With end of year reporting just around the corner, it’s time to think about your approach to executive remuneration disclosures.
Transparency around executive pay is far more than a matter of good governance. In fact, with the ever-increasing shareholder scrutiny and tightening governance framework, it is not surprising that over one-third of our Pulse survey respondents indicated improved shareholder communication as an area of focus this year.
When determining what you should be disclosing this year, there are pros and cons to consider if venturing beyond statutory reporting requirements. While both companies and shareholders have a common interest regarding the communication of a company’s remuneration practices, it’s important to carefully consider which disclosure methods will be most effective in sharing your remuneration story.
If your company is like most, your remuneration disclosures would have likely made great improvements over the past few years in an effort to explain your remuneration rationale in a clearer more concise way. Contemporary approaches to the narrative such as the inclusion of visual charts and tables, a letter from the Remuneration Committee Chair emphasising key points and information about the target variable incentive opportunity, are some examples achieving a favourable response from shareholders.
Another growing trend in recent years is the inclusion of a cash table revealing ‘realised’ executive remuneration. Drawing from a sample of 150 companies in The Reward Practice’s database, over one quarter included a cash table in their FY18 remuneration report indicating a desire to provide a more appropriate account of remuneration actually received.
Will a realised remuneration disclosure benefit your company?
Realised remuneration is the actual pay an executive takes home for the period including salary paid, cash incentives paid, the face value upon vesting of equity (e.g., performance rights, options).
When implementing a realised remuneration disclosure there are some important implications for companies to consider:
Does realised remuneration enhance the intended message?
Remuneration report disclosures aim to provide transparency between a company’s pay and performance relationship. However, more often than not, the statutory remuneration information disclosed is not useful for this purpose – particularly over the long-term.
This is largely due to accounting rules, which require share-based payments to be incorporated into the remuneration figure. Without getting too technical, the ‘true’ realised remuneration value can be quite different to the statutory value disclosed. In certain circumstances, you may determine that disclosing realised pay provides a more accurate picture of what payments the executive actually received, particularly in those years where statutory remuneration may have increased or plateaued, but total shareholder return (TSR – a key measure of performance) was negative. In these circumstances, the statutory remuneration is likely to be overstated relative to realised (or realisable) pay and therefore adopting this additional disclosure may tell a better story about the pay and performance relationship.
Are you prepared to disclose realised remuneration when the company under or over performs?
In practice, companies that disclose realised pay for the first time often show a statutory total remuneration that is greater than realised pay. This is particularly helpful where a company is underperforming and could help manage any misperception that pay is out of line with performance. However, in any given year, realised pay may be well above statutory total remuneration because of the vesting of shares, especially in a year where company performance has not been strong. To manage these variations, it is critical to provide multiple years of data (e.g., a three-year summary). This will help ensure that one year’s remuneration does not distort the picture of how realised pay compares to statutory total remuneration and company performance.
Disclosing realised remuneration should be considered as an ongoing practice. Selecting years to include/exclude cash tables is likely to be seen unfavourably by shareholders and proxy groups as this may be seen to promote good news stories only.
Taking Action – Preventing or responding to shareholder criticism
- Monitor historical realised remuneration – If not already, you may want to evaluate the realised remuneration of your executives over time and incorporate as part of your annual remuneration practices.
- Determine rationale for disclosing realised remuneration – Deciding to communicate realised pay to shareholders can be complex and may promote skepticism due to the alternative definitions used. If you have decided to disclose realised remuneration, it is vitally important to provide a rationale for why it is included and be prepared to continue the disclosure for the future.
- Present realised remuneration in a meaningful way – how and where to disclose realised remuneration must be supportive of your remuneration story. Presenting as a cash-based table or a graphic illustrating the relationship between realised pay and performance (e.g., TSR) can be effective methods when well positioned in support of statutory disclosures.
The Reward Practice insights are designed to provide the latest information and thinking from our consultants on remuneration trends and issues.