An essential guide to executive pay and bonuses
If you’re newly responsible for executive pay, it’s a daunting task. As a reward professional, your role is to help the Remuneration Committee function smoothly, ensuring that reward is fair, retains key individuals, rewards performance but doesn’t expose the business to unnecessary risk or cost. It’s a tricky balancing act but luckily help is at hand: here’s our essential guide to exec pay and bonuses.
The snappily titled UK Corporate Governance Code offers clear guidance on executive pay. Technically it only applies to the FTSE Premium Listing, but it does make sense for all companies, listed or not. You don’t have to comply, but the code acts as a framework to guide you – and for those companies planning an initial public offering or trade sale – it makes sense to root your practice in this highly compliant soil.
At best, remuneration strategy at Board level should join-up the story of how the business plans to succeed for its investors, with how it shares its success with the senior team who helped to create it.
The latest edition of the code (July 2018) spells out key standards:
- Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
- A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome.
- Directors should exercise independent judgment and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.
First steps might be to make a comparison with other organisations in the same sector that are a similar size. Companies you might lose employees to, or hire from. Companies on a similar trajectory to your own – high growth, or more stable income producing businesses. Linking your company goals with remuneration practice demonstrates your business is good at joining theory and practice. Your reward model should be custom made to reflect your own DNA. Are you a high growth, high risk, high reward firework, or mature income producing odds-on favourite?
However, don’t just slavishly follow the market. Being wary of using such comparisons means there has to be a basic understanding in your company of what ‘Good’ and ‘Great’ performance looks like, regardless of what others are doing.
Our work tends to be with high growth businesses who want to create growth into the future. This creates an interesting conflict sometimes, where the current size of the business would dictate a certain package for a new hire, but in reality they are being hired to bring about growth – and that comes at a higher price tag. We suggest putting some science behind gut feel by developing tramlines – where the business is now, and where it aspires to be in the future.
Link it to performance – preferably long-term performance – but with an annual plan which focuses on short-term, urgent and in-year goals.
Paying for performance should be based in measurable outcomes. Having a range of metrics is fine, but they have to be clear, understandable and quantifiable. Being linked to investor’s interest is essential, but the Board also need to ensure they are confident growth is sustainable. An example: growth in market capitalisation underpinned with earnings per share gives roots and wings to a long-term plan.
Finally, remember that it doesn’t always end happily ever after – like Premiership football managers, the tenure of an Executive Team can be ‘nasty, brutish and short’. If the non-Executive Directors decide it’s not working, be prepared for termination.
Consider what you’re prepared to pay in case of an early termination, including pension contributions, golden goodbyes etc. The last thing you want is to appear to be rewarding poor performance.
Deborah Rees-Frost is director of consulting at Innecto Reward Consulting.
This article was provided by Innecto Reward Consulting.
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