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You gets what you pays for

Executive pay is a sore topic for many people. But while styling the perfect remuneration strategy is incredibly tricky, that doesn’t mean we shouldn’t try Nigel Mills goes back to basics with a framework for getting it right.

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You get what you pay for
Since the start of the global financial crisis in 2008, executive remuneration schemes have been subject to intense scrutiny by the government, the media and the public. Pressure from stakeholders has caused many organisations to implement performance-related pay schemes that encourage long-term sustainability.

Few companies get to devise the perfect incentive scheme from scratch. A remuneration consultant is often brought in when a problem with an existing set-up gets out of hand. But a realistic plan for many is to aim for “as good as you can”.

But what do we mean by “remuneration strategy”? Simply put, it should be the breakdown between the various remuneration elements in the compensation packages for the executives and employees that make up the workforce of the business concerned. The diagram, above right, depicts the various components of an executive remuneration structure, although in most situations not all these components will be offered.

Five objectives

Those are the components – the easy bit. But what about the objectives for an executive remuneration strategy? That’s more complicated. It should:

  • Motivate executives to achieve, and hopefully to exceed, performance targets – within the accepted risk parameters of the company.
  • Enable the company to retain its key executives. They must see a good probability of targets being achieved, for example. If the company has been doing well, executives should have accumulated deferred bonuses and long-term incentive plan (LTIP) awards, which are likely to vest over the coming years. Un-vested, in-the-money awards act as handcuffs on successful executives.

This is an extract from the Finance & Management Magazine, Issue 205, December 2012.