Beyond corporates behaving badly (and still paying executives for poor behaviour), another reason for the continued outcry against remuneration outcomes of our public company senior executives, and the mistrust of the boards who determine that remuneration, is simply poor communication. Investors, both institutional and retail, the public, the media, our regulators and even our politicians often do not have a guide for what is being paid or why it is being paid and so they are lost.
A reason for this lack of direction is that the disclosure rules surrounding executive remuneration, having its genesis in the Corporations Act and accounting standards, are very long and complicated.
The lengthy, and typically complicated and detail heavy, remuneration report is required to be included in the annual directors report and is therefore also audited. Compliance and clear communication rarely go hand in hand.
The statutory remuneration table is neither a roadmap of what has been paid nor what may be paid. It is a complicated matrix of accruals, such as leave, and amortisations, including share based payments, combined with amounts paid – confusing for any reader. It also fails to impart what most readers actually want to know – how much did you pay, and more importantly, why?
A lack of transparency, especially between investors and the stewards of their investments, can lead to suspicion. Suspicion can lead to a loss of trust.
And it’s not just a lack of transparency that leads to distrust, media reports on those infamous cases of failed executives leaving companies with large payouts further fuels degradation of reputation and stakeholder trust in organisations.
Pay less? That is happening. Average CEO fixed pay, in particular, is slowly reducing as Boards are taking the opportunity to bring new appointments in on lower packages than their predecessors. Variable pay has also, under intense scrutiny, become more varied with Boards responding to the expectation that there will be differentiated incentive outcomes, based on performance, within the executive team and across reporting periods. Individual executive accountability rather than collective responsibility has also become more pronounced over recent reporting seasons. But this action is seen in some segments as too slow and, potentially, too little. Another answer should be to provide a clearer map to follow.
Long has there been disparate opinions between investors and executives (and some boards and their executives) around whether bonuses or incentives are for ‘outperformance’ or whether they are annual pay at risk for ‘underperformance’. This is a critical difference in departure point.
If the remuneration policies and frameworks of companies are built on an expectation that annual bonuses will be paid for ‘at target’ or ‘on budget’ performance this needs to be clearly stated. Not all shareholders will necessarily like this, if they maintain the view bonuses should only be paid for outperformance, but they may be more likely to accept this position if the Board is upfront and clear from the outset.
Many investors invest because of a company’s strategy, and because they believe in the management team to deliver on that strategy. Regardless of the remuneration structure adopted, a fundamental issue for boards to focus on is aligning variable pay, both short and long term, to the company’s articulated destination – and then charting this clearly. This should lead to better acceptance by investors as they are paying executives for achieving the things they have used as a basis for their investment.
It is now that smart companies should use the first few pages of remuneration reports as a schematic that reminds stakeholders of its corporate objectives, how the remuneration framework is linked to those objectives and how remuneration outcomes are linked to performance in attaining those objectives.
Communicating the message this way can be powerful in mitigating potential shareholder concerns around quantum, around pay for perceived lack of performance and around how short term goals fit in to long term business plans.
It makes sense that if a business plan has three or four key targets, a remuneration structure aligning incentives to hitting those same targets should resonate more strongly with investors. And the remuneration report should provide the map for this discovery.
Lobbying the Government for simplification of disclosure rules, while sensible, is unlikely to gather any traction in the current environment of mistrust. It is incumbent on Boards to go beyond meeting a compliance checklist, and ensure the remuneration report provides this map.
The point is for boards to not allow key messages be buried in the detail. The best way to convince investors that executive packages are aligned with strategic purpose is to ensure they genuinely are, and that those links are clearly communicated.
© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.