In the dynamic realm of corporate governance, the gold standard in remuneration policy isn't merely an aspiration; it's a journey marked by the interplay of theory and practice. As a seasoned consultant at the UK's leading independent Reward consultancy, I've witnessed numerous companies embark on this transformative journey. In this article, we dissect the critical components of governance, legal updates, organisational objectives, and the nuanced art of building effective relationships within the intricate landscape of executive compensation.
1. GOVERNANCE: Theory vs. Practice
RemCom In Theory…
Remuneration policies should seamlessly align with a company's strategy, promoting sustainable success. They must echo the company's purpose and values, forming a clear link to the successful delivery of long-term objectives. A transparent procedure for policy development should be in place, and no director should decide their remuneration outcome.
RemCom In Reality…
Research from Willis Towers Watson reveals that in 50% of Remuneration Committees ('RemComs'), management proposes solutions. The traditional structure sees the company's chairman leading the RemCom, with CEOs, Financial Directors, and other Executive Directors actively participating in decision-making.
Governance & Legal Updates: CEO Pay Ratios
In 2019, legislation came into force mandating the disclosure of CEO pay ratios for UK quoted companies with over 250 employees has added a layer of complexity. Calculating ratios accurately and effectively communicating them to stakeholders amid potential public and media scrutiny are key challenges.
Governance & Legal Updates: Board Effectiveness Guidance
The importance is placed on an effective RemCom, comprising a minimum of three independent Non-Executive Directors. The Chair's prerequisite experience and clarified remit underscore the need for proactive adaptation to stay ahead of future legislative developments.
2.OBJECTIVES
Formulating a comprehensive remuneration strategy demands a clear understanding of organisational objectives. Key questions include defining the business's purpose, growth plans, valuation considerations, success metrics, and the broader definition of success beyond mere profit/earnings.
Questions to ask:
- What do we want to achieve?
- Do we have a decent (i.e. written down, agreed and the numbers are on this planet) strategy?
- Do we want to exit or grow or both?
- How do we value the business now?
- What does success look like?
- How can we measure it? Is it just profit/earnings, the role of ESG or is it wider than that?
RemCom Chair's Role
The RemCom Chair should understand the business DNA, possess technical abilities for pay benchmarking, and comprehend various pay structures. This ensures realistic, tailored decisions that align with the company's future trajectory.
RemCom Effectiveness Audit
Evaluating the success of a RemCom involves probing into its composition, effectiveness, and the Chair's role. Identifying areas of improvement and overcoming barriers are essential for continuous enhancement.
What about Executive Pay Benchmarking?
Effective benchmarking necessitates considerations of background, alignment of roles with job descriptions, determination of reward elements, market positioning based on factors like revenue levels, business complexity, growth plans, and industry benchmarks.
Building Relationships
Chair of RemCo
Emotional intelligence, agreement brokerage, and technical understanding are essential. Recognising the importance of stakeholder buy-in is as crucial as decision-making based on facts.
CEO
While technically excluded from RemCom decisions, in practice, CEOs seek influence. Balancing their expectations with the need for independent decision-making is vital.
CPO / HR Director
Acting as a bridge between technical advice and agreement facilitation, HR Directors play a pivotal role in the RemCom process.
RemCom Advisor
Advisors should align with the business, providing sound benchmarking, technical advice, and independence. Checking for conflicts and ensuring relevance to the company's specific needs is crucial.
Action Plan
Setting timelines, aligning with legal and financial experts, structuring a well-defined RemCom paper, and managing stakeholder communication are integral components of a successful action plan. The gold standard in remuneration policy is not a static achievement but a dynamic journey. By embracing the delicate dance between theory and practice, addressing governance challenges, staying abreast of legal updates, and fostering effective relationships, companies can navigate the complex landscape of executive compensation with confidence and integrity. In this journey, success is not just about reaching the destination; it's about continuously evolving and adapting to the ever-changing corporate landscape.
