One of the recommendations in the Australian Productivity Commission report on executive remuneration was that a plain English summary of remuneration policies be required (see HERE).

 

Most companies can improve their disclosure of executive remuneration. This article provides a checklist to achieve this.

 

1.     Write disclosures that can be understood on first reading by a person with average education.  Companies can assess their remuneration report readability using well established tests.  This includes readability indices such as the Gunning-Fog Index, the Flesh Kincaid Grade Level, Flesche Reading Ease and SMOG.

Using the Gunning Fog Index, this article requires 11.1 years of education to understand on the first read.  Originally it required just 10.9 years.  But then the article was peer reviewed.  Perhaps there is a lesson in this.  That is, do not have too many people authoring your report.  Still, this article’s readability is better than most remuneration reports.  Most remuneration reports require a post graduate education to understand (see HERE). 

At their most basic level, these tests of readability assess two measures.  These are sentence length and the number of multi syllable nouns. To increase readability avoid use of conjunctions.  Use common words.  Minimise multi syllable words. 

2.     Remuneration reports should enable the reader to readily understand the reason for the remuneration level and structure.  Almost always this should include an explanation of the context as well.  For example, “an executive may receive a bonus for achieving a return on capital target.  This basis of reward can be put into context by explaining that the nature of the business is dependent on investing capital for earnings growth. This capital has become more expensive since the global financial crisis.  The performance benchmark reflects the increased cost of capital, including the margin required to cover risk.  So management reward varies on their ability to generate returns in excess of this cost.”

3.     Consider re-organising and presenting the remuneration report.  Begin with a summary.  Use graphs and tables where these are more helpful than words.  Confine details to the rear of the report.

 

4.     Emphasise material information. Higher levels of scrutiny are being levied on pay disclosures.  Therefore material information will be discovered, or found to be missing.  Make it easy for the reader to find.  To make it difficult will increase the risk of a “no” vote.

 

5.     Focus on how and why remuneration levels were established.  Shorten lengthy discussions of the mechanics.

6.     Re-consider the use of alternative remuneration tables.  Listed companies must apply prescribed tables.  Many consider the accounting values in these tables misleading, so some companies have presented additional tables disclosing remuneration levels using a different method.  This can cause confusion.  We suggest companies wait.  The government will respond to the PC recommendations by April.  These include a recommendation to disclose “actual remuneration received”.  If accepted, new definitions and disclosures will be prescribed.

7.      Remain compliant.  Part of the problem with remuneration reports is that they must comply with the Corporations Act and Regulations.  This contributes to their complexity.  As noted above, much of the complex detail required for compliance can be appended.  The front end of the report can be used to provide clarity.

8.     Know your readership.  Many companies successfully describe the big picture.  In good faith they de-emphasise immaterial items by using footnotes and small font.  But proxy firms and the quizzical but older person may seek such details.  Make the report easy to read for all by using reasonable font sizes.

9.     Be specific.  Many companies explain their remuneration philosophies.  However, few explain how and why those philosophies result in the remuneration levels disclosed.  For example, a company may have a philosophy of median fixed pay and 75^th percentile total pay for high performance.  The next step would be to relate the actual outcome to the philosophy.  For example:

 

a.     “The company measures performance using cash return on equity

b.     The benchmark required a return that exceeds 75% of competitors’ returns

c.     The company exceeded this return

d.     The CEO’s incentive payment was based on this requirement

e.     When added to fixed pay, the total remuneration level was at the 75^th percentile

f.      This outcome matched the company’s pay philosophy.”

 

10.   Note exceptions.  Pay outcomes may not reflect policy all the time.  Usually there is good reason.  Rather than remain silent, explain the reason. 

11.   Disclose benchmarks.  If pay is set at levels relative to competitors, describe this.  For example, “fixed pay is set at the median level of competitors.  Competitors are companies in the small resources index.”

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