Executive remuneration remains as elusive as much there is a need for greater transparency around it. There are several nuances that impact executive remuneration today which vary from global nature of roles to global location of those roles, structural placement and value delivered or perceived value delivered of the roles, short term gain vs. long term wealth creation balancing act and the performance play, remunerating for the position worth or the position and not to forget the entire spectrum of governance, shareholder activism, and founder/owner lead concerns on steering the organization away from the original philosophy of rewards.
Figure 1: Key nuances in executive remuneration
Let us focus on the following three nuances:
1. Industry lead differentiation in executive rewards
The question is if there is a similarity in size of the organization and the complexity at play, should the leadership team be remunerated similarly regardless of the industry. Both yes and no could be correct.
Yes – as the focus then is on the principle of pay for a position which is closely linked to the organization size and value delivery spectrum – we will see what Mercer data says about this!
No – as this doesn’t take into account the totality of the complexity due to the macroeconomic environment, stage of industry growth, stage of business growth and the absolute dynamics around the talent demand and supply in the industry, not to miss specific competencies being sought for enabling a distinct business success.
Here’s what Mercer research shows:
Figure 2: Industry based differential seen in Executive Pay (Total cash + Retirals), keeping Tech as base
2. Key people movement
As Indian organizations become more global, the hiring, placement and movement of leadership need due consideration. When enterprises place leaders across the globe to be closer to the customer or to manage delivery and operations in respective locations; how is an individual fitment treated – apart from the role related perks, is there a need for maintaining the quality of life in line with the potentially higher cost of living in that economy.
Would one then focus on internal equity of all global leaders or focus on external competitiveness in the local market? With increased focus on local hiring, will the play be more for skills, market knowledge or cultural alignment and how will these softer aspects play out while deciding the package? An added dimension is the increased frequency of young leaders managing larger portfolios and driving enterprises into next orbit of growth, where will then the value be placed – on the role or the incumbent? If we refer consumer industry, which has managed some of their global people movement and development very well, we find that usually global placements are offered more for individual development and in line with succession plans which then remain at the forefront to create individualized packages to stay competitive in the local market as well as internally.
3. The composition of executive pay
Coming to actual pay construct, it is important to understand the utility of each anchor and the play it provides. This may translate into structuring the pay to align different components or anchors differently, while base pay could be externally competitive, long term wealth creation could be closely linked to organization's philosophy of equal stake in organization’s success and relative contribution to help realize what that success could look like. This could be more pertinent when organizations and their units are in different phases of growth.
How does one then make pay outs equitable, does the business growth from $100 to 300 mn deserve the same rewards for growing business from $2bn to 2.5 bn? Is the payout apportioned for a stretch goal or extent of overachievement against the target? How do you quantify the role of a support function lead like a CFO to an organization’s success? While the treatment of all CXOs is the same with regards to fixed compensation, what is the leverage of the role in terms of variability? Should individual performance factor in variable payouts or should it be only a factor of company performance? Mercer data shows some interesting play of size and pay mix to establish some correlation of pay at risk with size and complexity.
Figure 3: Pay mix at CEO, CXO, CXO reports in large sized and mid-sized technology organizations
Finally, one also must place due importance to defining the role of NRCs and the charter that is defined for and by them in pay governance, maintaining transparency and fairness in pay decisions and being on top of shareholder expectation. It is critical to establish governance of the way the executive remuneration process runs, say stating up front the kitty for CEO/ CXO pay as a defined %age of overall payroll or profit per employee. In summary, executive pay decisions have never been easy but with increased process orientation, NRC role definition, regular review and keeping it close to business performance may help navigate to seemingly right, fair and transparent outcomes.