The critical thing is to be clear what the key drivers are in your business. What are the board-level accountabilities? Getting that right is the priority, not the actual levels of pay. Shareholders will vote with their feet if they dont like what you are doing with the company.
Its vital not to fudge these accountabilities. You really need to be clear on this before you start talking about pay and incentives. What is the real economic engine? You can then link your business objectives to measurable targets. If the overall direction of the company is right, the board will be earning their pay.
People like to try to incentivise executives around things you can measure easily and quickly. The problem is that then there is a tendency to drop the measures that arent looking good and find others when it suits you.
Simon Patterson, head of executive compensation practice, Mercer Human Resource Consulting
New rules on transparency have certainly had a big impact, and a lot of attention is being paid to how performance is being measured and rewarded. Weve had a lot of discussions with clients about this.
Looking at total shareholder return over a five-year period may be a useful comparison in some cases, but in others it is not a very good indication of how a company may be performing. You have to ask where they were starting from, and what this management team has actually achieved. Management decisions may take three years to deliver. Perhaps the incumbent management had little to do with it.
Pay is becoming more globally integrated. What happens in the US has a big impact over here. And the level of shareholder activism is much higher than at any time I can remember. Two years ago certain deals would have been nodded through. Now the response is more unpredictable. The quality of remuneration committees has a big part to play in this. The question to ask is whether your committee is just following the market.
Ruth Lea, head of policy unit, Institute of Directors
Of course we have always said that pay has to reflect performance but thats easier said than done. There have been abuses to the system. Part of the problem may lie with remuneration committees. Not everyone can be in the top 50% for pay, and the committees should be making this clear. The irony here is that transparency has actually made things worse. People know what everybody else is getting.
Sometimes the big pay-offs that attract attention are quite understandable. If there has been a merger between two companies you may not need two finance directors, for example. The point is to try to avoid some of these pitfalls when you are drawing up contracts in the first place. This, too, is easier said than done. And dont forget you have got to attract people who are prepared to do these high-risk jobs.
Share options can be abused, clearly, although the worst excesses have been in the US. These options actually played a part in the rush to buy shares that has now turned into a downturn. We do need to recognise that there is an international market for directors and they have to be paid a market rate.