The high level of executive pay in some companies has been occurring for many years. The recent publicity and reports have focused on the widening gap between the top management and employees.  Solutions have been proposed of links to the median pay of employees; reversing the trend of higher performance and lower basic pay.  In the light of such concerns, Boards should review their reward policies and strategies to ensure that these are appropriate to and reasonable in the circumstances.  What points should a strategy contain? Some pointers are given below to help directors and remuneration committees carry out a review.

A key point to remember is that, in the eyes of most executives, any type of performance/incentive reward legitimises the pursuit of certain goals by the director.  The consequence is that the organisation will be committed to short and/or longer term business decisions blessed by the reward structure. Hence, having a sound and appropriate policy is critical.

Reviewing your reward policy

Key points to consider are outlined below.

• The value of reviewing the policy is to ensure there is consensus about the direction of the business in the years ahead and whether that will involve entering new markets.
• The above will help to identify key goals to be achieved by the executives but as important is the identification of the competitive market(s) in which the organisation operates or will enter. Those are where comparisons will need to be made about total reward levels and the appropriateness of your reward structure for executives.
• Consider the target level of the reward package and how it will structured between basic and variable pay or other incentives. Bearing in mind the legitimization point above, how much flexibility should the remuneration committee build into the reward structure to allow the board to respond to significant shifts in the market place? Will the reward structure provide for situations in which the executives need to shift direction? New challenges and threats may arise for which directors should change direction rather than pursue the original goals because those carry the only financial incentive. If the need for direction changes is most likely to occur, rethink the basic to variable pay levels or ways in which the reward structure could respond.
• What key goals/objectives are really significant? Should those goals attract high remuneration in whatever form? Although boards need to keep an eye on external markets, in practice, performance improvement is often measured by a home made measure of the organisation’s success. There is a risk that a company can improve its performance compared to previous years but in reality have a large gap between it own performance and that of competitors. Such ‘internally’ focused progress measures can lead to high payouts for achievements that still leave the company trailing behind competitors. When identifying competitive markets and organisations.
• The mix of compensation needs consideration. Popular thought will often refer to the need to encourage senior executives to act as though they are key stakeholders/shareholders. The reality is that equity schemes have often been introduced because of tax advantages. The reward policy should be developed around the business needs; minimising tax should not dominate the shape of the policy but tax implications should not be overlooked.
• What type of reward culture has the company developed over previous years?

• Is there evidence that when performance is lower than expected that directors’ rewards are also lower? In other words is there a culture of both risk sharing and success sharing or only the latter? This will affect the degree to which changes in the reward structures will cause trust or distrust. Even so the board will need to address the means of adjusting the degree to which rewards are seen as guaranteed or truly at risk in line with the performance.
• Are pay levels falling within a discernible structure i.e is there an equitable pay approach within the firm? See articles such as

Non Executive Directors

The strategy should include both executive and non-executive directors as the latter are likely to be spending more time on matters such as reward strategies and corporate risk and governance issues. While non executive directors are more likely to be remunerated via a retained salary or fees, their hours are likely to increase and so costs will increase. The independence of the non executive directors will also need to be taken into account which will mean reviewing whether or not any equity rewards are appropriate.

Organisations will also need to consider the skill mix of non- executive directors. Some companies may need to appoint non executives with specific experience of reward strategies and corporate governance experience to help the Board develop reward structures that are appropriate to the business needs and required culture of the organisation.

Although attention is being focused on the scale of reward packages, the non-executive directors need to focus on what is appropriate for their organisation and the markets and environment in which it is placed.

Sources:

(2) Equitable Differentials 2012 – An article by HR Management Dimensions – read article via this link

© 2012 HR Management Dimensions Ltd.

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