Compensation models building on appropriate yardsticks and mechanisms are useless without appropriate governance.

  • When and how do we get say on pay?
  • Internal Governance
    Organization and capicity of firm level supervision
  • External Governance
    Law, codes, regulation, dialogue about remuneration

A new remuneration model can only work effectively through adequate adoption and implementation. This holds true both at the within-firm level and the across-firm level. At the within-firm level non-executives have to make sure that the compensation model is applied successfully and truthfully. At the across-firm level, there need to be processes for standard setting, updating of the model, etc. A related issue is the extent to which remuneration outcomes are disclosed so that stakeholders can monitor the firm and the executive pay. In short, beyond a yardstick and a pay mechanism, there needs to be good governance.

The distinction between within-firm and across-firm implies two ‘levels’ of governance – internal, and external.

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The successful implementation of a new reward model hinges on the quality of corporate governance. The objective of rewarding executives for stakeholder outcomes as opposed to only shareholder outcomes almost instantly and naturally begs the question to which extent broader stakeholders should be included in firm governance (of pay). We deem such representation desirable and are currently investigating innovative models for broader stakeholder engagement.

Specific to pay, a new model requires stronger governance on several fronts. First, the relative nature of performance suggests the need for a peer group. Selecting the optimal peer group is contentious, and it is indeed the case that executives sometimes attempt to use their influence within the firm to select favourable peer groups. This calls for stronger governance, potentially placing peer group selection further outside of the company. Likewise, manipulation of corporate performance could warrant claw backs – another contentious issue. This requires strong independent non-executives, an appropriate legal framework, as well as mindful inclusion of the interest of all relevant stakeholders.

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