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Talk About Low Expectations

Our analysis of PwC's new report on bonus target disclosure by FTSE100 companies.

PwC, the audit group and executive pay advisers, has today launched the results of their analysis of bonus target disclosure by FTSE100 companies. The report is entitled “Sunlight is the best disinfectant”. However, the findings of the study hardly justify reaching for the Factor 50.

The famous Louis Brandeis sunlight quote is used to underline the report’s central theme: that the 2013 disclosure requirements have resulted in improved disclosure of bonus targets, which in turn has improved the link between pay and performance.

Even accepting the narrow focus of the study (annual bonus typically forms just 25% of a FTSE 100 CEO’s total pay) it is hard to get excited about the fact that some companies are now doing what the law expects them to do by default. In order to avoid disclosing bonus targets companies must take advantage of an opt-out on the grounds of commercial sensitivity, and must report on the reasons for this omission.

PwC notes that some companies took advantage of this opt-out, but fails to identify what proportion of the 28% that produced limited disclosure simply failed to comply with the disclosure regulations.

In fact just 36% of companies were found to have made full disclosures, leaving 64% of companies still skulking under the sun-shade.

The 2013 disclosure regulations required many disclosures to be made. Bonus target was just one such disclosure. Look beyond bonus and it is not hard to find examples of poor compliance with the new rules. While the sun may be shining on bonus targets, disclosure of the maximum amount payable to directors under the terms of remuneration policy remains hidden in the shadows for many companies.

So much for improved disclosure. But what about improvements in the link between pay and performance?

To be clear, PwC is not saying in this report that there is now a causal link between bonus and performance. In fact they are not even saying that the correlation is particularly strong. The point being made here is that the relationship between bonus and performance has improved. This amounts to an admission that up to 2013 there simply wasn’t a meaningful relationship between pay and performance.

The High Pay Centre commissioned a study that reported the same conclusion in October 2014. This tacit admission, that directors have been overpaid for years, is not accompanied by suggestions that the model which delivered this over-payment for year after year needs a fundamental rethink.

The suggestion here is that bonus target disclosure is a panacea. This ignores the possibility that the performance metrics with which pay is becoming better aligned are themselves flawed. It is not clear from the PwC study which measure of profit is used for the regression analysis. The High Pay Centre’s own study of performance metrics found earnings per share (EPS) to be the most prevalent bonus metric. EPS improvements can be obtained by repurchasing shares without any fundamental improvement in company performance.  Evidence of improved bonus alignment with an EPS target is hardly mission accomplished.

Maybe a stronger disinfectant than mere sunlight is required.

Posted on 9 November 2015

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