What are the key factors affecting executive pay strategies in 2022?
Executive Pay | Executive Compensation | Executive | Pay Review
We are all living it - we know only too well the challenges with wage inflation and hiring of talent right now. Whilst we may think this predominantly impacts low to mid-level roles, the reality is, the same issues extend to Executive level roles too.
Overall, executive compensation has been tightly controlled following the impact of Covid-19. Pay freezes or reductions of salaries became commonplace, and pay-outs for STIPs/LTIPs were put on hold or significantly lowered in response to the financial impact on the company, or because of the inability to measure performance as the goalposts had moved. In addition, incentive plan targets changed to take account of recognising resilience in the face of the unusual situation and how Business Leaders had to pivot to ensure survival and keep employees motivated and supported.
Now we are in a fast recovery phase, executive compensation is rebounding, and looking forward to the type of executive pay strategies that will be deployed this year, there will be ground to make up for addressing the pay and bonus restrictions during Covid.
We are currently seeing a highly competitive labour market. The Great Resignation is impacting CEOs and executives, along with other mid-level professions, and there has also been a drive from CEOs and their Executives to pursue other opportunities.
Many CEOs responded to the disruption with a change in leadership and executives became motivated and inspired by the disruption and sought to actively look for new opportunities to challenge and to apply their skills to continue to make an impact. Some CEOs took it as an opportunity to take early retirement or simply take time out.
This change does allow other key talents to step into their shoes. But executive roles come with significant accountability and responsibility. Executives, particularly the CEO, oversee and build cultures that are aligned to the business strategy. Shareholder returns, profitable business and sustainable employee engagement and retention must continue to flourish - if the culture is positive, its continuation is important for long-term success. Therefore, the recruitment and retention of executive talent is critical.
Research suggests that CEO increases could be greater than 10%, particularly in technology, digital and biotech companies, as these are seeing a highly competitive labour market as the economy and companies continue to grow and receive investment. Whilst executives in slower growth or heavily impacted industries might see increases in low to mid-single digits, individual CEO pay increases will continue to be closely tied to peer competitor compensation increases.
As we are already nearing the end of Q1, most organisations would have finalised this year’s incentive plans, but generally, individual CEO plans will continue to be closely tied to overall company performance.
In terms of Shares, because it has been difficult in setting goals over a 2–5-year period, this has impacted the usage of Performance share plans. Share Options are still important for some companies, but their usage has also been in decline over the years.
Some key points for consideration:
- It is important to understand sector-based comparison groups when devising pay, plans and creating compensation packages. The composition of the comparison group is important. The group used needs to ensure that they are benchmarked against relevant firms that are similar in terms of business cycles and economic upturns and downturns.
- The period that incentive plans run over is key. Long-term predictions are difficult now. The Russian sanctions at the end of February are likely to have an impact on many organisations. This is either driving shorter-term performance or lengthier performance periods, to take account of the economic waves.
- Not relevant for most companies, but for listed businesses, they tend to use relative total shareholder return (rTSR) in some capacity in their LTIP. The use of relative matrices aims to help neutralise goal-setting ambiguity, particularly because of continued economic uncertainty.
- Plans need to consider future events, such as IPO, devesting, mergers and acquisitions. Also, consider:
- New CEO transition from either an internal promotion or external hire
- Drive to bring innovations to market
- Business operating model transformation
- Retention and external parity with other competitors
- Environmental, social, and governance (ESG) metrics are much more prominent in both short-term and long-term incentive plans. In part due to the growing influence of passive investors. With ESG now a priority, it follows that boards and shareholders ask themselves if it is important, it should influence how they reward. ESG covers several qualitative elements that the executive performance plan could consider.
ESG can have a large or small influence on any plan, but essentially it is ensuring that ESG is part of the performance conversation and reinforces key messages. If ESG needs to have greater prominence with audacious and transformative targets these may be held within an LTIP plan, as opposed to a STIP.
It comes down to the fundamentals of how the organisation quantifies ESG and what existing measures feed into ESG, such as environmental impact, employee satisfaction, safety incidents. Or is it more transformational - for example, is about transitioning into renewable technologies? Whether ESG sits within short- or long-term plans, it is about creating accountability driving the right priorities and measuring progress.
I think it is fair to say that nothing is going to settle down anytime soon. Executive pay and compensation needs to be responsive and agile, and for some companies will be complex and will fall under regulation and governance requirements. But ensuring that comparison market data is up to date and key trends are understood is key will help to lift the fog. Executive compensation is a bit daunting at times, but at the very least it should be reviewed regularly, kept relevant, be incentivising, and be aligned to business strategies, both in the short term and the long term.
If you would like to discuss your executive pay strategies for the upcoming year, please feel free to contact me, either via email (email@example.com), or call our office on +44 (0)20 3457 0894.