed by Section 10 of this Standard.  For example, a specified director may be a partner in a partnership that receives fees from the disclosing entity.  The partnership is a personally-related entity.  Whether payments by the disclosing entity to such a partnership form part of remuneration or are “other transactions” of the specified director will be a matter of fact, determined by reference to the meaning of remuneration.  If, for example, the fees were solely for professional services rendered by the partnership, then they would be disclosed as part of “other transactions” of the specified director.  However, if the fees were paid in respect of services rendered by the specified director in managing the entity, then the amount would be included in the remuneration of the specified director.

Components of Remuneration

5.2           Where this Standard requires disclosure of the components of remuneration for a reporting period, the aggregate amount of remuneration must be disaggregated to disclose at least the following components, grouped into four categories:

(a)      primary benefits, but excluding any benefits disclosed under paragraphs 5.2(b) or 5.2(c).  Amounts in this category (including any deferred amounts and regardless of when the amount is paid) must be divided into at least the following components:

(i)         cash salary, fees and commissions;

(ii)       cash profit-sharing and other bonuses, separately identifying amounts attributable to long-term incentive plans; and

(iii)     non-monetary benefits;

(b)     post-employment benefits, including retirement benefits and contributions by, or changes in the liability of, the entity to pension or superannuation plans and other arrangements to benefit employees following cessation of employment.  Amounts in this category must be divided into at least the following components:

(i)         pension and superannuation benefits;

(ii)       prescribed benefits (being post-employment benefits that are required by the Corporations Act to be approved by members); and

(iii)     other post-employment benefits;

(c)      equity compensation.  Amounts in this category must be divided into at least the following components:

(i)         the value of shares and units;

(ii)       the value of options and rights;

(iii)     if the terms of vested options or rights have been altered during the reporting period, the increase in value determined in accordance with paragraph 7.6(e); and

(iv)      the value of other equity compensation; and

(d)     other compensation benefits not disclosed under paragraphs 5.2(a), (b) or (c).  Amounts in this category must be divided into at least the following components:

(i)         termination benefits;

(ii)       prescribed benefits (being benefits that are required by the Corporations Act to be approved by members and are not post-employment benefits); and

(iii)     all other benefits, separately identifying significant items.

5.2.1      This Standard does not prescribe a specific format for disclosure of the components of the remuneration of individuals.  A tabular method of presentation that is recommended as a basic structure for individual disclosures is illustrated in Appendix 3.  Additional columns may be added in any category to identify types of benefits specific to the entity.  If one of the components listed above is not provided, it is not required to include a column with zero amounts.  The components are grouped into four categories for convenience but it is not required to show subtotals for each category for each individual or as a whole.  The following paragraphs in this Section provide guidance on what is included as remuneration and the classification of different types of remuneration.  Section 6 specifies how the amounts are to be measured.

Primary Benefits

5.2.2      This category of benefits includes salary, fees, commissions, profit sharing and bonuses and generally will comprise the most significant amount of remuneration for most individuals.  The purpose of separating this category into at least the three components identified in paragraph 5.2(a) is to assist users to identify the types of primary benefits provided by an entity to the individual and be able to compare this with the remuneration for other individuals in the entity or in other entities.  This Standard does not require the amounts disclosed to be separated on the basis of whether payable in the short or long term.

5.2.3      Paragraph 5.2(a)(ii) refers to all bonuses, other than equity compensation, earned by an individual in the reporting period.  It includes all forms of profit sharing, incentive schemes, performance pay plans and share-based payment compensation other than equity compensation.  If several types of incentive scheme are provided, disclosure of separate amounts for each scheme may provide more information to users on the performance of an individual.  In the case of long-term incentive plans, separate disclosure is required.  A long-term incentive plan means any plan or arrangement providing benefits, other than equity compensation, as an incentive for performance to occur over a period longer than one reporting period, whether such performance is measured by reference to the financial performance or share price of the disclosing entity or any entity in the economic entity or any other measure.

5.2.4      To the extent that a cash bonus earned by an individual in a reporting period has not been paid in that period, it gives rise to a liability of the entity.  Measurement of the benefit (liability) and changes in it are addressed in Section 6.  A change in the value of the benefit in a subsequent reporting period is included in remuneration disclosed in that subsequent reporting period until settled, including the final period in which the benefit is paid.  Although it is not required that an increase in an accrued amount be disclosed separately from a bonus earned in the same reporting period, disclosures that distinguish between these amounts are likely to be more informative than those that do not.  Where a bonus was earned in the preceding period but not disclosed, the amount paid or payable is included in remuneration disclosed in the current reporting period.

5.2.5      Some entities provide bonuses in the form of stock appreciation rights (SARs) where the benefit to the employee depends on the future value of equity instruments of the entity.  Such schemes are included in the definition of share-based payment compensation.  However, cash SARs, which can only be settled with cash and not equity instruments, are no different in substance from other cash-settled profit-sharing and bonus plans.  Amounts calculated in accordance with paragraph 6.4 are included in the component of remuneration disclosed in accordance with paragraph 5.2(a)(ii).

5.2.6      Some forms of share-based payment compensation may be subject to reclassification after grant date if the mode of settlement is not fixed at the time of granting.  Benefits that confer on an employee the right to decide whether to accept cash or equity instruments are treated the same as cash SARs for as long as the choice remains.  Following a decision on mode of settlement, the benefit will be reclassified as equity compensation if the employee chooses equity instruments; otherwise the benefit will continue to be treated as a cash SAR.  Benefits that confer on the entity the right to decide whether to settle with cash or equity instruments are treated the same as equity compensation for as long as the choice remains.  Following a decision on mode of settlement, the benefit will be reclassified as a cash SAR if the entity chooses cash; otherwise the benefit will continue to be treated as equity compensation.  Changes in the value of cash SARs are measured in accordance with paragraph 6.4 until settlement or reclassification and are included in remuneration disclosed under paragraph 5.2(a)(ii) in the reporting period in which the event occurs.  In cases where equity compensation is reclassified as a cash SAR, the amount of the change in value is measured in accordance with paragraph 6.5 and included in remuneration disclosed under paragraph 5.2(a)(ii) in the reporting period.

5.2.7      Benefits disclosed in accordance with paragraph 5.2(a)(iii) include items where an individual has received the benefit during the reporting period, such as discounts on goods (in excess of that available to trade customers, shareholders or other employees), medical care or subsidised housing.  Such benefits are not usually cumulative.

Post-Employment Benefits

5.2.8      Post-employment benefits referred to in paragraph 5.2(b) include retirement benefits and other post-employment benefits (such as post-employment life insurance and post-employment medical care).  This Standard requires inclusion in remuneration of all benefits arising in the reporting period that are paid, payable or to be provided in respect of post-employment benefits for the specified persons.  This includes the entity’s obligations to contribute to any pension, superannuation or other plan on behalf of the specified person for the reporting period, irrespective of whether a plan is a defined contribution or defined benefit plan or whether it is currently funded or unfunded.

5.2.9      This Standard distinguishes between retirement benefits payable in the normal course of events and termination benefits arising when an individual’s employment is terminated before the normal retirement date.  Accruals in relation to normal retirement benefits are included in the category of benefits described in paragraph 5.2(b)(ii) or 5.2(b)(iii), whereas termination benefits constitute a component specifically identified in the category of other benefits, paragraph 5.2(d)(i).  The Corporations Act describes all benefits for cessation of employment (irrespective of cause) as “termination benefits” and identifies those benefits that require approval by members (prescribed benefits).  Accordingly, companies may find it necessary to divide a “termination benefit” prescribed by the Corporations Act into two amounts, to disclose each in the applicable component.  When shareholders have approved retirement benefits for non-executive directors, for example to be calculated on retirement as a multiple of director’s fees pro rata for years of service, the amount accruing in the reporting period is disclosed as a prescribed benefit in the component described in paragraph 5.2(b)(ii).

Equity Compensation

5.2.10  Equity compensation includes benefits in such forms as:

(a)      ordinary shares, units, options and other equity instruments of the entity provided to employees at less than the fair value at which those instruments would have been issued to a third party or on the market; and

(b)      rights to equity instruments that may, at the discretion of the entity, be settled by either cash payments or the issue of its equity instruments.

5.2.11  The values of equity instruments, including options and rights, are estimated in accordance with paragraphs 6.2 and 6.3 and the principles for measurement and allocation in Appendix 6.  The amount shown as remuneration is the value after deducting any amount payable to the entity for those equity instruments.  Amounts initially paid or payable do not include an amount that may be paid in the future for the issue of another equity instrument, such as an ordinary share issued on exercise of an option or right.

5.2.12  The term equity compensation includes those forms of SARs that permit settlement in the form of cash or an equity instrument of the entity where the choice between cash or shares can be made by the entity.  Obligations to pay cash based on the entity’s share price that cannot be settled by the issue of equity instruments are not included in the category of equity compensation, since such obligations, when vested, constitute liabilities of the entity.  Similarly, schemes where an employee, and not the entity, holds the choice to receive on exercise either cash or equity instruments are not classified as equity compensation schemes.  Such schemes are functionally equivalent to complex bonus plans and are included in the component identified in paragraph 5.2(a)(ii).

5.2.13  Although sometimes described as equity compensation, any scheme that provides benefits in the form of equity in an entity other than the disclosing entity or any of its subsidiaries, such as an overseas listed parent company, is not classified as an equity compensation scheme.  Such compensation gives rise to a liability, since the obligation cannot be settled by issuing equity instruments of the disclosing entity or any of its subsidiaries and the instruments must be purchased on market or from the issuing entity.

5.2.14  Any value in excess of the amount disclosed up to vesting date that is realised later on the exercise of an option or right for shares or units of the entity is not included in remuneration for any reporting period or disclosed.

5.2.15  Many companies provide broad-based employee share purchase plans or share acquisition schemes that permit employees to purchase options, shares or units at a discount from market value.  Schemes such as these and dividend reinvestment plans offered to shareholders enable companies to raise subscribed capital over time without incurring the costs associated with public share offers.  The purchase discount may be viewed as encouraging employees to participate in the plan or as equivalent to the avoided cost of raising capital.  An employee share purchase plan or share acquisition scheme would be considered non-compensatory when there is no link between services provided by the individual and the extent to which the individual may participate in the scheme.

5.2.16  When an employee share acquisition scheme includes loans to facilitate employees purchasing shares, this does not necessarily make the scheme compensatory in nature.  When such loans are offered interest free or at a concessional rate of interest, the difference between the zero or concessional rate and the equivalent commercial rate is disclosed in accordance with paragraph 9.2(c).  The benefit to the individual of interest not payable is included in remuneration, in the component identified in paragraph 5.2(a)(iii).

Other Employee Benefits

5.2.17  It is expected there will be a variety of different types of benefits provided to individuals that are not easily classified into the categories identified in paragraphs 5.2(a) to 5.2(c).  For example, a disclosing entity may pay insurance premiums to protect a director against various legal costs that may arise.  Chapter 2D.2 of the Corporations Act specifies restrictions on indemnities, insurance and termination payments by a company in relation to its officers, identifying which payments are prohibited and which do or do not need members’ approval.  Prescribed benefits are those that require approval by members.  Chapter 2E of the Corporations Act, Related Party Transactions, Part 2E.1, Division 2, specifies several exceptions to the requirement for member approval, including reasonable remuneration and small amounts (less than $2,000) given to a director or their spouse.  Paragraph 5.2(d) requires that amounts paid under member approval be disclosed separately from amounts that are termination benefits or did not require member approval.  An exception from member approval does not mean an exception from disclosure.  Additional examples of other benefits that are included as remuneration are identified in Appendix 1 of this Standard.

Termination Benefits

5.2.18  An entity may be committed, by legislation, contract or other agreements with employees or their representatives or by a constructive obligation based on business practice, to make payments or provide other benefits to employees when it terminates their employment before normal retirement date.  An entity may offer benefits to individuals to encourage voluntary redundancy and these are termination benefits, as referred to in paragraph 5.2(d)(i).  Accounting for termination benefits, including those related to restructuring, is determined in accordance with AASB 1028.  Termination benefits are typically lump-sum payments, but sometimes include:

(a)      enhancement of retirement benefits or of other post-employment benefits, either indirectly through an employee benefit plan or directly; and

(b)      salary until the end of a specified notice period during which the individual renders no further service to the entity.

5.2.19  Some benefits provided on termination of service to the entity are receivable by the employee regardless of reasons for the departure.  Although the timing and amount may be uncertain, it is certain in such cases that the entitlement exists and payment of the benefit will occur.  Such benefits are retirement benefits and must be included in post-employment benefits, despite any description such as “termination gratuities”.  In some cases, a contract may provide for different levels of retirement benefit to be paid depending on the cause of departure.  Any additional benefits generated because the termination is involuntary or at the request of the entity are termination benefits as defined in this Standard.  By definition, the nature of termination benefits is such that they arise in one reporting period and, unlike most retirement benefits, are not accrued over several reporting periods.