Annual Dinner 2020
Thursday, 24th September 2020
Because they must feel that it is hard to get it right. They are coming under pressure from management teams who been out in the cold during the recession in terms of pay. With the sun emerging on the economy those management teams, understandably, are looking for some of that warmth to make its way into their pay package. Institutional investors are quick to criticise but are reluctant to engage in consultation on executive pay. And there is the constant fear of bad press – either literally, or from commentators inside and outside the company. Non-executives on remuneration committees can often be quoted as saying 'they do not want to put their head above the parapet'! Then there is the dilemma of performance linked pay: there is a fine line between paying for performance and encouraging undue risk-taking. The temptation is to identify the lowest common denominator as being the least controversial approach and to shrug their shoulders at management's objections.
But this would be unfortunate. Particularly as we are on the cusp of economic growth and we need to ensure that our pay structures support necessary improvements in productivity. Management teams need to have a clear picture of the business plan aspirations and what they will receive if these are achieved.
So where should the beleaguered Remco start? The following principles provide a good framework:
The Remco should have a clear picture of the performance targets set for both short and long-term incentives and how they fit together. Understand the cost to the company taking into account tax relief and accounting charges). The Remco also needs to ensure that it has mapped the 'what ifs' – in other words, modelled potential pay outs on a range of out-turns achieved by the company. Be prepared to articulate not only the separate components of pay but how they fit together and how this maps to the company's strategy. Comparisons with other companies are not for the purpose of spiralling pay but to understand who and how you compete with for talent in your market place. Note that this affects performance targets rather than levels of pay. Where will you need to recruit your high flyers – and what companies might lure away your current stars? How do you ensure that pay plays the right part in engaging your executives?
By ensuring that there has been a thorough process and that it has built a consensus with the stakeholders, the Remco should be in position to present a robust pay proposition. And the non-executives should be sufficiently well-armed to feel that they can go over that parapet!
This article was written by Amanda Flint, Partner at Grant Thornton UK LLP. For further information please contact Amanda Flint.
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