How to Clearly Articulate Executive Reward Strategy and Principles for Organisational Success

Author: Sarah Jefferys

Organisations large and small across every sector are turning their attention to executive remuneration in the second half of this year. Gallagher’s Reward Consulting team has seen a recent increase in enquiries about executive remuneration, which has raised our interest in what is going on in this space.

Executive pay continues to be heavily scrutinised, especially since the introduction of the CEO ratio reporting requirements. With the focus on greater pay transparency, as embodied in the EU Pay Transparency Directive 2023, this is set to continue for the foreseeable future. So, what is the right approach to managing executive pay?

CEO remuneration versus average worker pay

As a backdrop, according to annual research from the High Pay Centre, the average CEO pay is now 118 times that of the average worker in the UK, compared to 108 times in 2021¹.While you do hear of high-profile extreme examples where people are taking their pay ratios really seriously, they tend to be few and far between. One such example from 2015 is when Dan Price, the CEO of a Seattle-based credit card processing company, reduced his own pay from $1 million to $70,000 in order to move the minimum wage of all his employees to $70,000. The move got his company a lot of publicity and translated into strong, sustainable business results. According to a 2018 article in Harvard Business Review they have seen revenue grow and their customer base expand over the longer term². This case inspired other CEOs to think about how they pay and treat their workers, with positive results.

Looking at executive pay from a gender equity angle, the news is bad and good. Only eight Financial Times Stock Exchange (FTSE) 100 companies have female CEOs, according to data in the last reporting cycle³. Of the companies that had a female CEO for the full financial year, the median single figure of remuneration was £3.91m, which is equal to the average salary for all FTSE 100 CEOs in 2023. So on a positive note, the data indicates that there is no obvious gender bias in CEO pay within the FTSE 100.

Leverage pay transparency to avoid the ‘red’ list

Organisations can face reputational damage if they are not clear with their approach to all remuneration in their remuneration resolutions. For the 2023 annual general meeting (AGM) season, Investment Association’s Institutional Voting Information Service (IVIS) awarded a ‘Red Top’ to 10% of companies in the FTSE 250 for their remuneration resolutions⁴. This indicates the highest severity of issues to be considered and leaves them open to greater scrutiny.

Under such examination, companies are looking to demonstrate a level of restraint with executive increases, being mindful of current economic pressures facing the wider workforce. Such was a finding of the Deloitte’s 2023 Remuneration in FTSE 100 companies⁵. Greater scrutiny of quantifiable metrics, linked to organisational performance, tied with longer-term strategic business priorities continue to dominate discussions at many remuneration committee meetings. Across the UK, our team sees committees emphasize alignment of executive pay with investor interests and stronger corporate governance.

What can you be doing to help ensure no ‘Red Tops’ in your organisation, whatever its size?

Ensuring you have a robust reward strategy, supported by overarching reward principles, is key to driving greater transparency across the organisation and with external stakeholders. Clear documentation of pay and incentive principles with the support of your remuneration committee is crucial. As part of this, ask the following questions:

• Have you sourced appropriate sector-specific data, and do you make use of a meaningful comparator basket of companies when surveying the market?
• Have you clearly stated your preferred market position? For example, are you a median market payer, or do you position pay or total reward at the upper quartile?
• Have you clearly defined measures within your short- and long-term incentive plans, considering both what needs to be achieved and how this will be delivered?
• Do your incentive plans reflect the appropriate risk appetite of your organisation and are the plans aligned with corporate governance best practice?

Ultimately, organisational leaders must ensure that executives, supported by their boards, create an environment for growth and innovation. Clearly articulated executive reward strategy and principles will help drive the business, and ultimately that of the wider UK economy, forward so that all can benefit.

Gallagher’s Reward Consulting team can help you ensure you translate your reward strategy into a coherent, meaningful set of principles to manage executive reward now and into the future. Contact us today and speak with a qualified consultant to learn more.