This dissertation deals with the disclosure obligations of the Charities in the UK in regards to the executive remuneration to the public and stakeholders. One of the means of disclosure is the annual report of the Charities also known as the Trustees’ Annual Report to be submitted to the Charities Commission which is the authority charged with the oversight of the charities in regard to their compliance with what is known as SORP. There were criticisms in the media about the excessive remuneration being paid to the CEOs of the leading charities in the UK. Therefore, this study gains significance in that a comprehensive analysis of the top 20 charities in the UK reveals that the state of affairs is not as bad as it had been made out to be. The systematic analysis confirms that the Charities in the UK do disclose the executive remuneration to higher paid executives and the annual reports and returns submitted to the Charity Commission are transparent enough and a critical examination convinces that the executives are paid taking into account of the job market situation and that the trustees and volunteers do not draw remuneration in general save those having the dual role of trustee as well as executive. The executive remuneration committee in each of the Charity is obliged to justify the quantum of remuneration to its executives.
There are hundreds of thousands of Charities in the U.K. The Daily Telegraph reported in 2013 excessive executive remuneration the Charities have long been disclosing in their annual reports (Christopher Hope ,2013 a). The accounts of some international Charities showed that they had paid over £100,000 to executives whose number has increased by 60 percent in three years (Christopher Hope, 2013 b) . The Disaster Emergency Committee, which includes some of the U.K.’s largest Charities, has disclosed that the number of well-paid individuals has increased from 19 to 32. The CEOs have regretted that the trustees of the Charities have not come to their defence. Conservative MPs expressed their shock at the report and advised the charities to function with a voluntary spirit spending the donors’ or taxpayers’ money frugally if not free. Third Sector magazine reported that one charity had employed more than 30 executives drawing salaries exceeding £100,000. The Charity concerned was Eton College where the then Prime Minister, Charities Minister, London Mayor and Chairman of the Charity Commission himself who had originally voiced his concerns about the Charity executives’ salaries had once attended. The Chairman earns only £50,000 p.a., from his Governmental employment but works for only two days a week (Levitt, 2014). Trustees and directors must be made accountable and liable just as their for-profit counterparts. While the UK shareholders have their right to vote on executive pay and perks, charitable donors have no such right to vote on the executive remuneration for trustees and directors (Cunningham & Harney, 2012, p. 537).
Currently, Charity sector is becoming recognized as playing a significant role in communities by furthering government’s social objectives through offering support to disadvantaged members of society all over the world. There is no denying that the development of Charity sector has achieved great success in many countries such as the United Kingdom. In terms of the development of Charity in the UK, there has been a long history of charitable giving. The oldest registered Charity in the UK should be dated back to Twelfth Century. The religious groups, the nobility or the wealthy individuals, many of these earliest Charities were founded to help the neediest members of society. Usually, these members who were helped were the poor, especially orphans, the sick or disabled. Charities have multiplied in the last few hundred years, while there are still many Charities focused on helping the poor and caring the sick or injured, many Charities are tracking global issues such as climate change, HIV and AIDS. Statistics shows that there were more than 181,000 Charities registered with the Charity Commission of England and Wales as at31 March 2014, with an estimated annual income of £63.4 billion(Charity Commission, 2014).However, growth in the size and influence of the Charity sector has led to increased transparency for scrutiny of regulatory departments and general public including those who make monetary contributions.
Despite becoming an important part of the society, Charity sector has attracted controversy. Criticism of high executive pay in Charity has been a recurrent theme in recent years. According to research by NfpSynergy, with the increased income, the executives’ salaries at UKs’ 50 best-known Charities have risen as well between 2007 and 2012. The salaries of these Charities’ CEOs have increased by 18 percent during these years, or an average of 3.6 percent per year. To be more specific, those Charities that paid their CEOs below £100k in 2007have increased their CEO salary by an average of 38 per cent or £32,000 in actual money by 2012, and those who paid their CEOs above £100k in 2007 have increased their CEO salary by 6 per cent or £9000 by 2012.Besides, Jenna Pudelek(2013) argued that these figures of NfpSynergy’s report shows one unnamed Charity that has an income of £385m, has paid its chief executive salary of £105.000. Another unnamed Charity, with an income of £37.5m, paid its chief executive £125,000.
Christopher Hope (2014) argued that there was an audit of pay scales among Charities in England and Wales that found that 14,942 workers were paid more than £60,000 per year and over 3,000 of these workers were paid more than previous estimates. To be more specific, according to a review by the National Council for Voluntary Organizations, more than 2,600 were paid over £100,000 per year, and 55 more than £250,000 a year in 2011 (Christopher Hope, 2014).However, Charities only have to publish few details (for example, numbers of staff in anonymised pay band) about these payments to diverse stakeholders. As a consequence, it is difficult to judge whether these higher salaries belong to over-pay scandal. Although there were one per cent fall in the Charity’s aids and 3% reduction of income, the chief executive of the British Red Cross still received a payment increase by 12 per cent to £184.000 since 2010. According to this finding, William Shawcross said that salaries for Charity executives could risk “bringing organizations and the wider charitable world into disrepute”(Christopher Hope,2013). Christopher Hope also stated that an analysis revealed a large-scale dependency by the charitable organisations on donations of over £1.1 billion from donors in the recent past from a variety of sources. However, the Charity sectors are not as accountable as government departments in respect of donations received by them. Christopher Hope argued that Priti Patel said that donors were entitled to be informed of the manner in which their contributions are utilized so that they became aware of how Charity executives abused the public funds under the garb of executive remuneration.
Trustees of the Charity are responsible for the preparation of the annual report, which is generally recognized as a means of demonstrating accountability to external stakeholders. The Corporate Report (AccountingStandards cCommittee, 1975)states that such documents are the evidence of accountability. The introduction to the 2005 Statement of Recommended Practice (SORP), the Charity Commission states that the purpose of preparing a Charity’s annual report is to comply with trustees’ responsibility to be accountable for the public funds. With this in view, the Annual Reports of the Charities should be detailed and transparent enough for the public to appreciate the Charities’ manner of spending the funds received. Many ways can be used by organizations to communicate with their stakeholders and offer detailed financial information such as executive remuneration disclosure. According to Connolly and Dhanani, the annual report, which includes executive pay disclosure, is recognized as the primary tool to fulfil its reporting responsibility to discharge its duty of accountability.
There are 163,000 main registered Charities in England and Wales under the purview of the Charity Commission that regulates Charities in England Wales. It is directly accountable to the Parliament without coming under any minister and hence an independent body. Charities Acts 2006 and 2011 lay down the Commission’s objectives, functions and duties. Its regulatory activities are registration of Charities, and monitoring and investigating them for any mismanagement and misconduct with the objective of protecting and recovering charitable assets due to mismanagement. Charities should take permission from the Commission for making amendments to their constitutional documents and disposal of their assets etc. It has to maintain a public register of Charities and provide regulatory guidance to the trustees in relation to their duties. Although registration with the commission does not ensure that the registered Charities meet their quality requirement, it is only an indicator that they have complied with the statutory criteria for registration. Yet donors gain confidence and give Charity without hesitation by virtue of registration with the Commission (NationalAuditOffice, 2013).
Charity Commission’s website can be accessed for their inquiry reports, accounts monitoring reports, regulatory case reports for each year. How the Commission tackles abuse and mismanagement has also been detailed in the documents available at their website .
The National Audit Report however gives a dismal picture of the performance of the Commission during the past 26 years. This is a serious concern because Charity sector plays an important role in the society and hence the Commission’s effectiveness is important to enhance trust and confidence in the Charity sector. The stakeholders emphasize on the importance of having an effective regulator which should be knowledgeable enough about the sector and be independent of the government. At the same, the National Audit Office informs that while the Commission’s budget has shrunk by 40 per cent, the size of the Charity sector remains the same with the annual income of 60 billion GBP. The Commission can only deal with mismanagement and misconduct of the Charities and not operational deficiencies and disputes among trustees. Recently in 2013, a parliamentary committee has stated that the Commission functions on very vague statutory objectives and that the Charity Act 2006 expects a more active role of the Commission. The Commission is charged with not making full use of its statutory enforcement powers. In the past three years, the Commission has not removed erring trustees. It is accused of not taking adequate remedial action in many serious regulatory cases. The Commission unduly relies on the words of the trustees without verifying their actual compliance (NationalAuditOffice, 2013).
This dissertation aims to study the executive pay disclosure in annual reports of top 20 Charities in the UK as mainly studying objects and examine that if the content of executive pay disclosure meets the requirements of Statement of Recommended Practice (SORP).Besides, this dissertation examines that whether these Charities provide any additional information on executive pay either in the annual report or through other communications such as annual review and website.
1.1 Aims and Objectives
- With the above background, the aim of this dissertation is to critically examine the executive pay disclosures of the charities in the UK.
In order to complete this research, systematic analysis was employed and a checklist was designed to collect the data from the Annual Reports of the selected Charities. The more detailed explanation will be expressed later in the part of methodology. The remainder of the paper proceeds as follows. The next chapter reviews prior literature about accountability, SORP and allied areas of information. Third chapter is a description of the research method. Fourth chapter is the data findings from the selected annual reports and websites of the top 20 charities registered with the Charities Commission. Fifth chapter is the discussion of the data findings and conclusion with reference to the aims and objectives.
2. Literature prior review
There are many different definitions of accountability. In 2007, Fishman argued the definition of accountability as ‘the process by which is information is made available as to how best an organization’s resources are utilized. Connolly and Hyndman (2004)state that accountability can give different meanings to different stakeholders. However, for the purpose, this dissertation will follow the definition of (Unerman & O'Dwyer, 2006), who considered that the main purpose of accountability is to give all the stakeholders a means of knowing how a particular organization has carried on its activities in the manner it has carried on (p. 351).Connolly and Hyndman argued that definitions of accountability deal with the evidences by which the organizations can show how they have discharged their duties and responsibilities (p. 129).On the basis of these definitions, it is precisely that discharging accountability is necessary for both the Charity itself and its’ diverse stakeholders. Accordingly, keeping transparent (for example: detailed information of executive pay disclosure) is a kind of discharging accountability. Accountability is seen as significant for the Charities sector, to instil hope in the donors so that they are satisfied by the end uses of their contributions such as paying for executives. Connolly and Hyndman (2004) argued that as the Charities are crucial to modern society, a sector’s continued success is dependent on the reliance placed by the public on the activities of the charitable organizations.
The ways in which the trustees conduct themselves in an accountable manner and their charitable organizations are governed including internal controls generate the reliability among the stakeholders(Charity Commission, 2014).However, public trust is being nibbled by many non-transparent things (for example, without detailed information about executive remuneration) happened in Charity sector. For example, as reported by Christopher Hope(2013) “Martyn Lewis, the person appointed to review Charity pay has said that smaller voluntary organizations are preferred to big ones in the wake of the Telegraph’s revelations huge salaries to some Charity chief executives”. In particular, disclosure of executive remuneration can reduce information asymmetry by removing the opaque procedures of executive compensation . For example, a detailed and better level of such disclosures of executive remuneration can enable the donors to satisfy themselves that the pay-outs are effectively aligned with the wealth maximization of the principal or not (Thevenoz & Bahar, 2007, pp. 1-29). Charities are expected to give a good exposure of their activities and financials as they want to earn the trust of their donors. Charities that follow the best practices are less likely to misuse the public funds in relation to those who do not follow such practices. Gibelman and Gelamn argued that one response to these problems is to provide clarity in the use of funds (for example, executive remuneration).A genuine organization would appreciate that the public has a stake in it, and act accordingly (CharitiesCommission, 2009). In England and Wales, in terms of the importance of accountability in Charities sector, the Charity Commission has an objective to enhance the reliability of charitable institutions among the stakeholders (Charities Commission, 2009).
2.2 Statement of Recommended Practice (SORP)
More detailed requirements about executive remuneration disclosure can be found in the SORP. The original SORP was a short document based on commercial principles to Charities allowing accountants a high degree of discretion as to how they used the recommendations (Hyndman and McMahon, 2010). Compliance with the SORP was made mandatory for Charities in 1995. Thus, the ‘recommendations’ have become the ‘requirements’ for many Charities (especially large Charities).It is issued by the Charity Commission and the Office of the Scottish Charity Regulator. The Charity Commission and the Office of the Scottish Charity Regulator are regarded as the joint SORP-making body. One of the SORP requirements is that Charities are required to produce the trustee’s annual report. Charity accounts are accompanied and complemented by the information that does not form part of the financial statements. Within the United Kingdom such accompanying information is primarily provided by the Charities through a Trustees’ annual report. For example, executive pay disclosures are solely in accounting narratives, which is contained in the trustees’ annual report. As is explained in the paragraph 24 of the SORP, the legal requirements for an annual report and its contents differ according to the Charity reporting frameworks that apply within the separate legal jurisdictions of the UK. The SORP recognizes that such accompanying information is of high importance for users of Charity accounts in understanding the activities and achievements of a Charity as a whole and therefore provides the best practices recommendations for the content of such reports. In England and Scotland, the best practice recommendations are underpinned by law. In Northern Ireland whilst the recommendations are considered to be consistent with the law they should be regarded as voluntary best practice recommendations supplementing legal requirements. The accounting disclosure requirements have been separately identified throughout the SORP. Also, SORP emphasizes that generally Charities are only excused from a particular disclosure requirement where the item in question is not relevant to a Charity or where disclosure would be immaterial for the user of the accounts. For example, investment disclosures are not required if a Charity has no investments. Certain other disclosures, for example, remuneration of executive, provide information of significance to the reader and require a “nil” disclosure in the event of no remuneration being paid. Where such a “nil” disclosure is required, this is specifically stated in the relevant disclosure recommendation. In brief, preparing annual report is one of the requirements of SORP and executive remuneration disclosure is a necessary part in annual report. According to SORP 2005, every registered Charity is expected to produce an annual report and accounts that explains where their funds came from and what they did with it. In England and Wales, if a Charity’s income in a year is more than £500,000 or the value of total assets is £2.8m at least, the Charity will need an audit. If a Charity is not required by law to have an audit then only a simple annual report needs to be prepared. Registered Charities with an annual income over £10,000 and all Charitable Incorporated Organizations must provide annual information to the commission (CharityCommission, 2013). SORP para 42 states that disclosure of names of any recipient can be dispensed with if such a disclosure will endanger the personal safety of the recipient subject to being authorised by the charity commission to do so. For example “women’s refuge”. Para 51 of the SORP 2005 allows mentioning of notional value of volunteers engaged in the charitable or income generating activities if the charities so desire though it is not compulsory under Statement of Financial Activities (SOFA) in view of attributing monetary value to the contribution of the volunteers. Remuneration to Trustee or person connected with a charity trustee is a related party transaction as per para 230 (b) of SORP which requires individual wise disclosures including pension arrangements. Para 230 (c) requires disclosure of remuneration paid to a charity trustee or a person connected with a charity trustee along the legal authority under which payment was made i.e provision in the governing document, order of the Court or Charity Commission. Para 231 (d) requires to state the fact if neither the trustees nor any persons connected with the trustees have received any remuneration. Para 231 requires statement of expenses incurred by the trustees. Para 233 requires nil disclosure in case of the trustees not having incurred any expenses. Para 234 to 238 deals with disclosure of staff costs and emoluments. Para 234 states that staff costs should be stated regardless of the Charity having incurred on its own otherwise including seconded and agency staff and staff employed by connected or independent companies such as cases of staff having contracts for payments by connected companies. In addition, payments to independent third parties for staff procurement should also be disclosed where costs are material. Para 235 requires total staff costs to be disclosed with breaks ups such as gross wages, employer’s national insurance costs and pension costs along with average number of staff if there are part-time staff to be converted into fulltime equivalent employees. Para 236 requires in case of charities subject to statutory audit disclosure of number of employees whose emoluments including taxable benefits in kind but not pension costs fall within the each band of £ 10,000 from £ 60,000 upwards. Para 237 require pension details for the higher paid staff as in para 236 to be disclosed along with the number of staff. Para 238 requires to state the fact if there are no employees with emoluments exceeding £ 60,000. Para 240 and 241 requires ex-gratia payments to staff if any to be disclosed.
2.3 The National Council for Voluntary Organisations (NCVO) Guidance for trustees on setting remuneration
The NCVO has explored the arguments about the appropriate levels of pay for senior executives of Charities and the manner in which the levels should be determined. The relationship between levels of pay and public trust and confidence on the Charity sector as a whole, the definitive guidelines for Charity trustees to take into account for determining the salary levels have also been considered by the council. The committee of the NCVO appointed for the purpose included 18 independent members not connected with NCVO. They arethe trustees of leading small and large Charities and remuneration and HR experts. The Charity Commission has acted as an observer to the committee’s enquiry and the commission agrees with the committees’ finding and its report released in April 2014. The inquiry of the committee proceeded with the four main views expressed on high pay in the Charity sector. They are, 1) that no one who works for the Charity should ever be paid. 2) pay for top tier managers are permissible if there are no sufficient volunteers. 3) that those who work for Charity should accept it as a special vocation and the highest paid executive should accept salary at levels less than what they command in public and private sectors, recognizing what is known as “Charity discount” 4) that the Charities should be run as efficiently as a business and if that demands a high pay, it should be paid which many philanthropists, companies and foundations consider before deciding on their considerable donations running to millions or hundreds of thousands. It should be recognized that since the Charity sector is diverse, one size cannot fit all. The diverse natured Charities face different organisational and services delivery challenges especially in their growth trajectory. It should also be noted that there have been many overlaps between the public, private and voluntary sectors. One third of income for Charities comes from government contracts for provision of services. Some Charities argue that they do not take or take very less donations and their executive salaries are more than offset by their profit from trading activities. The Charities in the health sector have to compete in the open market and have to attract best talent in doctors and scientists by paying them comparable salaries. In spite of these viewpoints, it is argued that the decisions on pay should consider the values and purposes of each Charity as expected by donors. Hence, this should come before any conflicting interests that the trustees should bear in mind. It is a challenging task for both the trustees and donors as certain concepts like “Charity discount” is already being followed by Charity leaders by paying the seniors 25 to 45 per cent less than they could receive from elsewhere for similar services. The NCVO Committee has also found that there are about 161, 000 registered Charities with annual income of more than £39 billion that is higher than the defence budget of the UK. This income went to just 533 large Charities with an annual turnover of £10 million. 91% of the registered Charities have not paid any salary at all, being run by volunteers. The remaining 9% provide employment to about 800, 000 people which is significant in terms of employment in the country. Less than 1 percent of Charities employ for a salary of £60,000 or more. In view of the diverse nature of Charities, the NCVO committee has considered a maximum level of salaries for top-level employees. The NCVO has issued the following recommendations in respect of disclosures. All Charities employing staff for salaries should publish exact information on remuneration job titles, and names of their highest paid employees especially the Charities with a gross income higher than £ 500,000. The information so published should accompany justifications of the trustees for having determined such a high salary levels. And that all information should be collated within one document and it should not be more than two clicks away from the home pages of the Charity websites that the committee calls as “two clicks to clarity”(NCVO, 2014).
2.3.1Key Principles for Charities
Although the different Charities share the common legal characteristics, their service delivery for public benefit differ from one another. Most of the individual Charities raise funds through volunteers and their income substantially comes from the services rendered for payment. Each Charity is unique in funding and service that determine the pay policy and practice. Thus, each board of trustees has to decide the pay policy that ensures the success of its Charity. As a result, pay policy of Charities will vary from one another. Some Charities are wedded to the voluntary nature of service and hence the question of any payment to staff a salary is alien to them. They avail the services of volunteers as they firmly believe in the voluntariness as the best approach for delivering their charitable purposes. Yet another set of Charities justify payment of salaries to some or all of their staff given the length and breadth of their operations as unless they are competitive, they cannot achieve the charitable purposes professionally and effectively. Most of the Charities engaged in the social care, health, employability, housing and education sectors sustain themselves through funds from local authority or government through contracts competing against commercial providers or acting as partners with them or sub-contractors for them. As they are running on competitive basis, they need to attract people with the right talent and adequate experience to meet the standards expected of them in the contracts and hence they have to necessarily pay executive salaries on par with the prevailing market rates. Some Charities have embraced a hybrid model by which they try to combine charitable principles, volunteering and philanthropy with professionalism and business sense enabled by an appropriately paid workforce for delivering enhanced public good. Such Charities run with paid staff have expanded because of increased efficiency in service delivery and fund raising capacity. These Charities are a mix of paid employee resource and volunteer engagement, benefits of which are perceived by their donors. No single model is right or wrong and the best model depends upon the nature of the Charity concerned. The NCVO’s inquiry has recommended in its April 2014 report certain principles which the trustees should ideally follow in hiring paid staff to achieve their exclusive charitable purposes. First, the pay policy should be fair enough to attract and retain talent to achieve the Charity’s aims. Charities with volunteering spirit should be able to attract senior executives at a discount to the prevailing pay rates in the public or private sectors. Second, the trustees have the burden to identify the senior most executives and set their performance targets and salary levels. Third, trustees should make informed judgment and adhere to the Charity’s governance and constitutional requirements. Fourth, the trustees should take into account while deciding highest-level pay and rewards, the following. a) Charity’s aims and objectives (purposes), values and the beneficiaries’ expectations, b) their impact on pay policy on all employees especially the senior executives and justification of Charity discount in their pay in comparison with similar senior executives in other sectors, c) specific skills required of the senior staff with reference to the needs of the Charity and pay justification, d) business plan of the Charity for the present and number of senior executives required for the plan. e) Charity’s payment capacity to meet the levels of pay including periodical increases proportionate to the needs and purposes of the beneficiaries and Charity respectively, and f) long-term and short-term performances of both the Charity and the senior executives(NCVO, 2014).
Another important recommendation of the NCVO is setting up of a remuneration policy for Charities. The purposes, ethos and accomplishments decide the overall remuneration policy for the future and its implementation. While for smaller and less complex Charities, the policy can be straight forward by mentioning the process followed for remuneration setting, the role of trustees in doing so with reference to the Charity’s income and aims. That is, the policy should spell out if it follows the minimum wage, living wage or pay scales of the local authority that are external benchmarks (NCVO, 2014).
2.3.2 Salary limits:
The NCVO recognizes that it is not possible to set a cap for the highest paid staff in view of the different types and sizes of Charities present and the labour market requirements and resource requirements to deliver the Charities’ purposes. A cap can result in adverse outcomes such as payout in a bigger sum in the form of non-salary benefits or such a ceiling will make impediments in selecting the required leadership in senior staff especially in the complex sectors of healthcare, international development and education. It is therefore incumbent upon the trustees to fix pay scales of senior executives commensurate with the Charity’s overall remuneration policy. The NCVO believes that it is erroneous to fix artificial limits of pay as it will benefit neither the donors nor the beneficiaries. The salary policy should be left to the decisions of the trustee board and the donors should satisfy themselves on the pay scales in existence. The decision cannot be outsourced to the Charity Commission, the NCVO or any other NGO. This makes the trustees to act even more responsibly in the matters of pay policy and salary levels (NCVO, 2014).
2.3.3Case studies of NCVO
a) MEDICINES SANS BORDERS which provides international medical aid had their income and expenditure for 2011/12 as £ 23.9 million and £ 25.3 million respectively with 135 FTE staff and one of the staff had drawn more than £ 60,000 in accordance with the Charity’s policy that the highest paid staff salary should not exceed three times the salary of the lowest-paid staff (NCVO, 2014).
b) MARY’SMEALS: This is a Scottish Charity engaged in the provision of meals for poor children. The Chief Executive Magnus Macfarlane-Barrow has deliberated in the session of the Public Administration Select Committee that his Charity proposed to fix a cap on salary as it would not be possible to justify a partnership with poor people and this step helped the Charity’s fund raising efforts. Thus, the average salary was £ 32,000 with the highest payment of £ 45,380 to the Chief Executive MacFarlane-Barrow himself. He himself concedes that similar policy may not workout in other Charities with different mission requiring diverse skill sets (NCVO, 2014).
c) OXFAM concedes that it never had difficulty in attracting well-qualified staff prepared to work for lesser pay than prevailing in other sectors in a spirit of “giving back” to society. They had to pay higher salary to senior executives as there were salary increases in other sectors tempting them to shift. Oxfam reports that there are problems in fixing pay above the median level as it can result in salary escalation if employers decide pay more than 75% the market levels and that the Charities should be cautious to fix target pay above the median(NCVO, 2014).
Bonuses are included in the definition of remuneration. Institutions paying bonuses as it is not necessary to incentivise senior staff in a Charity by means of a bonus system. It is insisted that