Executive bonuses still shrouded in smoke and mirrors

Mar 30 2007 by Nic Paton Print This Article

Corporate America is only grudgingly giving up its secrets when it comes to executive bonuses, with nearly half of publicly traded companies keeping the actual goals on which bonuses are based under wraps.

New rules on the disclosure of executive compensation have been only half-heartedly embraced by big American corporates, with the result that there is still a lot of smoke and mirrors around how top executives earn their bonuses.

Analysis of the 2007 proxy statements of 100 large, publicly traded U.S businesses by consultancy Watson Wyatt has found a distinct sense of companies being dragged kicking and screaming into the daylight over executive remuneration.

Nearly half – 46 per cent – did not disclose the actual goals on which they based rewards under their 2006 annual incentive plans and 45 per cent did not include the goals for long-term incentive plans.

The Securities and Exchange Commission adopted new rules last year in an effort to provide investors with a clearer and more complete picture of how executives are compensated.

It now requests such information to be included within proxy statements, unless providing it would result in "competitive harm".

"Whether to disclose specific performance goals may be the biggest decision companies must make under the new SEC rules," said Ira Kay, global director of compensation consulting at Watson Wyatt.

"The SEC may have been expecting more companies to provide specifics, since disclosure offers shareholders a sense of how challenging the goals are relative to financial guidance the firm has given Wall Street," she added.

Almost half of companies did not disclose specific financial goals, for example earnings per share of $2.

Many more disclosed the underlying financial metrics used to set executive compensation, for example EPS or another metric such as net operating income, but without a specific dollar figure attached to it, said the Watson Wyatt analysis.

More than four out of five disclosed the metrics on which the annual awards are based, and nearly three quarters disclosed metrics for long-term incentives.

The analysis also found that two in five companies changed their incentive compensation programmes last year or planned to do so this year in the wake of the new rules.

"With increasing pressure from investors to hold companies more accountable for their executive pay programs, the new rules give companies an outstanding opportunity to demonstrate just how their pay programmes are linked to performance," said Kay.

"As these programs become more transparent through proxy statements over the years, we anticipate more companies will change the mix of pay components to maximise the connection between pay and performance," she added.