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Focus: Executive remuneration – 'Golden Handshake' Bill released

11 May 2009

In brief: The Federal Government has released a draft of new laws regulating executive termination payments for public consultation. The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 places strict caps on termination or 'golden handshake' payments to directors and executives, and clarifies the types of payments that will form part of a termination benefit. Executive Partner Paul Quinn (view CV) and Senior Associate Lisa Keohane report.

How does it affect you?

  • New contracts for senior executives and key management will have limits on termination payments.
  • These limits may adversely affect Australian companies' ability to attract talented executives.
  • Submissions on the draft Bill can be made to Treasury by 2 June 2009.

Key changes

The key changes which are proposed by the Bill are:

  • To amend the Corporations Act 2001 (Cth) to lower the threshold at which termination payments must be approved by shareholders, from more than seven times a director's total annual remuneration, to more than one year's average base salary. Where the person has worked for less than a year, then the threshold is the amount of base pay received for the period worked.
  • To extend the range of individuals whose termination payments can be subject to shareholder approval to cover individuals holding a 'managerial or executive office' with the company. This will include all directors and executives named in the remuneration report for listed companies and the directors of non-listed companies.
  • To broaden the definition of 'termination benefit' to catch all types of payments made at termination including any payments made in lieu of notice of termination, any amount paid as a voluntary out-of-court settlement, any options which vest on an accelerated or automatic basis on termination, any superannuation contributions made in excess of the minimum statutory requirement and any kind of pension.
  • To exclude from the definition of 'termination benefit' the payment of deferred bonuses ie. bonuses that have been earned but not yet paid, and payments from a defined benefit superannuation scheme that was in existence before the new laws come into effect.

The laws will only apply to the termination of employment arrangements that were entered into or extended after the commencement of the new laws – they are not intended to affect the termination payment arrangements under existing contracts. Employers and employees alike will need to be cautious when extending or varying employment contracts after the Bill takes effect if they wish to maintain the termination benefit arrangements in those contracts.

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Shareholder approval

Where shareholder approval for termination benefits is required, the vote must be taken at a general meeting that occurs after the director or executive has left the company, and a general meeting must not be called specifically for the purpose of holding the vote. Any payments made in excess of the threshold which are not approved will give rise to penalties of $19,800 for individuals (previously $2,750) and $99,000 for companies (previously $16,500), together with the option of up to six months' imprisonment. As most termination payments are negotiated either when entering the employment contract or when agreeing to terminate it, obtaining shareholder approval is not likely to be a practical option for most companies.

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Early terminations

The impact of the proposed laws on new executives who are terminated early could be harsh. Where an executive is terminated after, say, one month of service for reasons which may not be related to their performance, for example because of a merger, or a change in company strategy or corporate structure, the proposed laws will prevent the executive receiving any payment in excess of one month's base salary, unless shareholder approval is obtained.

Where a company is trying to attract an executive from interstate or overseas, the company may not be able to give the executive any reasonable security of tenure. If the company sacks the executive after a week (even in circumstances where the company breaches the employment contract), it is only able to pay a week's base pay as compensation. An executive who is in a good position elsewhere may not want to take the risk of moving jobs and possibly countries if the company can terminate without reasonable compensation.

A threshold of, say, two years' base salary would address this potentially harsh outcome, would allow companies to negotiate up to this limit when trying to attract talent and would still avoid excessive payments (although it is noted that focusing on base pay rather than total remuneration is likely to increase base pay as a proportion of total remuneration in new executive contracts).

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Fixed-term contracts

The new restrictions mean that fixed-term contracts for executives and companies will pose significant problems. Companies will not be permitted to make payments above the threshold when they want to remove an executive, and executives will not have the comfort of a fixed term when they know companies can terminate the contract early and be restricted from making a damages payment or payment in lieu of notice in excess of the threshold. The Bill undermines the security of tenure provided to executives under the current regime. While it is important to curb the excessive payments that have occurred in the past, many Australian listed companies search for talent in the global market and therefore the payment terms for executives need to be reasonably certain and competitive.

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Submissions

The laws proposed in the Bill will have a significant impact on the remuneration and termination arrangements for directors and executives. If you would like us to assist you in making a submission please contact us in advance of the 2 June 2009 deadline.

Published 11 May 2009

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