Executive compensation decisions should be judgements based on good information. The committee is accountable to shareholders and others for the process and the outcomes.
Data is important, but not the whole story. Data is the servant not the master. Investor’s dislike pay rises which follow the market slavishly. The belief that pay survey data causes pay ratcheting, is incorrect; but commonly held.
Pay data is often Right Skewed. That means the right spread profile of the higher paid is much wider than the left spread one of the lesser paid. So, the ‘Median,’ the middle occurring number, is a better guide to mid-market than the arithmetic mean.
Selecting comparator companies is a choice, and some consider more than one comparator set. Selecting the best job match is another one, as is the selected position against market, both in terms of pay levels and pay mix. Then there is also considering the importance, and performance, of the person in post.
Surveys assume broad compatibility of the performance conditions for STI and LTI; and the LTI vehicles observed. That assumption is unsafe. The performance test difficulty or the absolute delivered value vary; or both.
Framing gain share plans, such as a Value Creation Plan, is also tricky. Data has less application here; but is not irrelevant. In addition, the design framework to recognise the need, the market norms and investor views are all important.
Pay surveys can tell you what others are doing on average, and at the extremes; but they will not tell you what you should do.
In short, the right executive compensation answer is not found in a survey; it is a set of decisions. But getting to grips with what the surveys are saying is a vital part of the process.
