The Role of the Go-Between in Executive Remuneration

The worldwide financial crisis opened the floodgates of discussion about executive compensation and the role it played. The debate and discussion continues unabated as media, government and statutory bodies thrash out the what’s and wherefores of remuneration policy while the public grows more incensed at the number of Executives who are being handsomely compensated despite poor company performance.

The As-Is of Executive Remuneration

Large listed organisations are currently operating a number of different long and short-term variable compensation plans, whereas prior to 2004, the two most prominent schemes were almost exclusively a share option plan and a discretionary annual bonus plan.

However, there is increasing pressure from institutional shareholders, media and governance forums for the introduction of corporate performance targets on long-term incentive grants. There is a movement away from discretionary bonus plans to target based plans were specific performance requirements and contingent reward outcomes are set in advance. The targets for this type of remuneration are both quantitative and qualitative and begs the question of’ how did the executive earn it’.

The To-Be of King III

The King III Code on Good Corporate Governance in South Africa contains principles that have significant implications for executive remuneration and disclosure. King III applies to all entities regardless of their incorporation and responsible companies will be embracing it and not merely complying with the stated policies.

The implications of King III will ensure that remuneration committees are progressively more informed and equipped to make strategic decisions on remuneration. Furthermore, remuneration policies will become more aligned with a company’s strategy, reviewed regularly and linked to the executive’s contribution to company performance and shareholders will be invite to participate in discussion of remuneration of executives.

What can Executives expect from a remuneration committee regarding their compensation? Nick Icely of Deloitte Consulting suggests that the following considerations be taken into account by all Remuneration Committees:

  • Executive remuneration should be a fair level of guaranteed pay, defaulting to median market positioning unless very special circumstances exist.
  • Executives should be challenged and rewarded for above median performance.
  • A reasonable level of retention for a constant median performance should be rewarded
  • Executives should be challenged and handsomely rewarded for consistent upper quartile performance

While guaranteed pay will continue as an entitlement – supplementary, variable pay will become a privilege, predominantly afforded to executives but one that will need to be earned.

 

The role of Executive Search in Executive Remuneration

According to research (Nienaber & Bussin, 2009), while a monthly salary and guaranteed remuneration is an attractor for executives, while performance and career management are both motivators and retention factors for executives, in that order.

Whereas in the past, Executives being ‘head hunted’ could expect a 25% increase in remuneration, in a subdued market, executives can expect between a 12 – 18% increase in remuneration. The draw-card for moving is now firmly placed on the prospect of future growth and enhanced incentives.

The role of the Executive Search consultant is to manage the expectations of both their client and their candidate, ensuring that the executive remuneration package is fair, equitable and transparent for both parties. The remuneration must be fair compensation for qualification, experience and the anticipated complexity of work, whereas the package must be affordable to the company and aligned with the company’s strategic intent and the individual’s personal performance.

Executive reward is earned by individuals for bringing to and applying their skills in the organisation and for focusing on and achieving both operational and long term sustainable performance. Truly skilled executives will outperform their peers over sustained periods of time and should be rewarded for that.

Executive compensation should be attractive to executives, affordable to the company, proportional to the executive’s contribution, fair to shareholders and employees, provide payouts clearly aligned with actual performance and compensated for accomplishments instead of general industry trends.

For additional information please contact Annelize van Rensburg or Auguste (Gusti) Coetzer.

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