11.4 Key management personnel compensation

Key management personnel compensation is a crucial aspect of related party transactions. It involves disclosing payments to those with authority over an entity's activities, including executives and directors.

This topic covers the definition of key management personnel, types of compensation, and disclosure requirements. Understanding these elements is vital for transparent financial reporting and assessing alignment between management incentives and company performance.

Key Management Personnel in Financial Reporting

Definition and Scope of Key Management Personnel

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• Key management personnel (KMP) hold authority and responsibility for planning, directing, and controlling entity activities
• KMP includes executive directors, non-executive directors, and senior executives making critical decisions
• Extends beyond board members to individuals with significant influence over strategic direction
• Identification crucial for proper disclosure and transparency in financial reporting (IAS 24 Related Party Disclosures)
• KMP varies based on entity structure, size, and industry requiring professional judgment
• Subsidiaries must consider KMP at both subsidiary and parent company levels

Importance in Financial Reporting

• Enhances transparency and provides stakeholders with governance information
• Mandated by international accounting standards for comprehensive reporting
• Allows stakeholders to assess alignment between management incentives and company performance
• Influences investment decisions and stakeholder perceptions of the entity
• Impacts comparability of financial statements across reporting periods and between entities
• Triggers potential tax implications and regulatory scrutiny affecting financial position

Disclosure Requirements for Compensation

Short-term and Long-term Benefits

• Short-term benefits disclosed include salaries, bonuses, and non-monetary benefits settled within 12 months
• Long-term benefits encompass post-employment benefits, other long-term employee benefits, and termination benefits
• Share-based payments require separate disclosure detailing type and fair value
• Disclosures made for each category of KMP compensation presenting total amount
• Individual KMP compensation disclosed where required by local regulations
• Comparative information for previous reporting period provided for all KMP compensation disclosures
• Narrative disclosures explain significant changes or unusual compensation arrangements

Additional Disclosure Considerations

• Non-monetary benefits (company cars, health insurance, club memberships) valued and disclosed
• Termination benefits (severance packages, golden parachutes) require special consideration
• Mix of fixed and variable compensation components provides insights into risk management and performance incentives
• Changes in accounting standards or regulations affect disclosure requirements and comparability
• Potential dilution from share-based payments to existing shareholders' interests disclosed
• Impact on key financial ratios and overall profitability addressed in disclosures

Components of Key Management Personnel Compensation

Fixed and Variable Compensation

• Salaries represent fixed component determined by market benchmarks, experience, and responsibilities
• Performance-based bonuses tied to specific financial or non-financial targets (percentage of base salary or predetermined amount)
• Share-based payments include stock options, restricted stock units (RSUs), and performance shares
• Post-employment benefits (pensions, retirement plans) form significant part of long-term packages
• Non-monetary benefits valued and included in total compensation package
• Termination benefits structured and disclosed with special consideration

Compensation Structure and Alignment

• Mix of fixed and variable components reflects entity's approach to risk management
• Share-based payments designed to align KMP interests with shareholders
• Performance metrics for bonuses indicate entity's strategic priorities (revenue growth, market share)
• Long-term incentives (LTIs) encourage focus on sustainable value creation (3-5 year vesting periods)
• Clawback provisions allow recovery of compensation in cases of misconduct or financial restatements
• Benchmarking against industry peers ensures competitive compensation packages

Impact of Compensation on Financial Statements

Financial Statement Effects

• High KMP compensation impacts profit and loss statement affecting key financial ratios and profitability
• Share-based payments lead to potential dilution impacting earnings per share calculations
• Compensation structure influences management behavior and decision-making affecting risk profile
• Changes in compensation packages may require restatement of comparative figures
• Deferred compensation creates liabilities on the balance sheet impacting financial position
• Tax implications of certain compensation components affect effective tax rate and net income

Stakeholder Perceptions and Governance

• Excessive compensation may lead to negative stakeholder perceptions impacting reputation
• Disclosure allows assessment of alignment between management incentives and company performance
• Compensation structure signals entity's priorities to investors (short-term gains vs. long-term growth)
• Governance ratings agencies consider KMP compensation in overall corporate governance assessments
• Shareholder activism often focuses on KMP compensation leading to potential proxy battles
• Media scrutiny of KMP compensation can affect public perception and brand value