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Spotlight thrown on executive remuneration

THE latest tranche of corporate collapses has thrown executive remuneration – and more particularly the way these remuneration packages were accounted for – into a very harsh light.

Part of the WorldCom collapse and the blowout on pharmaceutical giant Merck’s books was attributed to the poor accounting for executive packages, with a large part of that due to the use of option schemes.

The use of option schemes is not new – it is something many publicly listed companies have been doing for decades – but what has got the accounting fraternity up in arms is the ways these option schemes are accounted for.

Most option schemes do not appear on company balance sheets, yet many accountants argue that they should.

They argue these options are, at the very worst, a cost that the company will have to bear at some time or, at the least, represent a dilution of shareholder value.

Another concern surrounding the use of option schemes is the short-term approach it is said they engender in senior executives.

Option values depend on the company share price. However, many financial experts argue the share price is not always a true indicator of shareholder value.

Association of Chartered Certified Accountants Australia & New Zealand Centre head Richard Francis said there needed to be clearer scrutiny of CEO and audit committee remuneration.

“I think there is too much short-termism tied into a lot of these share schemes. Management remuneration is based on short-term results,” he said.

“But then there is the problem of institutional investors who demand strong short-term returns.”

Mr Francis said he believed non-executive directors should have a stronger role in the appointment of the audit committee.

PKF Corporate Finance director Ian Olson agreed option schemes, and their accounting, would become problematic for companies.

“Fund managers are the powerhouses of the funds market and they are putting pressure on companies to report good returns. They have been expecting between 10 per cent and 15 per cent,” Mr Olson said.

“This in itself may have been the catalyst behind some of the reporting concerns but it also puts a lot of pressure on senior executives to meet those returns. This in turn leads to a short-term view when most market statistics show a long-term view provides the best way to grow shareholder value.”

He said options would remain one of the main forms of senior executive remuneration but suggested pegging them at higher share prices and extending the time until they could be exercised.

Mr Olsen said non-executive directors could be the key to good corporate governance, particularly if given a strong role on a company’s audit committee.

“But then it becomes an issue of paying them. A small listed company usually can’t afford the sort of remuneration package you need to attract a good non-executive director,” he said.

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