18/01/2012 - 10:45

Forging a new path on disclosure

18/01/2012 - 10:45


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Listed companies publish lots of information on their remuneration practices; this year, the quality might start to match the quantity.

Listed companies publish lots of information on their remuneration practices; this year, the quality might start to match the quantity.

THE remuneration reports published each year by ASX-listed companies often run to 20 pages or more.

With that amount of disclosure, you might think shareholders and analysts would be given a very clear understanding of remuneration practices.

Not so. The large volume of information does not necessarily equate to better quality or more useful information.

Sometimes it can be quite the opposite. Many remuneration reports are filled with predictable comments about the philosophy employed by boards of directors, to set remuneration for their executives and themselves as directors.

The common theme is: aligning the interests of directors and executives with the shareholders.

That philosophy can’t be faulted; the issue is, how well is it executed?

That’s where remuneration reports start to become problematic.

For instance, is the base salary really aligned with the market, as companies claim? And are the annual bonus and share options really aligned to performance?

These questions are rarely addressed in a meaningful way in remuneration reports.

There are at least two major problems with the information that ends up being published.

It includes a valuation, at a moment in time, of the share options held by each director and the senior executives.

As I have noted in the past, the valuation of share options is an inexact science, and the amount of value ultimately derived will usually bear no relation to the valuation published in the annual report.

The options may prove to be more valuable, or end up being worthless, depending on the company’s earnings, its share price performance, and other factors.

It would be far more useful to publish, in a systematic manner, whether the options were exercised, and if so, how much value they delivered.

WA Business News publishes this information each week (see page 17, Changes in Directors Interests) and it’s fascinating to see the number of directors who are able to use options to buy shares at a fraction of the prevailing market price.

A second major problem with remuneration reports is the lack of disclosure around performance measures.

Some companies disclose the type of metrics that are employed in their bonus schemes, but they don’t disclose the specifics.

For instance, what growth in earnings per share has to be achieved for the chief executive to qualify for the maximum bonus?

Similarly, what safety record, or production growth, needs to be achieved to qualify for the maximum bonus?

Those critical details have not been published, until now.

In announcing the appointment of new chief executive David Simpson last week, engineering and construction contractor Forge Group disclosed his full employment agreement.

Mr Simpson will be able to earn up to $2 million per year, making him one of the highest paid chief executives in the state, based on data compiled in WA Business News’ annual CEO Salary Survey.

More importantly, Forge has disclosed exactly what Mr Simpson has to achieve to qualify for his short-term and long-term incentives.

In both cases, the incentives are tied to growth in diluted earnings per share (EPS).

For Mr Simpson to get a short-term bonus in his first year, Forge will need to lift EPS by more than 10 per cent. To get the maximum incentive, the company must lift EPS by 20 per cent.

In order to qualify for the maximum long-term incentive, which will be paid in the form of unvested performance rights, Forge has to achieve compound EPS growth of 14.87 per cent. If Mr Simpson achieves that goal every year, Forge will double its EPS over five years.

“It’s a $2 million package if he seriously delivers,” Forge chairman Peter Hutchinson told WA Business News. “They are real stretch targets.

“If he can double diluted earnings per share over five years, then he deserves that kind of reward.”  

Hats off to Forge Group for setting an example to the rest of the market on full disclosure.



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