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KPIs are a useful tool that help investors understand and assess performance “through the eyes of management”, who use their discretion to determine which measures are key. Similarly, an increasing number of companies are using non-GAAP measures as KPIs (also referred to as alternative performance measures (APMs)) to explain company results which also carry a significant amount of management judgement.
The CRUF has identified barriers to investors’ understanding of the rationale for the KPIs, the appropriateness of the measures, and their alignment with company strategy and executive pay. Clarity on these measures – for example, through greater transparency or third-party assurance – is vital for investor confidence.
Click the tabs below to reveal what CRUF would like to see for each of these current problems
There can be concerns about appropriateness of certain KPIs.
Without an understanding of why a measure has been chosen, and whether or not it has been adjusted from a GAAP/IFRS measure, users may be unable to make an assessment on the appropriateness of the KPI.
The CRUF would welcome continuity over time on KPIs, with any changes that are made period-to-period clearly quantified and explained. Although there are regulatory requirements on this (e.g. ESMA’s Guidelines on Alternative Performance Measures for EU-quoted companies), disclosure quality is variable.
If there is a change in the definition of a non-GAAP number, reporting on the old non-GAAP measure should continue alongside the new non-GAAP measure for a period of time. This will allow the investment community to understand the trend and transition. In addition, companies should explain why they have stopped reporting any measures and, where possible, supply other relevant figures instead.
This will help improve the reliability of the information
Executive pay should be well structured and clearly linked to the company’s strategic objectives, KPIs, APMs, and, if the IASB’s proposals move ahead, MPMs. It should reward those executives who contribute to a company’s long-term sustainability and success.
Clearly disclosing both the KPIs used to determine executive pay, and the targets that were set, would add further transparency to how pay has been determined. These elements are already required in the UK under Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and Companies (Miscellaneous Reporting) Requirements 2018.
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