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Performance and bonus still not aligned

Performance and bonus still not aligned

Latest analysis of trends in FTSE 350 Directors’ pay reveals that, whilst there have been relatively modest rises in median salaries of around three to four percent, there is still some way to go for companies to effectively align pay and performance when it comes to paying bonuses.

According to KPMG’s Guide to Directors’ Remuneration 2013, one third of companies paid their CEO a bonus of 80 percent of the maximum value allowable, and the majority paid at least 60 percent. Additional analysis by KPMG showed that one quarter of these companies experienced a fall in profit during the relevant year. Just 10 percent of FTSE 100 and 7 percent of FTSE 250 CEOS did not receive any bonus at all this year. David Ellis, Partner and Head of the Remuneration Practice at KPMG in the UK, said: “From a shareholder perspective, and without further explanation, this may lead to a conclusion that some annual bonus payments were not justified.” The KPMG report reveals that the level of annual bonus payments remains an area of continuing concern for shareholders, which it says is exacerbated by the lack of disclosure in this area. David Ellis continues: “Many companies only disclose performance measures at a very high level. This is one of the areas where we expect to see a particular focus in 2014 now that new disclosure requirements have come in.”

New rules on disclosure and voting on directors’ remuneration came into force for financial year ends starting on or after 1 October 2013. For the first time shareholders will have a binding vote on a forward-looking remuneration policy, as well as an advisory vote on how that policy has been implemented during the financial year being reported on. This significantly increases the power of shareholders in relation to directors’ remuneration. Ellis comments: “These new mandatory reporting requirements should be seen as an opportunity rather than a compliance obligation. Both the companies and the shareholders have a common interest in better aligning pay and performance so in theory this should be a win-win. “The reality is that companies measure performance over a broad spectrum of measures, rather than focusing entirely on profit. Yet, there will be instances where Boards have a long term strategy meaning they will need to set pay awards as each year end comes around. In those cases, ensuring that shareholders are aware of and in agreement with the long term objectives will be crucial, especially if the trust that has been lacking in recent years is to be restored.”

According to the report, the annual bonus element of compensation remains a significant part of total earnings. KPMG’s analysis shows that annual bonus accounts for 31 percent of total earnings at the median for FTSE 100 chief executives, and 33 percent for FTSE 250 chief executives. The disclosure “gap” is exacerbated by the increasing complexity of annual bonus arrangements. KPMG analysis shows that the number of performance measures being used in annual bonus plans has increased in recent years, with the majority of companies now using three or more, and only a small number using a single measure. Together with the use of other features such as deferral, the complexity of such plans has increased. Annual bonus policy and practice remains therefore one of the key areas for companies to consider as they prepare their remuneration reports under the new disclosure rules. David Ellis concludes: “2014 will be the year where companies will need to better explain exactly what performance has been rewarded, and increase the level of transparency around annual bonus payments to avoid the adverse reputational consequences of a negative shareholder reaction.”

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