More transparency over bonuses improving link between pay and performance, says PwC

The correlation between pay and performance began to increase after the government published its final proposals for better pay disclosure in 2012, and strengthened further once the requirements were in force, according to PwC's report on its findings. The link was more than twice as strong for those companies making the most transparent disclosures, according to the professional services firm.

Share plans and remuneration expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com, said that PwC's report suggested the new regime had had an impact.

"From a political perspective, that will be a relief for companies and investors given the social and media sensitivities around high executive pay and the general wish of business to limit new regulation," she said. "The improved alignment of pay with performance also indicates that institutional investors have made effective use of the 2013 reforms."

PwC used the annual reports of FTSE 100 companies to compare performance with bonus 'outcomes', meaning the percentage of maximum bonus that was actually paid. The analysis assumed that companies outperforming market expectations would pay higher bonuses than those that were underperforming.

Companies have been required to include more information about how directors have been and will be paid, along with how this relates to company performance, as part of their annual reports since October 2013. This information can then be used by company shareholders when exercising their legally-binding vote on the company's executive pay policy, at least once every three years, as well as informing their annual advisory vote on implementation of the policy.

According to PwC, 36% of FTSE 100 companies fully disclosed threshold, target and maximum performance requirements in line with the fullest extent encouraged by the regulations for the 2014 financial year. A further 24% disclosed the level of performance required to generate an 'on target' bonus but not the full range of performance targets, 12% made some indication of where performance had been against the targets while the remaining 28% made limited disclosure or opted out on the basis of commercial sensitivity, according to its report.

The researchers found that the link between pay and performance was stronger the more transparent the company was with its disclosures. The correlation was more than twice as strong at those companies that complied with the requirements than at those that opted out, according to the formula.

"The report may prompt companies to revisit their approach where they have, to date, limited the disclosure of their executive bonus and long-term incentive performance measures and targets, perhaps by over-reliance on the exemption allowing delayed or reduced disclosure where commercial sensitivity is a concern," said share plans and incentives expert Lynette Jacobs of Pinsent Masons. "The report's finding of better alignment of pay and performance in the most transparent companies will encourage investors to press harder for more disclosure – already a key concern for investors."

"Stronger pay and performance alignment and greater transparency have been recurring themes in UK corporate governance recently, for example being addressed in the latest update of the UK Corporate Governance Code, the 2014 update to influential industry investor guidance on the 2013 reforms and the recent work of the Investors' Association on executive pay, including its recently-established Executive Remuneration Working Group, which is set to report in the first quarter of next year," she said.