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What is Executive Compensation Disclosure?

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  • Written By: Carol Francois
  • Edited By: Heather Bailey
  • Last Modified Date: 06 November 2016
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In the late 1990s, the topic of executive compensation disclosure was suddenly a high-profile issue, both in the financial reporting sector and the popular press. This change was due to an increase in the number of executives receiving record-breaking compensation packages that appeared to be provided regardless of company performance. In the United States, this change represents a large shift in culture, as high compensation for executives was previously a point of pride for many large companies, indicating great success.

The definition of who is required to be included in executive compensation disclosure varies by organization, but typically includes everyone at the vice president level and above. Some firms include the board of directors and senior managers in their reporting. The information is typically provided in the annual financial statements, and may be listed with or without employee names.

In the public sector, the selection criteria for executive compensation disclosure are usually based on a specific dollar value of taxable income, typically $100,000 US Dollars (USD) and above. This method is used to accommodate a wide range of position titles, which might be quite misleading about the level of responsibility associated with the role. For example, the president of a small government-funded research institute does not have the same level of responsibility or compensation as the president of a government-funded hospital. However, a senior police inspector can be included in this list, based on a combination of base salary and overtime.

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The financial statement notes should provide details about the criteria for determining who is included in the executive compensation report, and how this list was compiled. There is a range of compensation packages that include items not typically considered compensation. In the interest of fairness and comparability, the Financial Accounting Standards board reviews the notes and the financial auditors are obliged to ensure that the statement is an accurate reflection of true compensation.

Compensation packages for most workers are a combination of salary, benefits, and minimal taxable benefits. The total value of compensation is included in the annual tax slip and employees are expected to pay personal income tax on this value. For executives, the packages are typically much more complex.

A great example of complex executive compensation disclosure includes payment in stock options that have not been cashed in, and use of a company car, plane, and staff for personal requirements. This may include a company-paid nanny for a working mother, an apartment suite for use after late-night meetings, or a paid chauffeur. These items are not typically included in a personal tax slip and receive different tax treatment.

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