A New Approach to Setting Executive Pay

Does this sound familiar?

• Competitive practice trump’s performance in our organization
• Incentives do not drive strategy
• We feel paralysed by compliance and fear proxy advisors
• There is a disconnect between Board and Management on pay
• We get no advice on implementation and invariably get unintended outcomes
• Committee administration is overwhelming
• The advisory fees we pay are too high
• Several of the above

Many Boards feel that executive compensation advice has become overly “complianced” to the point of fear mongering and consequently more costly as more and more justification appears necessary. We hear them complain that executive pay has become disconnected from the achievement of goals and objectives and advisors are more concerned with compliance than application and advice.

Boards are busier than ever and have no time to become compensation experts which many perceive as the new “audit”. There is a delicate balance between meeting the perceived needs of shareholders as voiced by proxy advisory organizations, being able to attract and retain qualified executives and driving the unique objectives of the organization. A good advisor should assist in achieving all of these outcomes, providing rounded advice and assistance beyond just delivery of a report.

Selecting an adviser to provide comprehensive assistance is a very “personal” choice for a Compensation Committee and will not work with an advisor who insists on working only with the Board (and not additionally with management) and has a compliance orientation. While the intention of this type of relationship is to ensure objectivity and space between a Board and Management, the reality is that it creates misalignment and mistrust between two groups who need to be working closely together.

Some organizations look to HR or legal to undertake the interface between Board and management but that arrangement is influenced by reporting relationships and not accompanied by the consultants experience gleaned from numerous similar situations.

Others with knowledgeable compensation committees jaded by high fees will attempt to manage competitive pay and executive terms and practice without professional help or get by with just legal input. This may appear cost effective but usually results in outdated practices and fails to encompass the “soft” side of engagement and the evolving nature of motivating scarce human capital. Some shareholders would argue that it is not good oversight to decide these matters without external input.

We realise that this will sound like a cliche but we really attempt to “partner” with our clients and do this in a number of clear tangible that very quickly become apparent. We believe that “Big Consulting” can no longer deliver this service, pressured to grow and improve margins with advisers that have never worked at high levels internally.

Increasing shareholder expectations for disclosure of  analysis require a comprehensive paper trail meaning steadily increasing Compensation Committee administration but this “busy work” must not be allowed to impede effective governance.

Ensuring that issues are visited once (and not at every meeting), proposals are clearly explained and report the views of all stakeholders, and following approval, immediately update policy documents used to shape implementation. These are not new challenges for Compensation Committees, tried and tested tools are available that can be scaled to allow Committees to focus on oversight rather than the weeds.

We would enjoy sharing more of our thoughts on how to improve the effectiveness of executive pay oversight by calling the number below or emailing us here.