Keys to driving performance through executive compensation

The more that pay is linked to share price and to relative performance, the harder it is for executives to be genuinely motivated and feel they can have line of sight to drive performance, according to an executive compensation expert.

Towers Watson’s global leader for executive compensation, Mark Reid, said research has found that there is suggestion of a strong link between pay and performance at the executive level.

“Whether it is a backward causal link, pay is aligned to performance rather than pay is driving performance,” he said.

“I think the governance concerns around doing the right thing and ensuring that pay is not inappropriate have perhaps weakened the direct motivational link for senior executives.”

Another executive compensation challenge is the potential disconnect between actions at a board level, and the performance of the company, according to Reid.

“The particular challenges come when there’s some form of disconnect. So where you think an executive’s doing the right things and performing well, but the corporate performance isn’t yet showing it,” he said.

“That’s a tough situation in terms of the shareholder’s perception of performance and the broad perception of performance.”

Angelica Decena, a senior consultant with Towers Watson’s executive compensation practice in Australia, also said this trend had impacted the market in a number of ways.

“Because of recent disclosures, we’ve either seen pay freeze by the board for the executives or even if any increases are applied, it’s quite limiting, up to 2 per cent,” she said.

“Also, in terms of an incentive perspective, companies have started shifting a bit more pay further at risk.”

“The quantum of incentive pay is not as great as it is in Europe and the US”

While executive compensation in Australia is not without its challenges, Australia is quite sophisticated in its approach compared to other countries.

“The governance model [in Australia] is among the most evolved in terms of the structure and the professionalism of remuneration committees, in terms of the disclosure regime, and in terms of the rights stakeholders have to have a say on the design of pay,” said Reid.

“I’d put [Australia] in the same category as the UK and the US.”

Maggy Fang, MD of executive compensation Asia Pacific for Towers Watson, agreed, and said that Australia was at a leading level of maturity in the region when it came to transparency around disclosure as well as reporting requirements.

There are a few key differences, however, between Australia and other countries like the UK, US and Asia Pacific.

“Where I would see some difference, I think that pay mix in Australia is still much more fixed-pay focus. The quantum of incentive pay is not as great as it is in Europe and the US,” said Reid.

In comparing the portion of equity incentive as part of total direct compensation of executives locally with other markets such as China, Japan, Hong Kong and Singapore, Fang also said Australia has the highest proportion of compensation of executive using equity.

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