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ARCHIVE
July/August 2014

PRACTICAL TIPS FOR ENHANCING REMUNERATION DISCLOSURES


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Executive remuneration disclosure is a topic that captures attention around the world. Regulatory agencies are continually increasing and changing disclosure rules, and companies’ executive compensation policies are being intensely scrutinized by governmental agencies, stakeholders, business media, and the general public.

Progressive companies realize, however, that with this increased pressure to divulge information comes an opportunity to take advantage of these data. The information can be used to benchmark peer-group compensation, optimize executive recruitment/retention, assess executive talent pools, and design compensation packages. By sharing this information and then explaining why and how pay policies are designed, transparency increases, along with opportunities to build a company’s pay brand.

Mercer remuneration experts in Asia — where both shareholders and regulators are demanding more comprehensive disclosure on pay levels, compensation package design, and performance assessments for key executives — have developed tips for enhancing remuneration disclosure that will help companies meet and exceed corporate governance requirements. These recommendations can also help subdue concerns about the amount and clarity of information being presented.

TIP 1: SEND CORRESPONDENCE FROM THE REMUNERATION COMMITTEE TO SHAREHOLDERS

This correspondence should introduce the remuneration report and provide shareholders with important information, such as business context,executive remuneration, and governance areas that the committee explored in the past year; most shareholders are interested in knowing that the remuneration committee is monitoring executive pay. The correspondence should also provide an overview of key decisions made during the year, along with the rationale for any changes to the executive remuneration framework. This is also an opportunity for the board to reiterate that it believes the current remuneration philosophy/framework is fair.

TIP 2: DISCUSS THE COMPANY’S EXECUTIVE REMUNERATION FRAMEWORK

Progressive companies provide detailed information on their remuneration philosophy — for example, the role of each remuneration element and the package as a whole, plus how this is aligned to business objectives. Discussion regarding peer groups used for compensation benchmarking, the committee’s assessment of the executive talent pool (that is, where they hire people from or lose people to), and the construction and execution of incentive arrangements all provides context and a better understanding of the company’s remuneration philosophy.

TIP 3: PUBLISH CEO AND SENIOR EXECUTIVE COMPENSATION LEVELS

Regulators in most jurisdictions suggest that companies disclose pay levels for the CEO and at least the top five executives. Progressive companies, however, disclose remuneration details for all key management personnel. Increased remuneration disclosures may in fact help the assessment of compensation fairness, particularly if companies disclose actual take-home pay.

TIP 4: DISCLOSE REALIZED PAY

Realized pay, or take-home pay, includes the executive’s annual base salary, the cash component of the bonus plan paid out during the year (nondeferred element), and the value of any equity that may have vested from prior years’ awards. More and more companies are disclosing senior executive realized pay, as this is deemed a more accurate representation of what an executive earns each year. Realized pay disclosures can also help quell perceptions of egregious pay levels, particularly when accounting disclosures can be much higher than actual take-home pay.

TIP 5: EXPLAIN THE LINK BETWEEN PAY AND PERFORMANCE

Although many companies claim that “pay for performance” is a foundation of their remuneration philosophy, it is important to understand where performance lies. Generally, shareholders want to know what impact executive-team actions had on the value of their shareholding and whether they would have been better off investing in a peer company. The remuneration report can help address these questions in the following ways:

  • BETTER DISCLOSURE OF KEY PERFORMANCE INDICATORS — Without divulging commercially sensitive information, companies can talk about which value drivers are key for their businesses and why. Companies should share how they fared against targets for key performance indicators (KPIs). Understanding actual performance against targets helps in the assessment of the effectiveness of the executive team. Leading companies should share the CEO’s scoreboard, including measures, targets, and actual achievement against targets, along with commentary regarding the reasons driving the results.
  • DETAILED PEER COMPARISONS OF RELATIVE PAY AND PERFORMANCE — Assessing executive pay and corresponding KPIs in relation to a company’s peers is crucial information. Key indicators include relative ranking of fixed pay against company size (market cap, revenue), annual short-term incentives against one-year performance measures (revenue growth, economic value, profits), and long-term incentives against long-term shareholder value measures (three- or five-year relative total shareholder return, earnings per share, wealth added, or return on equity).
  • RISK ASSESSMENTS — The link between risk assessments and executive reward should be explained. The board risk committee and chief risk officer should review any material risk issues prior to vesting of deferred/unvested compensation, ensure appropriate risk measures in performance scorecards (for example, risk-adjusted financial measures, adherence to risk-appetite statements), and make recommendations regarding application of clawback or malus provisions.
  • TIME ORIENTATION OF EXECUTIVE PAY — Proportion of the total package delivered as equity or deferred bonuses versus the length of the deferral or vesting period should be assessed relative to that of peers.

 

TIP 6: DISCLOSE NONEXECUTIVE DIRECTOR FEES

Although some companies disclose base and committee fees paid to nonexecutive directors (NEDs), only a few disclose the philosophy behind NED pay — for example, peer group for compensation benchmarking, desired positioning after considering workload and reputational risks, and delivery of fees via shares to help increase NED shareholding. In addition to total emoluments received by NEDs, leading companies also disclose the approved total NED fee pool, NED fee policy, and target fees for chairing and membership of the board and committees.

CONCLUSION

Many Western companies already successfully employ the strategies outlined in this article, but there is room for improvement in Asia. Implementing these tips will help Asian companies satisfy and, in most cases, exceed the disclosure requirements included in their jurisdiction listing rules or corporate governance codes. And regardless of where a company is based and operates, these tips can help improve the quality and effectiveness of compensation disclosures, which in turn can enhance the company’s reputation as an organization with robust corporate governance standards.

For more information on executive remuneration issues in Asia, read:

 

CONTACTS

Dr. Hans Kothuis (Hong Kong)
Partner, Talent
+852 3476 3817
E-mail
Shai Ganu (Singapore)
Principal, Talent
+65 6398 2939
E-mail

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