time to ‘fess up

Executive pay packets will always attract high media attention, but it’s when
the blood pressure of investors rises that companies need to worry. Given the
requirement for shareholder approval via a vote, directors’ remuneration needs
to be handled carefully.

Too often, institutional investors vote against the remuneration reports
because they are unable to decipher the detail and understand how their
interests and those of management are aligned.

Organisations could take steps to minimise these situations by making the
remuneration report a more effective communication tool.

Currently, it’s easy to find fault with many of the remuneration reports
issued. While legally compliant, many reports swamp readers in a mass of data,
making it hard to identify key information such as whether any aspects of the
pay and benefits policy have changed in the year.

Multiple frustrations

It isn’t just investors that become frustrated with this process. Company
representatives also struggle in the face of inconsistent guidelines issued by
institutional shareholders as to what they consider best practice.

Buy-side analysts may hold one view in discussion with a company’s finance
director, but those analysts’ corporate governance colleagues may have a
different one.

Executive directors can sometimes also feel frustrated with their
non-executive counterparts, feeling that more could be done to explain why the
company’s approach to reward is appropriate.

Remuneration reporting needn’t be this way. The Report Leadership Group,
which includes PricewaterhouseCoopers, CIMA and communications consultancy
Radley Yeldar, consulted with investors and took inspiration from current best
practice to suggest what an effective remuneration report could look like (see
box). Many of the desired elements are being provided by some companies, but no
remuneration reports currently contain them all.

One important topic that many companies skip over is the matter of what the
remuneration committee actually does. This is a major omission. Investors want
comfort that the decisions the committee reaches are sound. Many investors admit
that they lack a full understanding of how remuneration committees organise
themselves. Some narrative explaining the committee’s role, and the topics that
have been addressed during its meetings in that particular year, can be helpful.

Three-tiered structure

It should be remembered that, as with all effective reporting, it isn’t just
the content that counts, but how that content is presented. Too much badly
structured material can be as problematic for users of the annual report as too

The Report Leadership Group suggests a three-tiered approach, starting with
high-level messages in the remuneration committee chair’s letter, accompanied by
a synopsis of key information.

This could then be supplemented with an explanation of the company’s approach
to remuneration, including current year performance, in a question and answer
format. The third tier of the report is represented by the comprehensive
disclosures required by local regulations and best practice guidelines.

One of the challenges that can arise in developing the remuneration committee
report is determining where ownership of it lies. Many individuals will be
involved in providing the content ¬ including the FD concerned (to ensure the
numbers are correct), the company secretary (who may oversee corporate
governance issues) and the remuneration committee chair (who has responsibility
for signing off the final report).

The involvement of so many individuals can result in a confused and confusing
structure and inconsistent reporting styles.

One solution is to plan the preparation of the report carefully, starting
with the remuneration committee chair. Thinking up front about the key messages
to be conveyed makes it more likely that the final document will be useful to

Valuable payback

Evidence shows that when investors believe that a company has effective
corporate governance procedures in place, they are prepared to pay a premium for
that company’s shares. Remuneration policies and procedures form an important
element of any organisation’s corporate governance activities.

So if a company can demonstrate that it is applying sound practices in
relation to pay and benefits, the more likely they are to win investors’ support
and sustain a healthy share price.

David Phillips is senior corporate reporting partner and Sean O’Hare is a
partner in human resource services at PricewaterhouseCoopers

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