Part 5: Severance payment and remuneration disclosures

Local government: Results of the 2016/17 audits.

5.1
In this Part, we report on severance payment and remuneration disclosures by several local authorities that we considered during the 2016/17 audits. We also note some disclosure matters that we considered for council-controlled organisations.

5.2
The Local Government Act 2002 (the Act) and accounting standards require local authorities to disclose information about severance payments and remuneration in their annual reports. The disclosure requirements in the Act are different and more specific than those in the accounting standards. Appendix 3 outlines the requirements of both.

5.3
We are required to audit how entities comply with the disclosure requirements in the Act and the accounting standards.

5.4
Our audits focus mainly on the disclosure requirements, but severance payments can also be an area of legal, financial, and political risk for public entities. Public entities need to ensure that:

  • payments are properly authorised; and
  • the amount paid is reasonable under the circumstances and a proper use of public money (in other words, that the payment and its components would withstand scrutiny).16

5.5
Our audit approach is to review the severance payment documents and processes to confirm that the public entity has met the disclosure requirements. We also check that the:

  • decision to settle was soundly based;
  • public entity had legal or external advice as appropriate; and
  • person(s) agreeing to make the payment had appropriate financial authority.

5.6
We do not make judgements about the merits of a decision to end an employee's employment.

Matters we considered during the 2016/17 audits

5.7
We considered severance payment and remuneration disclosures by all local authorities and council-controlled organisations during the 2016/17 audits. Larger payments and payments to some departing chief executives received the most audit focus. For the local authorities and council-controlled organisations listed below, we set out their severance payment and remuneration disclosures in paragraphs 5.9-5.20 and give our observations and comments in paragraphs 5.23-5.27:

  • Auckland Council and council-controlled organisations in the Auckland Council group;
  • Rotorua Lakes Council;
  • Hawke's Bay Regional Council;
  • Westland District Council;
  • Nelson City Council; and
  • Delta Utility Services Limited – a council-controlled organisation of Dunedin City Council.

5.8
We set out Delta Utility Services Limited's disclosure in paragraphs 5.30-5.40, where we discuss confidentiality.

Severance payment disclosures

5.9
Auckland Council's annual report for the year ended 30 June 2017 disclosed the following:

  • Twenty-eight severance payments to employees totalling $976,226 (30 June 2016: 17 payments totalling $726,910). The payments ranged from $3,000 to $405,739. The second largest payment was $68,202.17
  • Nineteen severance payments to employees of Auckland Council's council-controlled organisations totalling $772,557 (30 June 2016: eight payments totalling $229,581). The payments ranged from $2,885 to $275,000. The second and third largest payments were $120,000 and $96,519 respectively.18

5.10
Auckland Council also disclosed the $405,739 severance payment as a termination benefit in the key management personnel remuneration section in its annual report.19

5.11
Rotorua Lakes Council's 2016/17 annual report disclosed four severance payments of $126,933, $10,000, $7,000, and $4,000. The Council disclosed the largest payment as a severance payment and as a termination benefit in the key management personnel compensation section.20

5.12
Hawke's Bay Regional Council's 2016/17 annual report disclosed a severance payment to the departing chief executive of $306,200 and two severance payments to other staff of $9,000 and $8,000.21 The Council also disclosed the severance payment to the chief executive as a termination benefit in the key management personnel compensation section of the annual report.22

5.13
Westland District Council and Nelson City Council's 2016/17 annual reports disclosed severance payments to departing chief executives of $85,007 and $70,245 respectively.23

5.14
Westland District Council also disclosed severance payments to two other staff of $104,405 and $41,000. Nelson City Council disclosed severance payments to three other staff of $91,300, $53,662, and $11,067.24

Remuneration disclosures

5.15
Westland District Council and Nelson City Council both disclosed that remuneration paid or payable to the departing chief executives in 2016/17 was more than the amount paid in the previous year by $143,505 for Westland District Council and by $62,243 for Nelson City Council.

5.16
Both councils included additional information in their annual reports to help readers understand these differences. Nelson City Council noted that the remuneration amount for the chief executive included contractual entitlements on the termination of their employment.25 Westland District Council noted that remuneration for management in 2016/17 included accrued annual leave paid out to three leaving staff members.26

5.17
One-off payments at the end of an employee's employment can distort the salary band disclosure information required for local authority employees. We considered the situation where a senior council employee retired as at 30 June 2017. The employee had a large annual leave balance that had built up over several years, which a Council paid out when the employee retired.

5.18
The Council in this case was concerned that including the annual leave payment in the employee's remuneration for the period of the annual report would distort the disclosure of employee salaries, because it would move the employee up into a higher band. We agreed that it was appropriate to exclude the leave payment as part of the employee's "total annual remuneration" for the purpose of the salary band disclosure. Had the Council included the amount, an explanatory note would have been helpful.

5.19
Hawke's Bay Regional Council's 2016/17 annual report discloses five separate amounts paid to four chief executives in the period at a total cost to the Council and a council-controlled organisation of $782,699.27

5.20
Hawke's Bay Regional Council's disclosure includes remuneration and other benefits paid to:

  • its former chief executive of $646,800, which included his remuneration while seconded to a council-controlled organisation and his severance payment; and
  • two interim chief executives and a newly appointed chief executive near the end of 2016/17, amounting to $135,899.

Our audit work

5.21
For the local authorities that made severance payments, we confirmed that the disclosures met the requirements of the Act and accounting standards. This included considering whether components of payments were properly characterised as remuneration or severance payments.

5.22
We also checked councils' records and process. We looked more closely at the bigger payments to ensure that we understood the reasons for them. This included the payment of $405,739 by Auckland Council, the $275,000 payment by a council-controlled organisation in the Auckland Council group, the $126,833 payment by Rotorua Lakes Council, and the $306,200 payment by Hawke's Bay Regional Council.

Observations and comments

5.23
As well as focusing on the large payments, we noted some positive and negative aspects when reviewing severance payments in 2016/17.

Positive aspects

5.24
We were pleased to see that some entities took steps to enhance transparency by making disclosures that went beyond the requirements of the Act and accounting standards or adding information to explain apparent discrepancies. Examples we noted were:

  • Some councils disclosed severance payments separately as termination benefits to senior management, and some councils added additional information to explain higher remuneration amounts for employees who had left during the year.
  • Auckland Council's disclosure of severance payments in the whole council group went beyond the requirements of the Act. The Act requires disclosure of severance payments to all council employees but not employees of council-controlled organisations. Because Auckland Council has several council-controlled organisations, it is useful to show severance payments in the whole group to give the overall picture.
  • Auckland Council disclosed the full amounts of the severance payments made, including all components of settlement agreements, such as payments in lieu of notice. This aligns with accounting standards, which consider such payments as termination benefits.
  • Hawke's Bay Regional Council made a detailed disclosure of remuneration paid to each of its chief executives and interim chief executives.
  • Auckland Council and Nelson City Council put the disclosures required by the Act and by accounting standards next to each other in their financial statements, rather than in separate notes, which helps with understanding the information.

5.25
We welcome local authorities including additional disclosure and explanatory material. It is useful for readers. In the interests of transparency and accountability to the public, we have previously encouraged entities to go beyond the statutory disclosure requirements in some circumstances.28

Negative aspects

5.26
We considered some components of severance payments to be unusual or large for public sector entities. Examples were:

  • a payment of $15,000 for the purpose of coaching, outplacement, or counselling, for the departing employee to use as they saw fit (as part of an already large severance package);
  • giving inappropriate weight to an employee's personal circumstances when determining the parts of a severance payment;
  • paying business class airfares for a personal trip for a departing employee and another to visit a family member who was unwell;
  • a "back-dated salary payment" of $50,000 as part of a severance package, to address a departing employee's view that they should have been on a higher salary (the back-dated salary payment was incorrectly described as a "contractual entitlement"); and
  • two instances of tax-free "hurt and humiliation" payments of $25,000, which is more than the amounts awarded in the Employment Relations Authority or the Employment Court.29

5.27
Also, we were concerned to note the following:

  • A chief executive was directly involved in negotiating a large severance payment with a departing senior employee. The chief executive had in-house support, but little documentation and no written advice. Our guidance on severance payments notes that it is preferable to use advisers in sensitive and difficult situations, rather than for the employer and employee to negotiate directly.
  • Several departing senior executives had significant remuneration expectations for the public sector. The local authorities understandably took this into account when determining the amount of the severance payments. However, in one instance, an employee's severance package was more than their whole year's remuneration and more than double what would have been paid for redundancy with notice. We considered this approach to be unusual in the public sector.
  • An employee negotiated a "golden parachute" clause in their fixed-term employment contract. The employer was aware that the clause was outside public sector norms but believed that it was unlikely to come into effect because of the short duration of the contract. Although that was a reasonable belief, the clause came into effect. This resulted in a large payment to the departing employee.

Confidentiality

5.28
Confidentiality is standard in many employment settlements. However, public entities need to comply with disclosure requirements in the Act and accounting standards. These requirements override any confidentiality agreement or privacy considerations. One way to avoid any legal risk to the public entity from complying with statutory disclosure requirements is to make any confidentiality obligation "subject to any disclosure required or permitted by law".

5.29
People like to know how public money is spent, and confidentiality about severance payments does not always sit well with political, media, or public interest. We give an example below.

Delta Utility Services Limited

5.30
The outgoing chief executive of Delta Utility Services Limited (Delta) and Aurora Energy Limited (Aurora)30 received a severance payment that attracted some political and public attention. The two companies had operated together but separated from 1 July 2017. As a result of the restructuring, termination benefits were payable to the outgoing chief executive.

5.31
Delta's 2016/17 annual report disclosed information about employees' remuneration and termination benefits. As a company, Delta must comply with the disclosure requirements in accounting standards that apply to "for-profit" entities and the Companies Act 1993.31

Disclosures in Delta's 2016/17 annual report

5.32
Delta's 2016/17 annual report listed the number of employees and former employees whose remuneration and benefits exceeded $100,000 for the year ended 30 June 2017. The report noted that the remuneration disclosure included all non-cash benefits and redundancy payments. A redundancy payment is a benefit to an employee, so it is part of the disclosure.

5.33
Delta's 2016/17 annual report disclosed that one employee had received remuneration and benefits between $980,001 and $990,000.32 The 2015/16 annual report listed the highest-paid employee as earning between $560,001 and $570,000.33

5.34
A related party note in the financial statements about key management personnel remuneration disclosed termination benefits paid to the chief executive and one other senior employee of $378,000 after the company was restructured.34 This is required by accounting standards that apply to "for-profit" entities (see Appendix 3).

Media reporting

5.35
After Delta released its 2016/17 annual report, the media reported a "$1m exit package for Delta boss",35 an "almost $1m payout", and a "$980,000 golden handshake".36 This was based on the disclosure in the annual report that one employee received remuneration and benefits in 2016/17 of between $980,001 and $990,000. However, because that amount included the chief executive's normal remuneration for that period, the headlines were inaccurate.

5.36
The related party note in the financial statements had more specific information about termination benefits paid to the chief executive and one other senior employee as a result of the restructuring. The related party note disclosed that the total amount of those two payments was $378,000.

5.37
Two Dunedin City councillors wanted more information about the final payment to the outgoing chief executive, including whether it contained a performance-related component. They were concerned when Delta's parent company, Dunedin City Holdings Limited, gave confidentiality as a reason for not giving them this information. The councillors considered that they were entitled to the information, because Dunedin City Council was the ultimate shareholder of the company.37

5.38
The media asked us whether we had considered the matter. We confirmed that our appointed auditor had looked at the final payment to the former chief executive as part of our annual audit of Delta. We confirmed that the payment had been properly authorised and was disclosed appropriately according to the accounting standards.

5.39
In this instance, Delta made appropriate disclosures of termination benefits paid to senior employees in its annual report, so some information was available. Although the actual cost of the chief executive's termination benefit was not disclosed, it was included in the disclosure of the amount of $378,000 paid to two employees.

5.40
It is not clear whether Dunedin City Council, as shareholder, was made aware of the detail in the annual report disclosures, which showed that the actual cost to the company of the chief executive's "exit package" was much less than what the media reported.

Final comments

5.41
The requirements for disclosing remuneration and severance payments under the Act and accounting standards are not straightforward. Different rules apply to different kinds of entities. We encourage entities to include additional explanatory material in the interests of transparency and accountability to the public. We continue to encourage entities to take a careful approach to making severance payments to ensure that they are not a waste of public funds and will withstand scrutiny.

16: For more on confidentiality and other matters concerning severance payments, see our 2012 report Severance payments: A guide for the public sector.

17: Auckland Council (2017), Annual Report 2016/17, volume 3, page 77.

18: Auckland Council (2017), Annual Report 2016/17, volume 3, page 78.

19: Auckland Council (2017), Annual Report 2016/17, volume 3, page 76.

20: Rotorua Lakes Council (2017), Annual Report 2016/17, pages 146 and 148.

21: Hawke's Bay Regional Council (2017), Annual Report 2016/17, page 179.

22: Hawke's Bay Regional Council (2017), Annual Report 2016/17, page 144.

23: Westland District Council (2017), Annual Report 2016/17, page 40. Nelson City Council (2017), Annual Report 2016/17, page 147.

24: Westland District Council (2017), Annual Report 2016/17, page 40. Nelson City Council (2017), Annual Report 2016/17, page 147.

25: Nelson City Council (2017), Annual Report 2016/17, page 145.

26: Westland District Council (2017), Annual Report 2016/17, page 70.

27: Hawke's Bay Regional Council (2017), Annual Report 2016/17, page 179.

28: Office of the Auditor-General (2016), Local government: Results of the 2014/15 audits.

29: A review of Authority and Court decisions to the end of July 2017 estimates that the average hurt and humiliation award under section 123(1)(c)(i) of the Act is about $9,000. See MinterEllisonRuddWatts (7 September 2017), Hurt and Humiliation Payments on the Rise, minterellison.co.nz/our-view/hurt-and-humiliation-payments-on-the-rise. For payments awarded by the Employment Relations Authority and Employment Court in the 2016 calendar year, see www.employment.govt.nz/about/employment-law/compensation-and-cost-award-tables/compensation-awards-jul-dec-2016/.

30: These companies are part of the Dunedin City Council group.

31: The Companies Act 1993 requires a company's annual report to state the number of employees or former employees who, during the accounting period, received remuneration and any other benefits in their capacity as employees, of over $100,000 per annum in brackets of $10,000 – section 211(1)(g).

32: Delta Utility Services Limited (2017), Annual Report 2017, page 15.

33: Delta Utility Services Limited (2016), Annual Report 2016, page 12.

34: Delta Utility Services Limited (2017), Annual Report 2017, page 52.

35: Otago Daily Times at www.odt.co.nz, "$1m exit package for Delta boss", 22 September 2017.

36: Radio New Zealand at www.radionz.co.nz,"$980k CEO payment questioned", 16 October 2017.

37: Delta is a council-controlled organisation, owned wholly by the council holdings company, Dunedin City Holdings Limited, which is in turn owned by Dunedin City Council.