View from City Road: Hidden benefits for shareholders

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The Independent Online
COMPANY directors are likely to be rushing to study the small print of their service contracts in the wake of the new financial reporting standard, which requires everything to be charged against pre-tax profits.

Virtually every bonus scheme is based on the increase in earnings per share they produce - fine when the rules allowed losses on disposal and other bits of bad news to be treated as extraordinary items, where they did not affect earnings. Now that these costs - and profits - have to be taken into account in the calculations, the impact on directors' pockets could be severe.

Cynics would say it gives them yet another way of manipulating performance. When they expect personal expenses to be high, they can sell off bits of the business at a profit and watch their pay packets soar. True, that could make the following year's results look pretty awful but, fortunately, few bonus schemes allow the possibility of a cut in basic salary. They need not suffer too badly even if disposals can only be made at a loss - that creates a lower base for earnings against which future performance, and pay, can be judged.

More realistically, companies are likely to adjust their bonus schemes to specify a method of calculating an adjusted earnings per share - and the Association of British Insurers intends to change its guidelines to make it clear that is what investors expect. Exactly what method is specified by companies would make an interesting study and, in theory, the Cadbury guidelines on remuneration committees mean such information should be disclosed. But the hidden benefit of the new accounting rules is that shareholders should be able to work it out for themselves.

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