If you look through an ASX 100 remuneration report, you are likely to see 2 different tables of pay for the same executive. These are 1. realisable remuneration somewhere near the front of the report, and 2. audited statutory remuneration, usually near the back of the report. These numbers can vary vastly.
So why are there 2 different values for someone’s pay, and what does each number mean?
Audited statutory remuneration
Under current Corporations Act requirements, the disclosures reference AASB remuneration and benefit expensing standards. For share-based payments this is the fair value of equity granted or outstanding during the year. It progressively allocates the cost of equity over the employee’s service period. The cost is the fair value.
There are two different methods of calculating fair value, which depend on the performance measures applied, if any. If the performance measure relates, in any way, to share price, the probability of vesting is included in the fair value calculation. If performance is based on anything else the probability of vesting is excluded.
So the accounting method for share based payments do not allow direct comparison of the fair value across companies, or sometimes even within a company, because of the different performance measures applied.
The other major issue with statutory tables is that they include the expenses associated with equity grants made in prior years.
The realisable pay method is not statutory, so companies can apply any method they like. It is not audited. Generally speaking, realisable pay is the sum of cash and benefits expenses received in a year (sourced from the statutory table), and market value of equity that has vested in the year.
ACSI relies on a variant of this method for its annual review of executive pay (see HERE). However, in ACSI’s case, it values options when exercised rather than when vested, except for zero exercise price options (aka performance rights), which are valued at time of vesting. The ACSI method varies from how most companies report realisable pay, which ACSI terms realised pay (although ACSI’s version is a bit of a composite between most realised pay methods and realisable pay methods, as it assumes zero exercise price options are exercised on vesting, which is not the case with an increasing number of companies and executives).
In wrestling with the problems of how to report executive pay in a format that is useful, boards need to consider what is the purpose of a remuneration report.
Here is a remuneration report purpose two-point checklist:
1 . Inform investors on how the board manages the principal-agent problem, whereby executives (shareholders’ agents) are primarily self interested. Hence the board needs to set the ground rules and monitor how they pay executives so remuneration is aligned with shareholder interests
2 . Provide sufficient information to investors so that they can vote on how well they think the board has done in this regard. In effect, “was our judgement in granting and approving executive pay appropriate to aligning management with shareholder interests given what we knew at the time?”
Based on the above, statutory pay tables do not help. Realisable pay tables, focusing as they do on what vests, have only a bit part to play, interesting as they are. They are basically a control to indicate if discretions were applied in the hopefully rare event that the incentive arrangements had unintended consequences, or executives misbehaved.
If investors truly want to exercise their stewardship constructively, and boards want to demonstrate that they have appropriately handled the principal-agent problem, remuneration disclosures should provide a true picture of the opportunity granted given what was known at the time, and state what was known at the time.
There is no statutory standard for a table to assist in this. This is not for want of trying (see Guerdon Associates early attempts with other like-minded organisations to propose new draft disclosure regulation HERE and an accompanying rationale HERE although statutory standards exist for companies to narrate it.
So what is answer to the original question posed at the start of this article – which of the two executive total pay numbers (statutory pay or realisable pay) is better?
None of the above.© Guerdon Associates 2022 Back to all articles