Annual reports make me wish for a return to the bad old days where companies named the sum paid to top people

I HAVE just spent the morning doing something that has left me feeling bored and grumpy. I’ve been reading annual reports and proxy statements, concentrating on the bit where companies try to justify why their top person got paid quite so much.

What has annoyed me isn’t just the fact that most chief executives earn more than they are worth: this has been the case for such a long time that outrage fatigue has set in.

Instead, it is the increasing quantity of flannel and pseudo-scientific analysis in which the numbers are now wrapped. Take Barclays. Last week, Pirc, which advises shareholders on how to vote, complained that the bank’s system of setting pay was too complicated and advised them to vote against the pay deal at this week’s meeting.

I’ve just looked at the report and can’t make head or tail of the performance targets, but then I can’t make head or tail of anything else in the 12 pages devoted to the subject.

Some of the annoying detail is stuff the bank is required to provide but Barclays goes much further than it needs in offering obfuscating detail. There is a cute little pie chart depicting how its remuneration committee spent its time – shareholders thus know that it devoted 4 per cent to “other” compared with 12 per cent the previous year. The only vital information that appears to be missing is how many cups of coffee or biscuits the committee got through in the year.

However, Barclays is a model of brevity and clarity in comparison to Hewlett-Packard, whose report was last month wisely voted down by shareholders. It consists of an extraordinary 30 pages of throat-clearing in which it fails to make comprehensible its “six-level screening approach” or any of its perplexing array of clashing incentive schemes. Eventually, having bludgeoned the reader to death with detail, the report lets slip that Mark Hurd, who quit last year after a scandal, got $12 million in cash plus a load of shares as a going-home present.

My favourite statement this year though is Kraft’s, which seeks to explain why Irene Rosenfeld got a bonus of $2.1 million in return for missing her financial targets. Just in case anyone is simplistic enough to think that if you don’t hit the target you don’t get a bonus, the report pulls out of the hat a whole new set of reasons for why she deserved one.

Some of these are pathetically mundane – she apparently did well at CSR – but others are more puzzling. “Improved talent pipeline developed through retention of Cadbury leaders,” it says. I think this horrible, tortuous phrase means that Rosenfeld has hung on to a few top people at the confectioner – which isn’t the impression one gets from reading the newspapers.

More sinister still is the news that her bonus is due to “improved year-over-year diversity representation”. This idea – that CEOs deserve to be paid more if they promote women and ethnic minorities – is grotesque. First, it distorts the business of getting the right people into the right jobs. Second, anyone who succeeds in finding a few women to hire has not done anything terribly hard and surely does not deserve $2.1 million for their pains.

You could say that in offering such detail on its CEO’s bonus, Kraft was being admirably transparent. Or you could say the Kraft remuneration committee has been clever in producing after the event a list of the boxes they knew they were going to be able to tick.

What all these reports show is that the system of disclosure – so close to the hearts of regulators – isn’t working. The idea of producing chapter and verse seems sensible in theory: it ought to help shareholders decide whether the sums handed out are reasonable or not and make it harder for companies to pay their top people too much.

But it hasn’t succeeded on either count. Indeed, all this confusing detail may be having the opposite effect. It makes me wish for a return to the bad old days where companies simply named the sum paid to the top people. No explanations or excuses were given. Shareholders didn’t have the foggiest idea of how the figures were arrived at, but then for all the pages and pages of explanation that I’ve ground through this morning, I’m none the wiser either.

The bald numbers, stripped of all excuses, would surely be easier to grasp – and harder to defend. And they could be made harder still by the addition of one further figure: the ratio of the pay of the person at the top to the person at the bottom. – Copyright The Financial Times Limited 2011