The demand for making more disclosures regarding executive pay is getting louder among global companies, according to a survey conducted by Hay Group, the global HR management consulting firm. The global study titled ‘Corporate governance and executive pay: Taking the Pulse’ reveals executive pay to be at the top of the list of corporate governance issues.
“Pay disclosure should include solid statements of policy and practice and show a clear link to strategy. I want to see less boiler-plating and more bold statements on pay policy,” says a UK investor in the report.
The report states almost all companies were in favour of having some disclosure of executive pay. However, few respondents, including most investors and regulators, wanted to see much more disclosure than was presently required. The call was for improved quality of disclosures rather than quantity.
Regulators, too, have their concerns, attached to the executive pay issue. They said greater disclosure had led to the ‘ratchet effect’ of companies continuously pushing up levels of executive pay to catch up with what peers have reported, who in turn do the same, and so on. Companies agreed. “The (regulation) has a good intention to create more transparency in regard to board compensation. However, I feel that compensation levels increase by providing more transparency," said a German company respondent.
Another respondent from a UK company said firms have tended to follow each other by comparing practice and justifying their approach by saying they were keeping up with the market. The main consequence, according to this respondent, has been a ratchet effect on executive pay, rather than bad corporate governance.
“We are building a ‘perfect storm’ around executive compensation — asking a pool of non-executive board directors to spend more time, have more inexpert people to be on board who are horribly exposed and more likely to react to protect themselves. Non-executive board directors are so risk-averse that it's getting worse,” said an individual from a UK company.
The popular market practices have also been used to justify the level of executive pay, according to the report. "Pay levels are influenced partly by the market. If you want to recruit somebody that is known to be successful, the market plays a role," said a Dutch company respondent.
On the whole, the concern that executives are, in general, paid too much, seemed predominantly a political issue, the report said. Nine out of 10 companies argued the levels paid by the market justify how much they pay — combined with the contribution made by an executive. This view was shared by many investors and regulators, where just over half felt market practice could be used as justification. Most investors also felt the contribution of executives to their company was a strong justification of levels of executive pay but there was no discernible pattern among regulators.
Variable pay was seen by companies as strongly linked to their ability to attract and motivate executives, to drive performance and give a clear link to strategy. In general, investors and regulators responded in a similar vein, although investors showed more scepticism around recruitment and retention and regulators saw less of a link to motivation and clarity around strategy.
In terms of corporate governance, the report explained many companies were finding it difficult to navigate mismatched and often contradictory requirements from their own national regulators and those of other countries and regions. As a result, some companies are finding it difficult to remain competitive in an international landscape and, on occasion, to continue to operate legally within all regions.
The role of proxy investors was also questioned by respondents in the survey. It was mentioned by company respondents that they placed proxy investors in disregard. The greatest obstacle to corporate governance was reflected to be knee-jerk political interventions, with respondents from all camps pointing the finger at political point scoring.
With the exception of a few very large companies, most corporate respondents said dialogue was almost non-existent with legislators and regulators. It was also mentioned that culture was the single most critical factor in good corporate governance and effective executive pay, and the factor most often ignored.
Overall, companies said that better communication of pay structures of the top bosses and aligning of incentives with right performance indicators was key to an organisation's achievement of strategic outcomes.
