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14 June 2013
Sarah Wilson
Even more than its predecessors, Manifest and MM&K's Total Remuneration Survey 2013 (May edition) deservedly earned headlines and an impressive array of coverage in the press after the launch earlier this week (even making it into Vogue, which must be a first for corporate governance research?!). However, one very important point which we made deserves particular attention because of its timing - the question of a 'Single Figure' for executive remuneration.
Let's be clear: the idea of having a single figure for comparing executive remuneration across the board is, in principle, an attractive one. We're not ones for promoting unnecessary complexity (after all, our very name means 'to make clear'). But we are concerned that the proposal by BIS to include in a single figure calculation those bonus awards whose payment is deferred to future years creates a misleading and inaccurate measure. In fact, it creates more complexity than it resolves. Why?
What matters is being able to understand "how much has individual x been paid"? But it is equally important to understand when they are paid, to get a full understanding of how much an individual's wealth actually increases each year.
Firstly, deferred pay has, by definition, not been paid to the recipient yet. Why, then, should it be counted as pay until the individual actually becomes a recipient? Inferring that an individual has received a sum of money, by reporting it as a part of a 'single figure' designed to show how much they have been paid, when they have not been paid the money is misleading and wrong. Until a mortgage is paid off, a property does not belong to its 'owner', so why does a bonus payment become completely attributable to an individual until they have actually been paid it?
Secondly, remuneration that is paid in the form of shares (as is often the case for deferred bonus and frequently the case for long term incentives) cannot be precisely reported until its precise value is known. Deferred bonuses which will be paid at some future point in the form of shares are not quantifiable until we know the market value of the share on the date they are given to the recipient. For example, an award of 100,000 Barclays shares this time last year would have been valued at around £105,000, but at today's price would be nearer £192,750. If those 10,000 shares were set aside as a deferred bonus this time last year, then paid out today, the difference in valuation of the award depending on whether it was counted at date of award or point of payment is, to say the least, significant.
The proposals, as they stand, may instead seek to discourage the use of deferred bonus, in favour of additional or greater long term incentives (though we would hope that WPP's new LTIP with a maximum award level of 975% of salary certainly does not become the norm). This would have the effect of making total remuneration more, not less, complex to monitor.
So we advocate the use of two figures:
1) Total Remuneration Awarded, which focuses upon payment made to an individdal in respect of a given year. For components which have yet to have their actual value realised (such as deferred bonuses and LTIP awards) we use an 'expected value', which at the individual level uses a st of assumptions which may prove to be inaccurate in reality, but we exclude the value of deferred bonuses and LTIPs which have vested in the year.
2) Total Remuneration Realised, which includes LTIPs and Deferred Bonus awards that vest in the year (i.e. awards from previous years), but excludes the expected value of deferred bonus and LTIP awards made in respect of the year in question, but which have yet to be realised by the individual.
We anticipate that ultimately BIS may opt for a hybrid of the second, by adding to it a requirement to report the realisable value of share options which have had exercise restrictions (such as performance conditions) lifted in the year.
In addition to BBC Radio 4, BBC TC, Sky News and Bloomberg, the survey attracted coverage in the following newspapers or journals:
http://www.ft.com/cms/s/0/f93083de-d055-11e2-a050-00144feab7de.html#axzz2VnYS19BF
http://www.efinancialnews.com/story/2013-06-10/deferred-bonuses-fuzzy-thinking
http://www.guardian.co.uk/business/2013/jun/10/burberry-angela-ahrendts-pay-league
http://metro.co.uk/2013/06/10/fat-cat-bosses-paid-an-extra-ten-per-cent-last-year-3834591/
http://www.expressandstar.com/business/city-news/2013/06/09/top-ceo-pay-growth-outrageous/
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