Executive reward – never mind the clarity…

In a recent blog, I was speculating about the influence of increased scrutiny in keeping executive pay movement more in line with that of other employees. I can’t help feeling there is a link between the two and it appears that the government agrees.

Increased attention on executive pay reporting

One element that has no doubt enabled, and indeed encouraged, increased attention from shareholders is the mandatory requirement for reporting executive reward. The regulations have been in company law since 2002 and were, until recently, laid out in Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.  

The government’s reaction to the so-called “shareholder spring”, which followed the banking crisis, has resulted in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and some related changes to the Companies Act 2006. These changes represent the largest overhaul of the reporting requirements since they were first regulated in 2002.

The new reporting regulations

In summary, the new regulations mean that annual reports, covering reporting periods ending on or after 30 September 2013, will need to include the following features:

  • A remuneration report, which separately includes a remuneration policy report and indicates what has been done in the last year;
  • The policy report will be subject to a binding vote by shareholders in the first financial year starting on or after 1 October 2013;
  • The annual report, which will be subject to an annual advisory shareholder vote, must give details of the remuneration paid in the reporting period and some details of what will happen in the following year; and
  • The annual report must contain specific information, including a “single figure” for the remuneration paid to each director.

Vince Cable, Secretary of State for Business, Innovation and Skills said he wants the regulations to equip shareholders to challenge excessive pay. He wants a clear link between pay and performance, and to have companies held to account through increased shareholder engagement.

Length does not ensure clarity

I recently happened to be going through the report and accounts of a well known major UK quoted employer – let’s call it company ABC. We frequently do this to gather data on executive reward. It struck me that the remuneration report section, for the last financial year, was extremely long, at 26 pages. Looking back through earlier reports, I noticed that it had grown dramatically over the last few years. Back in 2005 it was a mere nine pages long.

Looking at another familiar UK employer’s report, let’s call it XYZ; I saw that this too had grown considerably in the last decade – in this case from six pages to 15 pages. Both ABC and XYZ had filled their remuneration reports with text, tables and charts and, on the face of it they both provided a pretty comprehensive description of their executive and non-executive directors’ rewards.  

It seems that the previous regulations, coupled with a need to address shareholder concerns about executive pay, have led to considerably more information being communicated. It’s also true that in the last decade we have seen increasingly complex packages being developed for executives and these need to be explained.

I am less convinced about the real clarity that has been achieved so far. It strikes me that the water has been well and truly muddied. Indeed, I can’t help but feel that we have allowed ourselves to get far too complicated - not just in the way we describe executive reward in annual report and accounts, but also too complicated in the way we manage executive pay. 

It will be fascinating to see whether the new regulations, with their stated aim of increased transparency and clarity, really manage to cut through that complexity as the government hopes. As imperfect as counting pages may be as a measure, I’m looking forward to feeling the width of the remuneration sections of annual reports of companies ABC and XYZ for the current financial year.