CSL Non-executive Director fees salary sacrifice plan aligns interests of Directors and Shareholders

About CSL Limited

CSL Limited (CSL, the Group, ASX: CSL) is a global biotechnology business that provides lifesaving products to patients in 100 countries and employs 32,000 people. Originally known as Commonwealth Serum Laboratories, CSL was established in 1916 by the Commonwealth Government to manufacture vaccines like insulin and penicillin and vaccines against influenza, polio, and other infectious diseases. These vaccines were necessary to service Australia’s health needs when the nation was isolated from the rest of the world during the first World War. In June 1994, under a Keating-led government, CSL was publicly floated on the ASX at $2.30 per share.

Non-executive director fees salary sacrifice plan

CSL Non-executive Directors are required to sacrifice at least twenty percent of their annual pre-tax base fee for shares under a salary sacrifice plan that aligns Directors’ long-term interests with Shareholders’ interests. This is a groundbreaking Non-executive Director company compensation plan because until recently, equity-related compensation plans have been the exclusive domain of senior executives.

Under the salary sacrifice plan, CSL Non-executive Directors can own CSL shares equal to one hundred percent of their base fee within five years from the date of their appointment to the CSL Board. The plan structure enables Non-executive Directors to build up meaningful levels of equity reasonably quickly from the date of their appointment.

Directors are required to hold them for between three and fifteen years. The shares are bought at the prevailing market price on market following release of the half-year and full-year financial results. The number of shares purchased is determined by dividing the fee sacrificed by the prevailing market price of CSL shares at that time.

As this is a salary sacrifice arrangement, no performance conditions apply to the shares to be purchased. Additional shares may be purchased by Non-executive Directors on-market in accordance with CSL’s Securities Dealing Policy.

CSL is a global business and so must attract experienced and well-credentialled Directors from around the world and this incentivisation plan assists CSL in achieving this objective. The plan has served the interests of Directors and shareholders well as reflected in the $88.79 or 45 percent increase in the CSL share price over the past five years. This compares to a 30 percent lift in the ASX100 (XTO) Index over the same period.

CSL wins Tax Office approval in 2018

The game changer for Non-executive Director equity participation came on 15 August 2018 when the Australian Taxation Office published class ruling CR 2018/35 which confirmed that the shares received by Non-executive Directors under the salary sacrifice share plan arrangement first proposed by CSL qualify for tax deferral. This was a significant ruling because it ruled that the taxing point of the shares is the earlier of when the Non-executive Director leaves the CSL Board or the date on which the disposal restrictions on the shares are lifted, which is commonly fifteen years.

This initiative by CSL has cleared the way for other large ASX-listed companies to impose minimum shareholding requirements on Non-executive Directors without creating an unintended tax burden on them. Today most of the ASX 20 companies require their Non-executive Directors to have a shareholding in the company equal in value to at least one year of their base fee, with up to five years in which to attain the requisite shareholding level. Shareholders appreciate this arrangement because ASX100 Non-executive Directors are by and large generously rewarded and the alignment of their interests with Shareholders’ interests can only have positive consequences for all stakeholders.

Corporate Governance considerations

From a corporate governance perspective, Non-executive Directors can and are encouraged to receive part of their Board fees as equity. The ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations specifically recognise that it is generally acceptable for Non-executive Directors to receive equity as part of their remuneration, to align their interests with the interests of other security holders.

The Future

Steadily rising global demand for CSL’s product portfolio is delivering double-digit earnings growth that is likely to drive share price appreciation at least over the medium-term. Non-executive Director equity participation as mandated by CSL’s salary sacrifice plan provides added confidence that this shareholder value accretion will occur.