Article: Transparency of Senior Executive Remuneration. Time to update the rules?

Transparency in senior executive pay was last formally addressed in New Zealand legislation over 20 years ago. Today new rules and laws surrounding this matter are being debated and enacted across North America, Europe and Australia with a view to improve the levels of disclosure. The impetus for this came from the Global Financial Crisis (GFC) when the light shone strongly on the high levels of pay in the financial sector, but has spread generally to senior levels of pay. It has been debated in New Zealand and often gets discussed. To date we have not reviewed our legislation.
 
Transparency of senior executive pay arrived in New Zealand with the Companies Act of 1993. Data on the highest pay levels has been a feature of Annual Reports since that date, accompanied by a level of explanatory information around the reported pay levels.  However, after over 20 years of following this reporting practice, it is now seen as a minimal amount of information that can be confusing and complex for the casual reader (although the casual reader would possibly have as much trouble with the detail of the financial accounts). Issues such as a change in executives, one-off payments (such as redundancies being made), and so on,  confuse the content of the tables presented.
 
In looking at improvements to our reporting requirements a good place to start would be a UK options paper prepared for their Coalition government in 2012, looking at Improved Transparency of Executive remuneration reporting. The paper highlighted the following areas as worth including more detail on:
 
a) Single total figure of remuneration for each director*
b) Detail of performance against metrics for long term incentives
c) Total pension entitlements (for defined benefit schemes)
d) Exit payments made in year
e) Detail on variable pay awarded in year
f) Total shareholdings of directors
g) Chart comparing company performance and CEO pay
h) Information about who has advised the remuneration committee
i) Information about how shareholder’s voted at the previous years’ AGM
                                                                                                                      
* Read senior manager for NZ conditions
 
Examining these factors would give a much greater level of detail and hence transparency around many key issues that stakeholders wish to understand better. Will it stop the rise in executive remuneration levels? Possibly not,  but it will provide the opportunity to fully debate levels of pay, the value pay is delivering and how it is composed, something that is difficult given the current disclosure regime. For shareholders/stakeholders, depending on the final form of any new rules, this detail would provide better information on a consistent basis across organisations enabling comparisons to be more easily made. Those that wish only to rail against senior executive pay would of course have additional information, an unfortunate side effect of such disclosures.
 
As an additional note the rise in executive pay has been rapid and very real in recent years. There is no doubt that this rise has occurred although the extent of it and the reasons for it generate a wide range of simplistic explanations, for example, putting it down to simple greed, poor governance procedures, and/or a lack of a clear policy. We believe the importance of the growth of long term and short term incentive pay, the internationalisation of senior roles, and the change in the philosophy of pay that started in the US in the 1970’s are important reasons that too often get ignored in the points scoring contest any debate on this matter generates. In New Zealand it is worth remembering we are a price taker on international pay rates, our levels of increase have been modest compared to those internationally, and although an international player we are a small economy with many small companies where the executives are paid relatively small salaries.
 
However, is it time to update the rules on the disclosure of executive pay? In my view, yes it is.
 
Source for UK information: Impact Assessment: Improved Transparency of Executive Remuneration reporting, BIS, BIS0355, 26/06/2012