The Importance of a Well-defined
Executive Remuneration Strategy
Executive Remuneration Strategy
Establishing and maintaining your organisation’s Executive Remuneration strategy has never been more important than during 2023.
How an organisation positions its handling of remuneration determines the likely level of success in attracting & retaining key staff. Many organisations are facing what is a seismic shift in the NFP sector’s view of Executive remuneration packages.
While Covid has given birth to many challenges, the one presenting a serious immediate risk is the change in how executives in the NFP sector are now viewing their recognition and reward packages. Recently, it has been usual for CEOs & senior executives to be discussing double-digit figure increases in their remuneration packages with their boards.
With both internal as well as external pressures at play, the drive to establish and execute a fit for purpose Executive remuneration strategy, supportive of the organisation’s strategy, is now critical.
Passive vs. Active Remuneration Strategy
An organisation’s remuneration strategy has a key connection with, and potential impact on, an organisation’s success in achieving its strategy.
The importance of this link seems often overlooked when remuneration matters are discussed and finalised. Hence, the question goes begging: what is the board and/or remuneration committee doing in the remuneration space?
There has been a fairly widespread disquiet arise among CEOs and senior executives concerning their levels of remuneration packages. Too often, in our experience, boards and/or committees opt for the easy approach of leaving it to the staff to determine the remuneration arrangements.
During stable and predictable periods, this can work reasonably well. However, during unpredictable and quite volatile operating environments, it is an unsatisfactory governance approach and boards need to step up in their efforts to be reliably informed and influential in this space.
Drivers of Remuneration Pressures
The pressures that have shifted the remuneration narrative comprises various forces, some of which are always present while others are relatively new, as are outlined below:
- Attraction of talented staff – influenced by supply/demand of talent, Employer Brand
- Retention of talented staff – clarity of Employee Value Proposition, understanding of current organisation culture and talent pipeline/review program
- High Impact Loss Review – it’s important to understand which employees if they were to leave tomorrow would cause the biggest disruption/hole in the organisation. Too often the true impact of a loss is only realised once the employee has left and it wouldn’t have taken much to highlight their value and retain them
- Fairness & Equity – the truest way to ensure fairness is to engage an independent review that outlines like-for-like market benchmarks and also considers internal relativities. This establishes a fair and equitable strategy but also a clear and defensible rationale for remuneration changes
- Link to Performance/Impact – the best remuneration strategies and scales align to clear performance expectations and outputs so that at each performance and/or remuneration review, both remuneration and performance are considered objectively against the pre-agreed construct.
Why is it Necessary?
A clear and structured remuneration framework underpinning the organisation’s remuneration strategy is critical. This ought to be a priority for all organisations regardless of size or complexity.
The enables each organisation to approach their talent remuneration management with the following advantages:
- Consistency of Decision Making – a clear set of principles ensures consistency when reviewing all remuneration decisions
- Independent Insights – an independent benchmark review identifies under/overpaid employees compared to the market highlighting any key risks for retention or business continuity
- Holistic Approach – The remuneration strategy should be aligned to the Organisation Strategy, Capability Evolution, Risk Management, market positioning alignment
- Addressing bias elements which undermine sound decisions.
For organisations, having a sound remuneration strategy signed off by the Board and/or CEO is no longer a ‘nice-to-have’. Our operating environments continue to be uncertain and volatile, so having an informed and professional remuneration strategy that supports attraction, retention, and ongoing capability and strategy alignment is essential. In addition, a professional, consistent, fair and clearly understood remuneration strategy supports a positive culture.