05 March 2013

FRC: Financial Reporting Lab: 'Reporting of pay and performance'

At the request of the Department of Business Innovation and Skills (DBIS), the Lab has undertaken a second project on remuneration - this time exploring the views of investors and companies on two new aspects of the draft reporting regulations on remuneration:

• scenario charts demonstrating how directors’ pay varies with performance, and
• a chart comparing CEO pay based on the single figure for remuneration, with company performance, measured using Total Shareholder Return (TSR).

These two areas were selected for the Lab to focus on, as responses to the DBIS consultation highlighted a number of challenges in relation to these particular new disclosure requirements.  

Views were also sought on certain aspects of the Lab’s first report 'A single figure for remuneration'.

Investors and companies are both concerned about the increasing length of remuneration reports and accordingly, investors favour measurement methodologies and presentation of remuneration information that is clear and simple, and prepared consistently from year to year. The section entitled ‘Investor and company views’ considers each of the two areas of focus for this project in detail. There is a great deal of agreement between investors and companies on these areas, as well as those discussed in relation to the first project. All agree that there is a need to educate the market and market commentators on the new regulations.

Scenario charts

Both groups favour a simplified version of the scenario charts proposed by DBIS. Development of common practice, particularly around measurement methodology, would be very helpful, especially as such guidance could go some way towards ‘future proofing’ practice as remuneration plans develop and change.

Assessing pay and performance

Investors and companies agree with DBIS’ stated aim of the new requirement that there should be information to help investors assess the relationship between CEO remuneration and company performance. However, they both have a number of concerns about the specific proposals. Instead of requiring the new graph, investors and companies suggest retaining the current five year TSR graph and supplementing this with a simple table setting out historic levels of CEO pay and information on the level of performance related elements of pay, against the maximum opportunity.
 
Director of the Financial Reporting Lab, Sue Harding, said: “This second project has again achieved significant agreement among participating members of the investor and corporate communities. Participants favour a simplified version of the scenario charts proposed by DBIS. They also conclude that, rather than replacing the current five year TSR chart, this should be retained and be supplemented with a simple table setting out historic levels of CEO pay together with information on the level of performance-related elements of pay. We hope that DBIS finds the conclusions in this report helpful in their decisions on remuneration reporting requirements”.

Press release

Financial Reporting Lab project report

© FRC