Remuneration in turbulent times

Source: Management Scope (10/06/2020); Author: Xavier Baeten

The expression ‘never waste a good crisis’ has already appeared on several occasions in recent weeks. Decisions that directors take now can help to make companies future-proof, with the added benefit of strongly embedding them in society.

In my opinion, it would be courageous to take advantage of this crisis to rethink corporate remuneration policies. At present, the bonuses for top executives are still mainly shaped by profits and share prices. I think the coronavirus crisis – a time when profits are already under pressure – is a good moment to think a little more deeply about what we actually want in terms of executive rewards. Not so we can still pay bonuses in spite of everything, but in order to bring them much more into line with the company's strategy.

Simplification

A remuneration policy should not only improve companies’ competitive position on the labour market, but also make clear choices and be transparent about them. In this context, I see an evolution: companies are increasingly having to earn their licence to reward, not least because quite a few stakeholders are watching – many more than before.

Finally, significant efforts must be made to simplify executive rewards. Many systems are too complex, raising questions about what behaviour these systems will ultimately give rise to. And speaking of behaviour, why not take the personality characteristics of the CEO into account when determining the composition of the package? So far, this happens either rarely or not at all. This isn’t right, because a CEO with excessive self-confidence may take excessive risks if this could also lead to a large proportion of variable remuneration.

Moreover, many companies’ remuneration policies currently lack vision. They often amount to little more than a mathematical formula. If the profit target is reached, the bonus is paid. This kind of formula leads to strange phenomena. For example, American scientific research (Balsam, Irani, Yin) among CFOs showed that directors usually made sure they always just achieved the targets. So what would have happened if the targets had been higher or lower?

Looking beyond financial targets

A healthy remuneration policy will also have to look beyond financial targets alone. Not that they should be ignored, of course, but I do advocate a more balanced approach. Corporate social responsibility or sustainability performance could easily be taken into account in a company's bonus policy. Bonuses could be linked to the translation of the of United Nations’ relevant corporate sustainability objectives. Improving customer satisfaction or service orientation, the net promoter score or innovative strength of a company could certainly also be taken into account. Scientific research (by Flammer, Hong and Minor) has demonstrated the positive impact of doing so: the integration of sustainability measures leads to a stronger long-term focus, better environmental performance and an increase in firm value. Although some companies have taken this path, more work appears to be required when it comes to thinking about the strategically relevant sustainability criteria.

Clear and in line with the strategy

In brief, the remuneration policy of the future must tie in with the strategy and purpose of the companies concerned. Which values do we represent? Which associated behaviour do we want to see and (additionally) reward?

Fortunately, a number of companies seem to be taking the right turn – particularly companies that have learned from the past. In ING's most recent annual report, the Supervisory Board openly admits that the bank has not always got it right in the past. Lessons have now been learned from this. Extensive research has been carried out at ING. Talks were held with virtually all stakeholders, such as the works council, the government, De Nederlandsche Bank, the European Central Bank, institutional investors, proxy advisory firms and associations that defend shareholders' interests. As a result, ING's remuneration policy is now transparent, clear and in line with its strategy.

Supermarket group Ahold Delhaize establishes a very clear link with the strategy in its remuneration report. The company focuses on sustainability and has translated this into long-term incentives. Other important factors include reducing food waste, reducing the use of plastic and reducing CO2 emissions. In turn, the growth in online sales serves as a strategic indicator for determining the bonus.

The supervisory board should stick its neck out

Drawing up a good remuneration policy is one of the Supervisory Board’s most important tasks. The board should not simply copy and paste a competitor’s bonus policy. Directors must not only be inspired by the dictates of the market, but must also have the courage to add their own touches. Together with the Supervisory Board, the Executive Board will need to examine the company's priorities, its purpose and the appropriate strategy. The bonus policy should reflect this. Customised to suit each company, with a different ‘basket of benefits’. The current crisis can now serve to speed up the discussion on this matter. It’s time for the supervisory board to stick its neck out.

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