The world is becoming more conscious. Social movements have prompted a greater call for transparency and accountability from governments, boards of directors, employees and society at large. Increasingly, these stakeholders are focusing on executive pay: How it is awarded, what it is rewarding, and whether that reward is earned.
For example, the 2022 proxy season saw increased scrutiny in typical key areas, including poor disclosures, one-time special awards, changes to in-cycle long-term incentives and responsiveness (or lack thereof). WTW expects that, going forward, this scrutiny will tighten. Though investors and proxy advisors understand the current market volatility, there is an expectation that companies have established guiding governance principles to move forward in both good times and bad.
While the “E&S” of Environmental, Social and Governance (ESG) are receiving attention, WTW believes the big “G” is always important, and not just during challenging times or when the investor spotlight is on. Those companies and compensation committees with a strong track record and a good governance framework tend to be viewed more favorably by investors and proxy advisors over time — whether it pertains to robust goal setting, responsiveness, limited evidence of problematic pay practices, or adjustments to prevent or mitigate windfall gains during market rebounds.
Understanding the importance of ESG goals, the Remuneration Committee (RemCo) of a large North American-based life insurance and retirement company wanted to take a closer view of the way it was rewarding its executives. To achieve these goals, the organization first reached out to WTW 3 years ago for a customized analysis of executive pay by benchmarking its programs and practices against its peers.
Initially, this analysis was vital for the organization to stay on top of salary budget planning amid ongoing economic volatility. Today, what is now an annual exercise has become more complex due to global labor and fiscal challenges, including attracting and retaining key talent. The analysis reviews peer company practices more broadly as well as ensuring the fairness of plans against the full employee population.
The regulatory environment is demanding more transparency from organizations, and this is happening in markets around the world. At the executive-pay level, transparency can also be a turning point for an organization’s reputation, directly affecting corporate performance as well as the ability to attract and retain both talent and clients. After all, perception is reality, right? One way to fortify an organization’s reputation is by providing transparency, particularly for its financial decisions.
To ensure its salary budget and pay decisions were fair to all employees as well as aligned with the company’s philosophy and values, the insurer’s RemCo reached out to WTW to conduct a holistic review of its executive pay plans. It specifically wanted WTW to focus on peer benchmarking for the:
WTW conducted a “highest paid” analysis to show pay data for the top 10 highest paid executives. Typically, standard survey results only show the highest paid by actual total cash compensation (TCC) for top executives, but the RemCo wanted to compare the company’s executive pay data with industry peers.
Armed with years of industry expertise and a deep understanding of the organization, WTW identified a relevant set of peers and delivered a custom ranking report that showed full pay statistics for each top paid executive in the industry, plus comparisons for TCC, target total direct compensation (TDC) and long-term incentives (LTI).
In response to the request for sum of total pay for the top 3, 5, 7 and 10 executives, WTW provided an analysis of different pay elements, including base pay, target total cash and direct compensation. The results were split into different peer groups such as ownership types (e.g., mutual, private, public) to provide a deeper view into peers’ pay-related decisions.
Tasked with goals and accountabilities that impact an organization’s long-term growth and success, getting executive pay right, including ensuring it is market competitive, is critical. The RemCo understood that if they did not manage executive pay effectively, it could result in costly implications both internally and externally.
By taking a custom and extended approach to reviewing its executive pay practices, the RemCo was able to validate its spending actions and identify areas where the overall total compensation budget needed to be adjusted to avoid expensive losses. By requesting this data annually, they also are ahead of evolving executive pay practices and regulatory requirements. Perhaps more important, though, by having a clear understanding of the market situation as well as the organization’s goal to practice pay transparency, the RemCo is empowered to set a more attractive and defensible talent strategy.
Whether it’s the economy, health crises, political issues or any other crisis that arises, adaptability and staying attuned to market influences will be organizations’ key to survival. Being proactive in obtaining the right data for executive pay plans – whether it’s robust salary data, state-of-the-art compensation software technology or experts that provide tailor-fit solutions – is crucial in overcoming the challenges brought on by change.
