‘How much is too much when it comes to executive pay?’ This is the question a lot of shareholders increasingly ask and companies themselves still struggle to define.

Commonly, CEO pay packages comprise of a mix of ‘hard’ and ‘soft’ targets, i.e. financial targets versus culture, people and client targets which are notoriously harder to measure. But what we know is, people are more and more aware of and sensitive to social and financial inequality, so transparency around executive pay will only need to increase.

In terms of financial targets, metrics like profit, return on equity and earnings per share tend to be unambiguous and easy to measure so are often quoted. But there’s two inherent dangers in using these measures alone in working out what to pay CEOs and top management. For one, it can lead to issues such as disregarding or even rewarding overt risk taking and or cost cutting resulting in poor customer service or high staff turnover. Secondly, these indicators tend to be lagging, which means it can take a while for warning flags like low quality and sustainability of future earnings to reveal themselves.

The clearer the link to long-term value creation, and the more clearly targets can be measured and articulated the more likely it is that shareholders will support the pay structure. (AMP Capital Corporate Governance Report 2017)

So what are some other leading metrics that strong companies and boards can link back to their executive pay packages?

  • How happy are customers, i.e. customer growth and recommendations?
  • How engaged are employees, i.e. how productive, co-operative and creative are they?
  • How well have things been done, i.e. the quality, timeliness and cost effectiveness of decisions?
  • How well have risks been managed, i.e. the safety, reputation, legal and environmental considerations?
  • Have we invested for the future, i.e. what programs do we have in place in terms of education, sustainability, innovation and development?

These intangibles are obviously harder to measure, but that’s where having tools like employee engagement surveys, staff turnover and absenteeism reports, safety and litigation records can be useful, along with considering the speed management has responded to past crises.

Beyond the metrics used to determine pay, how a company communicates all this is key, with shareholders increasingly demanding clarity, detail and transparency directly from boards.

For more insight on how companies can up their game on remuneration and communications, read our latest Corporate Governance Report, 2017.

 

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