Greater disclosure is improving link between FTSE 100 executive pay and performance – PwC analysis

Published at 09:53 AM on 09 November 2015

New PwC research suggests that greater disclosure of annual bonus targets by companies is strengthening the link between executive pay and performance.

PwC’s new report ‘Sunlight is the best disinfectant’ analysed FTSE 100 companies’ executive bonus pay outs versus performance over the last five years and found that the correlation between the two significantly increased after 2012 – the year the Government’s proposals for better pay disclosure were announced. The trend in alignment between bonus pay outs and company performance strengthens further in 2013 and 2014, when the disclosure requirements came into force. This includes better disclosure of pay levels, targets and outcomes; and a binding shareholder vote on executive pay policy.

Further PwC analysis reveals that the link between executive pay outs and performance proved even more striking for the companies making the most transparent disclosures. The correlation value for the companies making the best disclosure is more than twice that of the other companies. (36% of FTSE 100 companies making full disclosure versus the other 64%).

PwC’s analysis of remuneration reports published for the 2014 financial year shows that just over a third (36%) made full disclosure of threshold, target and maximum performance requirements - in line with the fullest extent encouraged by the regulations. Nearly a quarter (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. The remaining 28% made limited disclosure or opted out on the basis of commercial sensitivity.

Fiona Camenzuli, pay, performance and risk partner at PwC, said:

“Executive pay has remained broadly static in real terms and has become harder to earn since the financial crisis, but trust in the system remains low.

“Distrust in executive pay is driven by the belief in some quarters that bonuses don't reflect performance. Our research suggests that the discipline of better disclosure of how bonus targets are set and met is significantly improving the link between pay and performance.

“Pay has become more strongly linked to performance since companies have been required to provide fuller disclosure. The link between pay and performance is twice as high in the FTSE 100 companies that provide full target disclosure than in those that don't.

“It is right that investors should know how executive pay tallies to company performance and it seems inevitable that investors will eventually push all companies to adopt the most transparent requirements.

“Disclosure is often accused of fueling increases in executive pay, but in this case greater disclosure is leading to a better link between pay and performance.”


Notes to editor:

  1. Correlation is measured using the coefficient of determination (R-squared). This measures how well the data fits in a straight line model between bonus outcomes and company performance. A value of 100% indicates a perfect fit. Typically R-squared above 25% indicates a meaningful relationship.
  2. Bonus outcomes are measured as a percentage of maximum bonus
  3. Company performance is based on comparisons to the market consensus at the start of the year, when the bonus targets are set. Our analysis assumes that companies outperforming market expectations would be expected to pay higher bonuses than companies that are underperforming.
  4. For a full copy of the report ‘Sunlight is the best disinfectant’ please contact Amy Tiernan, PwC media relations, 020 7804 0556 or [email protected]


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