Financial directions - Boards criticised on performance pay.

The DTI published its intention to tighten up disclosure on boardroom ?pay in March this year. But a recent PwC report* indicates companies are a ?long way from meeting requirements of the new legislation, writes Tom Berry.

The main thrust of the DTI’s proposal is to improve the link between pay ?and performance at executive level. It requires companies to publish ?detailed reports of each director’s pay, bonuses and share options. ?Performance graphs will have to be included in the report along the lines ?of current US requirements, plotting, for example, total return over five ?years from an investment in a company’s stock, set against comparable ?return from peer group companies.

Executives’ pay is the main area where comparative data is hard to come ?by. Only 18% of companies surveyed by PwC implement any form of ?comparative analysis when determining directors’ remuneration; and 38% ?give no information at all on comparators used.

One area where you might expect performance criteria to be more ?transparent is in the allocation of company bonuses, but even here the ?picture is confused. Whereas 95% of surveyed companies operate a ?performance-related annual bonus scheme, 52% of that figure base bonus ?allocation on company performance alone. A further 27% combine company and ?individual performance; a mere 4% rely on individual performance; and 14% ?of companies did not disclose any information on bonuses allocated.

Despite this lack of individual performance criteria, companies are still ?awarding massive bonuses to directors: 46% of companies do not specify a ?maximum limit on the amount of bonus payable, and of those that do cap ?bonuses, the average maximum payout is 50% of salary; 20% of companies ?also set additional bonus entitlements for CEOs and FDs of anything from ?10% to 150% of salary.

Eight out of ten directors receive top bonuses for below average ?performance.

Companies will need to rethink their performance indicators to prevent ?them being embarrassed by such statistics.

In May 2001 Andersen published its similar Directors’ Remuneration on ?Flotation 2000/2001** report and found that FDs receive substantially more ?pay than the majority of board members even though financial performance ?was sluggish.

Of 126 newly floated companies in 2000 that were surveyed, FD remuneration ?ranged from #50,000 to #246,250, while other board members received ?#40,000 to #185,000. Moreover, 9.5% of companies paid a flotation bonus to ?FDs on top of the average 50% annual bonus.

Compare these payments with the financial performance of these companies ?and the call for more transparent remuneration reporting seems ?justified.

The share prices of nearly 70% of the companies surveyed fell after ?flotation, while in 40% of cases they more than halved.

* Sharing in the Boardroom. It is available at https://www.pwc ?global.com/uk/eng/ins-sol/survey-rep/sharing.html

** Directors’ Remuneration on Flotation 2000/2001 survey is available from ?Ayshea Williams, (020) 7546 9731.