Management: Top people's pay is called to account: More openness could deflect criticism of directors' salary rises, Jane Simms reports

TOP PAY rises are expected to fall this year, but the projected drop to 10 per cent from an average of 12 per cent last year will still outpace inflation, increases in average earnings and growth in value to shareholders.

More disclosure would not change poor performance, but companies could deflect criticism for apparently excessive awards to board members if they were more open about the reasoning behind them.

Few would dispute that good performance merits reward. Richard North, finance director of the Burton Group, says: 'It is high-risk stuff being a company director. You are held to account publicly and there is no mitigation. Your primary task is to make money for shareholders, and no one can complain if you are rewarded for that.'

Mike Sandland, chairman of the Institutional Shareholders Committee and chief investment manager at Norwich Union, adds: 'Companies have shot themselves in the foot over the last two years because of their hopeless public relations.' If companies simply announce a bald figure, they have only themselves to blame when it gets an angry reception, he says.

According to Company Reporting, the accounts monitoring service, 28 per cent of listed companies now provide some information on directors' earnings. Many include details of ex gratia payments and other benefits, but only one in ten discloses the amount paid in bonuses, and only three in a hundred show how they are calculated.

While these disclosures go beyond requirements of the Companies Act, they fall short of the recommendation of the Cadbury Committee on corporate governance that 'the criteria on which performance is measured should be explained'.

Company Reporting observes: 'No companies disclose the actual formula or calculation used to arrive at the figure for bonuses paid in the year.'

Many in the investment community think Cadbury hasn't gone far enough. They believe total emoluments of all directors should be disclosed and broken down into basic salary, profit-sharing and other performance-related elements. Hugh Jones of the Association of British Insurers argues that the way a company chooses to pay and provide incentives to top managers is an essential part of its financial management, and 'as such it needs to be understood'.

But Nigel Stapleton, finance director of Reed International, contends that such a level of detail would be counter-productive. 'Users would get bogged down,' he says.

David Tonkin, managing director of Company Reporting, says this defence is spurious. 'The average small shareholder is completely irrelevant,' he says. 'It is the institutional shareholders and analysts who are the price- makers, not the man in the street. And these professional investors ought to be able to dredge as much information as you can throw at them.'

The draft Cadbury report also recommends that companies have remuneration committees made up wholly or mainly of non-executives, and that the chairman of the committee should face the AGM on the issue.

Fewer than half the UK's listed companies have such committees, the record of FT-SE 100 businesses being predictably better than that of smaller organisations. The excuse given by smaller companies - that they lack the resources to form them - doesn't cut much ice with Mr Sandland. 'Listed companies must accept the responsibilities of being listed,' he says.

But critics claim executive and non-executive directors all sit on each others' boards and act in cosy collusion. Steve Tatton of Incomes Data Services says: 'Remuneration committees don't control pay at all, because they are effectively setting their own pay levels. They talk each other up.'

Cadbury believes the proposal that shareholders should be able to vote on directors' pay would be unworkable. 'A director's remuneration is not a matter which can sensibly be reduced to a vote for or against,' it says.

Mr Jones agrees. 'The whole pay question is one that is greatly complicated by envy,' he says.

He thinks shareholders could exert a more effective downward pressure on pay by voting for shorter service contracts - ideally one year - and ratifying all directorships, including the chairman's position, every three years.

(Photographs omitted)