Balancing decisions on executive reward
Decisions on what to do with levels of executive reward can be tricky at most times. But with the current environment presenting an unprecedented set of challenges, deciding on the best course of action this year is probably the toughest it has ever been. Remuneration Committees across the sector face difficult decisions, with many factors impacting reward and pulling organisations in different directions.
With the remuneration review time of year upon us, these are the key areas Remuneration Committees need to consider debating.
The key upward pressures on remuneration this year include:
- Inflation – Continues to be more than 10% and is resulting in the current cost of living crisis. Inflation is a key reference point for pay negotiations across all sectors; with pay settlements offered below inflation, we are witnessing the highest levels of industrial action since the 1970s. However, compared to staff on lower pay levels, executives are not as directly exposed to the pressures of the cost-of-living crisis. Likewise, there are forecasts that inflation will begin to settle and reduce over the coming months. As a result, the pressure may decrease in the medium term.
- Recruitment market pressures – Competition for staff has cooled slightly compared to the heights of 12 months ago. There are still real pressures and competition in the sector at an executive level for Chief Executives and individuals focused on professional areas such as Transformation, Finance, Technology, and Strategic Asset Management. Organisations will be keen to ensure that their remuneration levels enable the recruitment and retention of Executives in a competitive market.
- Risk of losing key staff – Losing a critical senior staff member should not be underestimated. Whilst you can usually replace lost skills in time, it is more difficult to replace the lost tacit knowledge and experience held by an individual. Likewise, there is typically a gap between losing one individual and bringing in another, which can impact the successful delivery of any major programme. A concern for any organisation’s risk register should be the loss of key staff. Appropriate remuneration levels are a necessity to mitigate that risk.
With these areas in mind, there are crucial arguments for executive remuneration levels to keep pace with the market. However, there are also significant downward pressures to consider, such as:
- External scrutiny – The sector has been under significant external scrutiny concerning examples of poor service provision for customers, which has not helped with media, social media coverage and political interventions. As a result, a significant increase in executive remuneration is likely to lead to challenging public relations and reputational issues.
- Challenging economic environment – With inflation more than 10%, interest rates above 3.5%, forecasts of a recession and unemployment hitting 5.0%, not to forget the 7.0% rent cap, which has widely been welcomed by the sector, clearly most will still be needing to make cutbacks of some form. These factors all create challenges around affordability, but also a risk that any increases in executive remuneration could be juxtaposed to the economic climate.
- Experience of stakeholders – This primarily includes staff and customers experiencing the sharp end of the current cost-of-living crisis. There are increasing reports of staff in the housing sector needing to access food banks. Whether right or wrong, there are already deep-held views amongst stakeholders on the levels of executive remuneration, which could be further compounded by increases at this time.
This summary presents a challenging situation. But what are we seeing?
It is crucial to state that there is no one-size fits all approach to deciding what to do with executive remuneration this year. Every organisation needs to make their own decision against its context and drivers. That said, we can see an overall leaning towards restraint with executive awards, but that is not to say that some individual organisations will take a different approach. We are also expecting to see some organisations take quite different approaches for different groups of staff, for example, potentially awarding lower increases for executives whilst increasing rates for other staff at higher levels.
As mentioned above, this year presents a tricky set of circumstances for organisations on executive remuneration. We advise that when organisations make their decision, they need to ensure that the governance process is robust and that there is transparency in how the decision was formed. Have a look at what you should include:
- Independent advice on market data, as well as the context in which the decision should be made
- Adequate time for sufficient debate and discussion around the information available and the wider context
- A clear reference to what is being awarded to staff across the wider organisation
- Consideration of the risks and potential unintended consequences of the decision which could be made
- If significant changes are chosen, then a clear narrative should be developed to explain any decisions.
For support and guidance on reviewing levels of executive, NED or staff level reward, contact Julie Leo.
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