CIPD WebinarExecutive Pay

By John Macdonald FCIPD, CIPD Lead

Associate – Total Rewards;

Independent Consultant

• What changes are we seeing in executive pay management and governance?

• What’s driving these changes?

• What can we learn from these changes for GCC companies?

• Best practices in incentive plan design

• Golden rules for executive pay management

• Q&A

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Session agenda Executive Pay – CIPD Webinar

• ”Executive pay” – relates to CEO, C-Suite and the wider senior leadership team.

• Sharp focus on CEO pay but principles apply across the team.

• Changes stem from the spotlight on UK public listed companies but our focus will be on learning and best practices that we can bring to any type of organisation.

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Context

Executive pay: A high-profile affair

• Stronger links between business strategy, company performance and reward

• Curtailing of senior executive pay increases without corresponding increases in performance

• Better alignment of executive pay with long-term interests of owners

• More transparency in the design of executive pay and incentives

• Closer monitoring of executive pay levels relative to rest of workforce

• Development of “employee voice” in company pay policy and strategy

• Broader remits for Remuneration Committees including oversight of pay across the workforce

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What changes are we seeing in executive

pay management and governance?

*CIPD Report August 2019 “The truth about executive pay”

High-profile corporate failures due to

excessive risk-taking –esp. banking & finance

sector

More and more instances of rewarding

failure or mediocre performance (e.g.

Carillion)

Executive pay drift and overly generous pay

reviews

Weak Remuneration Committees seen to be too far removed from the front line

*Limited evidence that senior executives will leave if pay demands

are not met

*Limited evidence of the impact of a single executive on company performance(“the myth

of super talent”)

What’s driving these changes?

• Closer monitoring of executive pay relative to the general workforce

➢CEO pay ratios (the average UK FTSE 100 CEO earns 117 times more than the average worker)

➢ Is that truly reflective of relative contribution? Impact on company reputation? Impact on employee engagement? Trust?

• “Employee voice” – Listed companies must show that they have a formal communication channel with the wider workforce on pay policy and strategy

• More robust governance and administration of executive pay – establishment of remuneration committees? Scope? Authority? Membership?

• Avoidance of executive pay increases without corresponding increases in performance

• Stronger alignment of executive pay with company strategy, vision, culture and performance

What can we learn from these changes

for GCC companies?

Incentive plans

A PwC report in 2017 called into question the

effectiveness of incentives……

30%

30%

40%

95%

5%

75%

25%

50%

50%

50%

20%

Admin &

Prof staff

staff

Middle

ManagementSales

Rep.

Senior

managementCEO

Long-Term Incentives (e.g. share plans, deferred cash)

Short-Term Incentives (e.g. annual bonus)

Fixed Pay (Base + Benefits)

30%

Typical pay mix scenarios

• Set targets that:

• are challenging, meaningful and simple to understand for all stakeholders.

• are fully aligned with the business strategy, culture and values

• drive the right business results AND behaviours

• let executives know that significant outperformance will deliver significant reward and that mediocre performance will not

• take account of non-financial performance measures, e.g. social, environmental, employee engagement and wellbeing

• Strike a balance between short-term and long-term rewards

• Strike a balance between targets that reward individual, business unit and overall company performance

• Ensure incentives keep your senior talent engaged with the business rather than switch them off.

• Keep the plan design simple. Executives are not motivated by things they do not understand.

Best practices in incentive plan design

• Take a long-term view of performance and retention whilst not neglecting the positive impact of short-term incentives

• Set truly strategic targets that mix financial and non-financial metrics

• Pay differentials in the top management team should be commensurate with relative contribution; recognise the principle of shared leadership and don’t focus excessively on the figurehead at the top

• When hiring new executives, pay attention to the unique skills that they bring in and don’t under-estimate job design as an intrinsic motivator ahead of money

• Award executive pay increases only where there are corresponding increases in performance

• Establish impartial governance of executive pay:

• Remuneration Committee with diverse skills/ backgrounds – include HR

• Broader scope to cover wider workforce pay as well as executive development/ succession

• Consider using an independent external adviser

Golden rules for executive pay management

CIPD annual Reward Management survey

>> See the 2018 report

CIPD Executive pay in the FTSE 100 Is everyone getting a fair slice of the cake? – August 2019 report

>> See the report

Some CIPD resources

CIPD reward and pay

factsheet

CIPD Reward and Pay factsheet

>> See the factsheet

CIPD Gender Pay Gap reporting

>> See the CIPD guide

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u

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Compensation and Reward Management Short Course Become an effective compensation and reward practitioner

This course provides a comprehensive guide to structuring and optimising your base

and variable pay design for maximum ROI. Through several case studies, you will

explore the different processes needed to develop a robust reward strategy. You will

determine which reward processes are most appropriate for your organisation and get a

starting point to developing your own taking into account your business needs.

Next session: 8 – 11 December | Dubai

>> Download the course brochure

Related CIPD courses

>> Download the 2019 training calendar

Any further questions?

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Thank you and Q&A