Industry body issues executive pay guidelines

The Chartered Institute of Personnel and Development (CIPD) has launched a set of general principles on executive pay.

The guidelines are also intended to stand the test of time, rising above some of the excessively heated aspects of the current debate on executive reward, but without losing sight of the crucial issues around risk and reward that have been thrown into sharp focus by the crisis in the financial sector.

The principles have been produced following wide consultation with reward industry experts. Charles Cotton, CIPD Reward Adviser said: “There’s been an awful lot of heat, and not a lot of light in the debate about executive pay and bonuses.”

Unfortunately, he said, the issue has been reduced to a slanging match around how much executives earn. “We need to move beyond this,” said Cotton, “organisations should focus their attention on what they need to do to ensure their reward packages support the needs of the business and its stakeholders, and to attract and retain the talent the business requires.”

He went on to say that the CIPD principles have been written by reward professionals for reward professionals working in every type of organisation in all sectors of the UK economy.

The 10 principles are:

  1. The design of remuneration plans should be clear, appropriately simple and relevant.  This helps remuneration be motivational to the executive and transparent to owners and other stakeholders. The structure and level of remuneration should enable the organisation to attract and retain key talent.
  2. The mix of fixed and variable remuneration should be commensurate with each executive’s role and level in the organisation.  They should not lead to inappropriate risk-taking e.g. incentives that drive inappropriate behaviour such as revenue growth to the detriment of profit.  Levels of fixed pay should be affordable, even in years of weaker performance.
  3. Variable elements of the remuneration package should ensure that the value of the package, in its entirety, would vary with business performance.  As incentive schemes reflect the cost of doing business, the financial impact of these should be assessed and budgeted for in advance of any awards occurring.
  4. Incentives should reward outcomes that lead to, and reflect, sustainable and measurable value creation.
  5. Remuneration Committees should act independently and be able to demonstrate that in approving remuneration policy, they have taken into account: market(s) within which the organisation operates for talent; short-term objectives and long-term strategy set by the organisation; the organisation’s structure, financial situation and foreseeable future prospects; the expectations of the organisation’s owners and other relevant stakeholders; the total remuneration package and the approach to remunerating other employees.
  6. It is important that members of the Remuneration Committee should have the appropriate skills, current knowledge, independence of thought and experience of performance management and reward. There should be written terms of reference for the Remuneration Committee and the decisions taken by the Remuneration Committee should be written down.
  7. The time line(s) over which performance and value creation is measured should be considered by the Remuneration Committee in designing the remuneration package. They should support and be in alignment with key strategic goals.  Time lines that are too long can diminish the effectiveness of incentives, and if they are too short can reward performance, which is not sustainable.
  8. Remuneration Committees should seek to understand the potential cost of remuneration arrangements over the short, medium and long term, assessing these under different performance and value scenarios, taking into account any share dilution impact if relevant.  This analysis is key to ensuring the affordability of variable pay elements.
  9. Remuneration Committees and those making remuneration decisions in general should have access to and, if necessary, call upon appropriate independent expert advice, whether that be external or internal to the organisation.
  10. 0. When agreeing remuneration decisions, Remuneration Committees should have the discretion to exercise judgement and take the broader context of an organisation into account alongside its performance, as appropriate.  This holistic view may result in decisions being taken which are to the benefit or detriment of those executives in the scope of the Remuneration Committee.

The draft document also examines the importance of the Remuneration Committee in directors’ pay, individual elements of the remuneration package, including bonuses and the issue of deferrals and contractual commitments.

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Photo: Nick Smith

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