Remuneration Committees: Avoiding the pitfalls

Start the process of designing any new policy or assessing the likely outcomes of existing arrangements at an early stage. All too often the RemCo’s work gets squeezed into a month or two at year end. It might be inevitable that the timing of the results means a lot has to be done then – but some forward thinking and anticipation can smooth the discussions with executives and analysts.

Keep in mind the full range of important stakeholders. Whether shaping policy or looking at outcomes, the response of regulators, the wider workforce and broader society (as reflected in the media and political noise) are increasingly becoming important factors. It’s not that you have to – or can – respond to everybody’s concerns or interests. But weighing them up and considering the possible implications can help manage reputation risks and the possible impact on the organisational culture. Forewarned is forearmed.

Have somebody play the role of the cynic – most effectively a member of the RemCo. Get them to think through – and then vocally set out – what the reaction of other stakeholders outside the business and the Board might be. And have them apply the “moral test”: how will this award go down in outsiders’ eyes?

Aim for simplicity and avoid unnecessary complexity. If it’s only the committee chairman and the consultants (and probably the highly-motivated CEO) who understand it, it’s too complex. A scheme that can’t be explained or understood is probably not going to achieve its objectives.

Think strategy first – and then compliance. It’s about the impact you want to have in increasing the chances of strategic success, not about fitting policy into a straight jacket of expectations.

Do some scenario thinking from a strategic, not just numerical, perspective. If all goes to plan (or much better) what might we find ourselves paying out – or wanting to pay out? And in the flip side scenario, how much embarrassment and how many “wrong” messages to staff and the outside world might take flight?

Consider how far you want the committee to maintain discretion – upwards or downwards. Even though the policy will be reviewed every three years, the environment and circumstances can change a lot more quickly with the result that the outcome just doesn’t seem right.

Look at the package as a whole: salary, bonus, LTIP, pension and benefits. And in particular make sure there’s enough time spent on understanding the pension angle.

Apply a good dose of healthy scepticism and caution when looking at benchmarking data.

Think how the remuneration policy and targets fit with the “people strategy”, whether that’s about the desired culture or how you want to develop, motivate and retain “stars”. And think risk: what attitudes do you want to nurture through reward? A less conservative attitude – or reining in unhelpful aggression?

Consider how best to go about understanding the psychological angle and how key executives might respond. If it might be complicated, it could be worth getting some professional advice if the risks are high – or simply seeing this as part of the induction training for RemCo members so they can factor in considerations in general.

Have a clear communications plan – for the executives and for the investor community. That means thinking through early notice, face-to-face meetings, who’s doing what, allowing people time to think and respond – and allowing the Committee time to think through differing responses (as the messages coming from investors will differ almost for sure).

Make sure targets are known and communicated before you get into the period they cover.