Curb on executive payouts passes Senate

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Curb on executive payouts passes Senate

Legislation that limits executive payouts to one year’s salary without shareholder approval has been passed by Federal Parliament.

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Legislation that limits executive payouts to one year’s salary without shareholder approval has been passed by Federal Parliament.
 
The legislation passed through the Senate yesterday and will come into effect the day after it receives Royal Assent.
 
The Minister for Financial Services, Chris Bowen, welcomed the passage of the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 and said the reforms will ‘empower shareholders to reject excessive termination payments and promote responsible remuneration practices’.
 
Major changes
 
‘They are a major change to laws left by the previous government, where termination payments could reach up to seven times a director's total annual remuneration package before shareholder approval was required,’ he said.
 
Bowen said the government particularly welcomes the dropping of an amendment [moved by independent Senator Nick Xenophon] that would have had the effect of torpedoing the government’s new regulatory regime on termination payments in three years' time.
 
Genuine payment
 
In the Senate, Assistant Treasurer Nick Sherry said the amendment would have the effect of removing an important exception where the termination benefit represents a genuine payment by way of damages for breach of contract.
 
‘It would require such payments be subject to shareholder approval irrespective of the amount of the payment,’ he said.
 
‘In practice, it would mean, as Senator Xenophon has acknowledged, that virtually all termination benefits, regardless of their size, would require shareholder approval.’
 
‘Even a legitimate payout of $1 would require the approval of shareholders at a general meeting. This is unworkable.’
 
Important principle
 
However, Senator Xenophon said there is an important principle at stake.
 
‘The fact is, you can use the mechanism of a creative sunset clause,’ he said.
 
Xenophon was claiming that excessive termination payments could be included in contracts to be paid out at the end of the employment.
 
‘The intent of this amendment was to force the government to come back to the parliament within three years with an improved Bill that included a greater degree of accountability in relation to termination payments.’
 
Key features
 
Key features of the new laws include:
  • The new regulatory framework will ensure that termination benefits for company directors and executives exceeding one year’s average base salary are subject to shareholder approval.
  • The scope of the requirements relating to termination benefits is expanded to include senior executives or key management personnel of a disclosing entity.
  • The definition of what constitutes a benefit is broadened, including a requirement that the substance should prevail over its legal form.
  • New regulation-making powers to specify what types of payments are, or are not, a termination benefit, and to define base salary.
  • The immediate repayment of unauthorised termination benefits with an increase in the penalty provisions.
  • The retention of the existing requirement for the giving of the benefit to be approved by a resolution passed at a general meeting. 

 

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