How hard is it to get executive pay right?
Depending on your viewpoint, executive remuneration is either the most contentious element to reward, or the least.
Where you sit on this will be shaped by a range of factors such as the sector you operate in, the profile of your remuneration committee, the board - and sometimes even gender.
The “top dollar” perspective: market-driven simplicity
Let’s start at the least contentious end. It’s easy, isn’t it? We operate in a global market. We expect exceptional delivery and we must remain competitive in both base pay and variable elements. If we don’t pay top dollar, our competitors will.
Typically, though not always, this “top dollar” approach will be linked to pre-agreed performance metrics: pay for performance.
However, we still come across entirely discretionary schemes (not linked to performance), and perhaps more concerning, schemes that are not costed against net profit.
Motivation and retention: the limits of pay
This approach, while uncomplicated, certainly aligns with Maslow’s Hierarchy of Needs. Maslow suggests that as individuals we strive to meet four fundamental growth needs to achieve self-actualisation, the highest level. The fourth level of the pyramid - esteem - relates to status, prestige, and feeling valued.
Some CEOs approach to executive remuneration is based on this need to evidence value by paying as much as possible. Likewise, many senior post holders use similar rationale to justify higher compensation.
The challenge with this approach is clear: if motivation is purely financial, what prevents a competitor from offering more and successfully poaching that individual?
We see this with long-term incentive plans (LTIPs), designed to retain talent by deferring percentages of equity or cash – so called “golden handcuffs”. In reality, competitors are often willing to buy out these deferred elements to secure key hires.
So, what should organisations do?
The optics challenge: fairness and perception
At the other end of this contention spectrum, things become more complicated.
What message, or optics, are we sending by paying excessive sums, often not our money, to individuals at the top, whilst a large proportion of the workforce potentially earns close to the National Minimum Wage?
What is the ratio between our highest and lowest paid employees?
Some CEOs (often female) are reluctant to accept market rate pay because it feels, in some way, excessive.
The counter to this thought process is succession planning. If such leaders leave, and take their views with them, would the organisation need to redesign its budgets to align with the market?
Pay compression can also emerge as a real issue where a recalcitrant CEO resists pay increases, as this can impact the reward trajectory of their immediate directors.
So again, what should we do?
The reality check: affordability and sustainability
The midpoint of this spectrum is one of affordability and sustainability.
This can be an uncomfortable position. While organisations may wish to pay their high-performing teams “what they’re worth,” doing so is not always financially viable. Left unchecked, this could quickly erode business sustainability.
A core principle of executive remuneration, therefore, is sustained affordability.
So, what should we do? That’s three versions of the same question. The reality is: there is no oneapproach.
Executive remuneration is shaped by multiple factors - sector dynamics, individual motivation, affordability, remuneration committee and board perspectives, and the optics for shareholders and employees alike. They all play a part in defining your approach.
A pragmatic view: the finite pay envelope
We work with some brilliant CEOs who take a pragmatic view: ultimately, there is a finite pay envelope. If this doesn’t align with the expectations of the senior team, then it may be time to part ways professionally, with mutual respect.
Compensation, while critical, is ultimately the least “sticky” element of reward. It is essential - but it is only one part of an effective reward strategy. The most effective strategies are those aligned to the core ethos and values of your organisation.
Asking the right question
You need a clear understanding of your market position. You need to know what your competitors are paying, but do you need to match it?
That’s yet another version of “what should we do?” Fortunately, these are decisions we can help you navigate.
Supplied by REBA Associate Member, Turning Point
Our data and insight helps organisations build the best reward strategy for their business and people.
