Tips to Evaluate Discretionary Action for Executive Incentives in Australia



The effects of the COVID-19 pandemic have been felt far and wide from both a business and humanitarian perspective. Several organisations have adopted measures, such as pay cuts, layoffs, furloughs and material reductions in spending to stay afloat. The current economic outlook in Australia does not look promising, indicating further business challenges in the coming months.
 
Financial performance for many companies has been significantly affected by the prolonged hiatus in economic activity around the world. On the other hand, we saw a surge in business for certain industries that provide in-demand services. This volatile environment will likely be reflected in the outcomes of executive incentives. Boards will have to determine, in accordance with their organisation’s own unique circumstances, if the payouts dictated by incentive plans require discretionary adjustments to smooth out short-term instability and reflect normal business performance. Discretionary adjustments are not uncommon and usually carefully scrutinised by investors and shareholders. Unsurprisingly, in years of constrained financial performance, investors are more likely to disagree with upward discretionary adjustments in the prevailing governance environment notwithstanding the actual contribution of the executive team.
 
In this article, we explore considerations for boards when making discretionary decisions on executive incentives in the current environment and the various forms that board discretion could take.

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