‘Responsible remuneration’ seeks to link pay and purpose

If the way to a chief executive’s heart is still through their pay package, then it stands to reason that remuneration should be a lever for changing corporate behaviour for the better.

That is the theory behind the launch today in Davos of six “principles of responsible remuneration”, which start with the idea that a company’s pay policy should “reflect and support its commitment to its stated purpose and values”.

The initiative’s backers, who include André Hoffmann, vice-chair of pharmaceuticals group Roche, and Colin Mayer, professor at Oxford’s Saïd Business School, hope organisations will sign up to the principles as a first step towards linking pay to long-term financial, environmental and social impact goals.

Frederic Barge, managing director of Reward Value, a non-profit research foundation that has developed the principles and the research behind them, said he expected signatories to take concrete action. “If we just add an ESG sticker to current practices we’re not going to solve the issue,” he told Moral Money at Davos.

Barge pointed to companies such as DSM, the ingredients and bioscience group, which has made “strong progress” linking remuneration and purpose, and Nestlé of Switzerland, which he said was taking the first steps towards establishing such a link.

The principles commit signatories to focus on broad sustainable performance, impact, “long-term value creation, over short-term financial results”, engagement from multiple stakeholders, and transparency.

Still, the initiative faces a number of challenges persuading companies, investors, remuneration consultants, and proxy advisers to come on board. Many are still geared towards the existing system of shorter term financial targets and incentives. Pushback against “woke” capitalism, particularly in the US, may deter boards from signing up. Chiefs are also notoriously touchy about anything that affects their own pay and bonuses.

An FT analysis in 2021 of how companies were linking climate targets to executive pay uncovered some scepticism. One danger, critics said, was that companies might game the system by implementing “less rigorous programmes with easy-to-hit targets”. Another wider question is whether executive pay is even the right lever to force the profound action necessary to arrest climate change and address other social priorities.

Adopting responsible remuneration requires “systemic change”, Barge acknowledged, but “companies need to take these steps now rather than waiting until the dust has settled”.