One of the questions faced by investors when considering say on pay votes is whether the payout is appropriate. While salary may be easily compared against peers, assessing how appropriate the bonus is may not be so straightforward. To try to get a clearer perspective on such a hot topic, Manifest teamed up with Swiss research organisation, Obermatt, in an effort to objectively analyse bonus payouts.

Obermatt has developed a quantitative methodology which identifies a recommended bonus payout based on the percentage of peers a company outperforms using a consistent metric. The more peers a company outperforms, the higher the Obermatt Bonus Index bonus recommendation.

Manifest analysts took this payout recommendation and used it to assess the actual payouts recorded in annual reports of FTSE 100 companies. With the system being based on target bonus levels, the analysis was restricted to those companies who disclosed the target bonus level in their remuneration reports (Schedule A of the Combined Code recommends the disclosure of maximum bonus). For the FTSE 100, the analysis was possible for the approximately one-third of FTSE 100 companies based on the available disclosures.

In addition to commentary in Manifest's research reports, we created a voting guideline based on the result of the analysis - thus being able to provide a recommendation to clients where the bonus was considered to be "excessive" under the objective Obermatt criteria. Among the companies identified by Manifest as potentially paying "excessive" bonuses included Tesco, Reckitt Benckiser, Randgold Resources and Rio Tinto - all of whom recorded significant levels of dissent on their remuneration report votes.

With the Obermatt data in use by the Manifest team for AGMs held since March 2010,  Manifest conducted an analysis of the voting outcomes of the remuneration report vote to determine whether companies which had paid "excessive" levels of bonuses had seen higher levels of dissent.

The data analysis shows that for the FTSE 100, those companies who were identified as paying excessive levels of bonus recorded notably higher levels of dissent on the remuneration report vote than those paying an acceptable level. Within the "overpayment" group however some companies experienced below average dissent - suggesting that the methodology may successfully highlight companies which have paid excessive bonuses but which have managed to slip under the radar of investors.

FTSE 100

All Constituents Bonus Payout per Obermatt Recommendation Overpayment Acceptable Underpayment Dissent 9.2% 11.1%

9.7%

9.1% *Data available for 33% of companies.

Manifest has found the methodology to be both useful and objective and intends to include the voting guideline in our analysis of say-on-pay votes in additional markets in 2011.

Further Reading

The Obermatt Bonus Index measures a company or division of a company relative to a customized peer group. The actual period performance is compared to the corresponding period in the previous year (year-over-year comparison) in a percentile rank calculation. This percentile rank is converted into a Bonus Rating and a Bonus Multiplier to assess deserved variable executive compensation (see: http://www.obermatt.com/bonus-index/method/).

Note: For 2011, Manifest will include the assessment on the voting templates for additional markets including Germany and Switzerland - where say-on-pay votes are expected to increase in frequency. In 2010, the Obermatt data was used in these markets only in Manifest's research reports.