Traditionally, remuneration decisions have been made by an organisation’s board and most senior executives.
Today, with an increasing focus on good governance, a specialist remuneration committee is often set up to make decisions about reward. Sometimes this is a subset of the board; sometimes a combination of board directors and other specialists from the HR or reward function.
The increasing role of governance in remuneration
The reward practices of organisations – particularly when it comes to their highest-paid executives – have become an area of increasing focus for shareholders, activists and the public as a whole in recent years. The financial crisis brought into focus the disparity between corporate remuneration and performance – and since then, pressure on businesses has intensified, with shareholders frequently voting against reward packages that are seen as excessive.
For firms regulated by the Financial Conduct Authority, this issue was brought to the fore again recently, when the Authority sent a letter to Remuneration Committee chairs, reminding them of their obligations around reward and compliance.
In the letter, the Authority highlights the connections between reward, organisational culture and behaviour, pointing out that ‘there is no doubt that the way an organisation incentivises its staff will drive its culture’.
What does this mean for boards and remuneration committees?
Balancing your firm’s remuneration policy with the need for decisions that will meet good governance standards is essential.
Boards are having to become more proactive on governance and this is one area where your approach can be very visible. Your reward strategy needs to stand up to scrutiny from your own wider business as well as your shareholders.
Misreading the culture has been identified as one of the five mistakes board directors make most. You need to ensure your own remuneration decisions don’t fall into this trap.
How can remuneration committees and boards make better decisions?
A wide range of factors go into decisions around remuneration.
- Different industry sectors will have different norms when it comes to pay and reward; every organisation needs to ensure that it’s comfortable with where it sits in relation to its peers. Understanding the market you operate in is essential to ensure your offering is competitive.
- Culture: as the FCA noted, the activities your business rewards people for are both indicative of, and have a huge impact on, your corporate culture. What type of behaviours do you want to reward? What sort of culture do you want to build?
- What stage is your organisation at? A start-up may well have a different approach to remuneration than an incumbent.
- How has the business performed as a whole? Again, a question closely related to the issue of good governance. Rewarding directors in a failing business is likely to be perceived very poorly by the outside world.
- Where does your country operate? Expectations around reward can be very different in different parts of the world, even where the countries have similar economies.
Gathering the information you need to make good remuneration decisions
An understanding of all these issues – as well as an eye to governance – is essential to any board or remuneration committee wanting to make the best decisions on reward. How can you collate and access the background information you need to support your conclusions?
Many firms are finding that board portal software can help to support these decisions. A good portal can host and allow easy access to a whole range of board data, not confined to board papers or meeting minutes. Many of these corporate strategy and policy documents are invaluable in supporting remuneration decisions by providing background on culture, competitor activity, strategic objectives and governance.
If this is something you’re considering, you can download a copy of our 6 tips for choosing a board portal provider. They contain advice on selecting the right solution for your business, with key considerations to take into account. You can read a copy here.
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