BusinessCorporate FinanceA transparent problem with pay

A transparent problem with pay

Transparency is proving to be a bone of contention between institutional investors and listed companies.

Institutional investors are calling for more transparency in executive pay
and bonuses, but a recent KPMG study found that 53% of FTSE500 company
executives said their companies had no intention of increasing disclosure on
pay.

The survey also showed that just 19% planned to provide more information in
respect of past awards and only 17% planned to provide more detailed information
on future awards.

Clearly, there is resistance towards increased transparency.

I believe a compromise is needed to provide clarity and to ensure that all
companies can be judged fairly on this issue – and this seems to be the crux of
the problem.

I have seen individual companies produce 18 pages’ worth of company figures
reflecting their executive pay structure, which, in theory, is increased
disclosure. But this disclosure does not amount to increased transparency.

Furthermore, the make-up of executive pay deals is becoming increasingly
Byzantine with long-term incentive plans making it very difficult to work out
how much an individual really earns or will earn in the future.

This is not helped by the fact that most studies on executive pay and bonuses
use slightly different criteria for measuring pay and valuing long-term
incentives. Until there is a uniform methodology, there won’t be proper
transparency.

Meanwhile, we are left with the ‘ratcheting-up’ effect of ‘increased
disclosure’ whereby companies increase executive pay in line with the ‘median’
in their sector. But if the median is misleading, then this is superficial at
best and damaging at worst.

According to the executives and non-executive directors I meet during my
working week, remuneration committees would like to get back to basics and make
executive packages less complex.

I would join them in calling for an agreed uniform methodology applied to the
increased disclosure rules. That way, transparency would be much easier to
achieve.

Sean O’Hare is head of KPMG’s executive compensation practice

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