More than a quarter of Britain’s largest companies are failing to explain to investors the criteria by which top executives are awarded bonuses, according to PricewaterhouseCoopers.
PwC, which advises many FTSE 100 firms on executive pay, said 28% of Britain’s largest public companies are excusing themselves from a requirement, which was introduced two years ago, to explain performance pay.
Companies that offer only very limited disclosures, or decline altogether to explain the basis for payouts, have told shareholders that fuller explanations risked giving away commercially sensitive information. Under the 2013 disclosure rules, this excuses companies from a requirement to spell out performance pay measures.
But PwC in a report entitled “Sunlight is the best disinfectant”, a PwC partner Fiona Camenzuli said that data from the past two years showed that those businesses with the fullest disclosure were also the best at tying bonuses to profit growth.
Camenzuli said: “Distrust in executive pay is driven by the belief in some quarters that bonuses don’t reflect performance. Our research suggests that the discipline of better disclosure of how bonus targets are set and met is significantly improving the link between pay and performance.
“Pay has become more strongly linked to performance since companies have been required to provide fuller disclosure. The link between pay and performance is twice as high in the FTSE 100 companies that provide full target disclosure than in those that don’t.”
Camenzuli added that it “seems inevitable” all companies will eventually be pressured by their investors to make full disclosures on bonus payouts. She said there was evidence that greater disclosure was combining with pressure from investors to force those non-executives responsible for setting pay to take a tougher and more robust approach.
Sarah Wilson, of Manifest, a firm that advises shareholders of boardroom pay and other issues, agreed. “Commercial sensitivity [as an excuse] does not hold when it is the previous year’s performance you are reporting on. There are still remuneration committees that offer only limited disclosure [of bonus criteria] and that exercise discretion over bonuses – that’s a toxic combination.”
The PwC survey found that only 36% of FTSE 100 firms provided shareholders with full disclosure of all the performance thresholds used to determine performance pay in 2014.
A further 24% gave only a single “on-target” performance indicator for bonuses, while 12% offered a description of the criteria without giving numbers. That left 28% providing little or no disclosures at all.
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