David Prosser: Pay transparency has failed to deliver restraint in the boardroom

Outlook Every week, Pirc, the corporate governance specialist, publishes a newsletter with guidance for investors aboutissues to consider at forthcoming company meetings. This week's newsletter, which came out yesterday, is pretty typical: it includes recommendations to investors to vote against the remuneration reports of two large companies, a report on a pay revolt at a third, and some wider remarks on the whole issue of executive rewards.

Two observations: first, there is no sign of executive pay becoming any less of a hot potato for UK Plc; and second, investors, though more active in this area than ever before, do not appear to be having much success in nipping potential problems in the bud before they turn into flashpoints.

Why might that be? Well, according to Lord Myners, the former City minister, who has become something of a campaigner for better governance, shareholders need to change theirapproach to executive pay – they have, he says, allowed non-executive directors to hide behind ever more complicated remuneration formulae, rather than requiring them to exercise some judgment of their own.

It is a compelling argument. The good news about executive pay is that companies are now far more transparent about how they reward their senior staff. Less happily, that hasn't always made it easier to compare what executives of different companies are paid, or even for shareholders to make informed decisions about remuneration deals.

Take Close Brothers, for example, one of the companies where Pirc is currently suggesting investors should vote down the remuneration report. Its explanation of how the pay of its executives is calculated runs to a full five pages of its annual report, covers four separate long-term incentive schemes in addition to basic pay, bonus and pensions, and uses benchmarks ranging from earnings per share to total shareholder return. It's all absolutely transparent, but good luck working outexactly how much directors stand to receive, what for and when.

Close Brothers is by no means untypical. And as Lord Myners rightly argues, these complicated formulae enable non-executive directors to dodge one of their most important responsibilities, to hold executives to account. Only corporate governance fanatics take the time needed to make a proper fist of evaluating whether management deserves what it is being paid.

Non-executives are paid to sit on boards to show independence of judgement, not to hide behind this formulaic approach to pay or other matters of governance. Lord Myners, pictured, suggests shareholders may have to begin sitting on the nominations committees that appoint non-executives if they want to be sure the right candidates to exercise such judgement are appointed. That's the approach they take in Scandinavia, for instance. It is no coincidence that those countries are not having to deal with protests in the street about unjust levels of executive reward.

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