Ten years on from new reporting requirements on executive pay, companies have a chance to use their Directors’ Remuneration Reports to explain their decision making to stakeholders, says PwC’s Dan Harris
It’s been over a decade since the government overhauled the requirements on what public companies have to report on directors’ remuneration.
A key aim of these changes was to improve transparency on directors’ pay, with the consultation at the time noting that, in particular, shareholders wanted better information on its relationship with company performance. The consultation also referred to it being important that public companies provide ‘clear and accessible information’, stating that over time remuneration reports had become increasingly lengthy and complex.
If we then fast forward to today, Directors’ Remuneration Reports (DRRs) remain lengthy (on average, a FTSE 350 company’s DRR is around 30 pages) and shareholders and other stakeholders continue to express concerns that insufficient background to, and rationale for, director’s remuneration, specifically executive pay, is provided.
So what does good reporting look like? And why does it matter?
For over twenty years, PwC has established a best-practice framework for assessing the communication and disclosure of remuneration through PwC’s Building Trust Awards (PBTA) programme. Our criteria look for disclosures that manifest what we consider to be best practice; drawing on key feedback from investors, regulators and wider stakeholders.
Our analysis highlights that there is a significant divergence in the quality of companies’ reporting from a best practice perspective, with even the average report being some way behind the standard put forward by the leading reporters based on a number of factors: pay for performance, workforce fairness, shareholder and strategic alignment. On the whole, whilst most companies are good at explaining the wider context to key remuneration decisions, more could be said and done (e.g through the use of charts and diagrams) to clearly explain how pay policies align with the company’s purpose, strategy and culture and how outcomes align with corporate performance.
Telling the right story
That said, the highest scoring companies are examples of those leading the way in using the DRR as a key tool for communicating externally, as well as internally, the company’s approach to remuneration both at Board level but also across the organisation.
This includes the use of innovative disclosures that go beyond what companies are required to disclose but help to evidence how and why the arrangements for the executive directors are considered appropriate. In many cases, this often returns to how a particular decision aligns with stakeholder experience. Best reporters are those that do this holistically; clearly evidencing how each of the companies’ stakeholders, be that employees, shareholders, customers or suppliers, have been considered when finalising outcomes not just focussing on one or two.
This matters because companies’ disclosure of executive remuneration is the window through which the decisions made by the remuneration committee are judged. In an environment of increasing shareholder pressure and public scrutiny of executive pay, the DRR is an opportunity for companies and their Remuneration Committees to ‘tell their story’. It can serve to provide stakeholders with better insight and explanation into the quality and robustness of Remuneration Committee conversations and the reasons for the decisions being reported. We know from speaking with investors and other stakeholders that they are looking for companies to evidence their decision-making and not simply report the conclusions of those discussions.
Using tech
It is undoubtedly a challenge for companies to succinctly and impactfully explain the remuneration decisions taken in the year and there is perhaps a role for using technology to make DRRs more accessible. In a world where pay decisions are sometimes nuanced taking into account the circumstances at the time, could an embedded video with the annual report be used to provide a voiceover of the decisions made?
In any case, with over a decade having passed since the current disclosure rules were introduced and the continued scrutiny surrounding executive pay, now feels like a natural point for companies to pause and reflect on whether they are making best use of the DRR. We recognise that not every company wants to be a trail-blazer in terms of reporting on this sensitive area. However, we believe that making relevant information readily available, in the right context, can positively impact a company’s reputation and its relationships with stakeholders.
Dan Harris is executive compensation partner at PwC