Pay and performance must be matched for compliance

Bonuses for executives have been a point of heavy scrutiny for some time, with whether or not they are deserved among the questions that can come up. Yet that could all change in the new fiscal year with new rules coming into play.

For some businesses the rules are already in play. Those whose fiscal year started on October 1st 2013 are seeing new rules come in on disclosure and remuneration where shareholders will be able to cast a binding vote on the matter, giving them a lot more power over directors’ pay.

Partner and head of remuneration practice at KPMG David Ellis said: “These new mandatory reporting requirements should be seen as an opportunity rather than a compliance obligation.  Both the companies and the shareholders have a common interest in better aligning pay and performance so in theory this should be a win-win.”

However, according to a survey of directors’ pay by KPMG, it seems there is still a long way to go before performance and pay will be properly matched up. The majority of companies on the FTSE 350 paid their chief executive officer 60 per cent of the maximum amount of bonus allowed even though a quarter of these had seen a fall in profits.

Perhaps one of the sectors most responsible for the negative feeling towards bonuses in relation to performance is the financial industry. Bankers’ bonuses particularly came under scrutiny as they were still awarded in spite of the fact that many had seen their firms almost collapse in the wake of the financial crisis of 2008.

Officials in the European Union have also come together to ask if bonuses were partly to blame as the promise of a larger paycheck may have encouraged bankers to make more risky investments.

As a result, financial firms have seen a limit imposed on the amount of bonus they are allowed to receive. They are not allowed to gain more than double their annual salary; a rule that was initially applied to those thought to be ‘material risk takers’ but later applied to anyone earning more than €500,000 (£416,534) per year.