Rewarding executives requires informed judgement. Remuneration committee members do not need expert knowledge, but they do need data to make informed decisions on levels of remuneration, on the link between remuneration and performance, and on the structure and cost of all elements of the executive package.
Remuneration committees need to have a thorough understanding of their company and the forces that shape directors’ remuneration.
Supporting the Remuneration Committee with its remit
- Business Model
- Corporate Purpose and ESG
- Markets and positioning
- Competitor analysis
- Governance comply or explain
- Share Ownership guidelines
- Share holder consultation
- Market benchmarking
- Pay mix and incentives design
- Pension and other benefits
- Business plan/budget
- Sustainability agenda
- Impact of the wider scene
- Special needs for new hires and on share price fall
- Bespoke incentives for ventures, CDU, and M&A
- Assessing observed results
- Use of discretion and judgement
- Adjustments to outcomes or targets
- Use of malus and clawback
- Drivers of the unexpected
- Capital changes
- M & A
- ESG and the wider scene
- DRR drafting
- Investor views and consultation
- DRR vote outcome and response
- Revisions to practice or policy
- Directors Remuneration Report disclosures includes consistency with Strategic report and Sustainability report.
REMCO REMIT: PLEASING ALL OF THE PEOPLE - ALL OF THE TIME
Chairing the Remuneration Committee of a listed company is complex and challenging. The decisions are vital to the company’s success, but they are highly visible and sometimes controversial as seen from the deep backdrop of corporate governance and societal norms.
A minimum need is getting the committee annual cycle settled early. There is also the longer policy cycle and the fast-moving fields of ESG and corporate governance expectations to be considered as well. This takes time and deft stakeholder sensitivity.
Aside from all that, the business will throw extra items into the mix. New capital, M&A or disposal, new hire needs of an odd nature, a good/bad leaver assessment and so on.
In addition, too, the overarching ask is for the committee to be aware of, and sensitive to, the wider scene, both in framing proposals and assessing outcomes.
Judgement is expected, discretion is permitted but much care is needed. Adjustments to outcomes are seen, adjustment to targets less so – other than on a capital event like a rights issue.
- Malus and Clawback
Outwardly similar, but often the most fraught areas of the committee’s role.
Shareholder consultation had a strong role too; for items of true substance and then genuine listening is a must. Consultation is neither a rubber stamp, nor is it a decision outsource mechanic.
Done well executive compensation adds huge value. While some are dissatisfied with the process, they have yet to advance a good alternative.
So, it may be like Churchill said of Democracy:
“No one pretends that Democracy is perfect….Indeed, it has been said that Democracy is the worst form of Government, except for all those other forms that have been tried.”
(11 November 1947)