In its recent Annual Improvements to IFRSs: 2010-2012 cycle, the IASB has returned to the IAS 24 requirement to disclose compensation paid to key management personnel.

I’ve written in the past that this seems to me one of the least useful disclosures in all of IFRS – it’s very difficult to see how anything coming out of it would ever be remotely decision-critical. This is how I put it in October 2009:

• The IASB says this is important, among other reasons, because “the structure and amount of compensation are major drivers in the implementation of the business strategy.” Now there’s a hot button issue…but I don’t think the IAS 24 disclosure requirement does much to address it, nor to address anything at all really.
• The disclosure gives you some numbers, but there’s no requirement to disclose how many people the numbers cover. It wouldn’t tell you if 90% of the share-based payments went to one person and 90% of the cash to someone else. It doesn’t tell you whether the share-based payments represent easy money or whether there’s some genuine, rigorous incentive there. It doesn’t address deferral mechanisms, clawbacks, and so forth. There’s no clarity anyway on how you’d necessarily measure some of the items (is the share-based payment amount just the accounting expense for the year, or a grant date measure, or something in between?)
• Given these limitations, no one could meaningfully compare the data provided by two competitor entities, or reach any informed conclusions from it on how compensation might drive the business strategy. In any event, aren’t there a myriad of other things that are equally major drivers in implementing the business strategy, but which financial statements make no attempt to address?

Nothing’s happened since then to make that seem wrong. I suppose most issuers dealt with this by settling on a reasonable interpretation of the requirements, and then aiming to keep it on autopilot from now on. But for other issuers, unavoidable questions arise, and one of these has involved how the disclosure should apply when management services are provided by contracting with a separate entity, rather than with individuals. The new improvement therefore adds a requirement that “amounts incurred by the entity for the provision of key management personnel services that are provided by a separate management entity shall be disclosed..” In situations where an entity obtains key management personnel services from such an entity, it specifies that the requirements for disclosing key management personnel compensation don’t apply to “the compensation paid or payable by the management entity to the management entity’s employees or directors.” In other words, if a company pays $1,000,000 to an entity for management services, it doesn’t need to go digging into how much of that sum ended up in the pockets of key individuals.

This should surely have seemed obvious – we don’t ask companies to disclose how much profit their suppliers made from their business transactions, or how well their financing arrangements work out for their bankers – and yet the basis for conclusions attached to the improvements suggests that the IASB would have required companies to go digging in this way, if it wasn’t so difficult: “The Board was informed of concerns that it is impracticable to access the detailed information that is required in paragraph 17 when compensation is paid to a separate management entity as fees. The Board therefore decided to provide relief (from having to do this)…”

Readers familiar with Canadian securities requirements might hear an echo here of the executive compensation disclosure requirements in Form 51-102F6, usually provided in the information circular: these address a similar situation and in this case do require disclosing compensation that “the external management company paid to the individual that is attributable to the services they provided to the company directly or indirectly.” This might seem like overreaching too, but at least those requirements are built on the explicit premise that there’s value to investors in knowing what was paid to key individuals, and why, making it somewhat more logical that the requirements would seek to push past intervening entities and to touch the end recipient. But the IAS 24 requirement doesn’t have that kind of rigour to it – the number as it stands is just an impenetrable dark pool, making it bizarre the IASB might ever have been inclined to make companies spend any more time splashing around in there.

I used to spend quite a bit of time on executive compensation disclosure – I even had a hand in developing Form 51-102F6. But later I became disillusioned with the whole area, concluding that there just isn’t enough organized stakeholder interest in “pay for performance” and related concepts (not to mention the absence of a consensus over what that even means) to enable the information to accomplish anything other than compensation inflation, except in rare and egregious cases, and often not even then. Given all the evidence on how little value flows from all that painstakingly assembled detail, it’s astonishing the IASB could think their high-level compensation disclosure accomplishes anything. But maybe being a standard-setter requires a heightened capacity to believe in the incredible.

The opinions expressed are solely those of the author