In March 2021, FCLTGlobal published The Risk of Rewards: Tailoring Executive Pay for Long-term Success, featuring toolkits to help corporations design longer-term CEO remuneration packages and help investors engage with corporations on these pay plans in longer-term ways.
Implementation is a natural challenge for this type of work because the most evident moments for redesign – a CEO transition or a merger or acquisition event – are infrequent. Accordingly, FCLTGlobal hosted an Implementation Forum on The Future of Long-term Executive Remuneration Design on 23 September to advance the effort and broaden the range of possibilities for change.
Corporations, asset owners, asset managers, and professional services firms in this virtual meeting saw much more opportunity to act than waiting on CEO turnover or M&A activity.
One opportunity is to focus on firms that are preparing to go public. These firms are designing rather than redesigning their pay packages, which reduces the weight of inertia and offers the promise of influencing the next generation of public companies more systematically.
Crisis leadership opens a second set of opportunities to act on CEO remuneration. Specifically, crisis leadership brings the firm’s risk-taking strategy to the forefront, and it is that focused consideration of risk-taking – rather than the mere context of crisis – that marks the opportunity.
Crisis leadership begins before the arrival of a crisis for a long-term corporation. These firms use stress testing and scenario exercises to understand how their strategy performs under different permutations of risk, and the fitness of CEO remuneration will feature in these stress tests and scenario exercises because it is part of a long-term strategic roadmap. Accordingly, it can be instances of simulated crisis, rather than actual, that call attention to short-term influences within the pay plan and that enable the firm to redesign the plan proactively.
The actual moment of crisis is also part of this opportunity set. One expert argued, “It’s one you don’t want to talk about but it’s the truth that crisis yields change and gets everyone’s attention.” A Net-Zero 2050 commitment in response to the climate crisis has inherent ramifications for CEO remuneration, for instance, as do commitments to racial justice, the gender wage gap, income inequality, and many other crises that long-term, stakeholder-minded firms currently encounter. The reason is perhaps both straightforward and surprising. If “you get what you pay for,” and what you want to get has changed, it is necessary to reconsider what you are paying for – while understanding that this reconsideration may involve paying for something else or just simplifying pay and getting out of the way.
Again, deliberate shifts in risk-taking open these opportunities for remuneration redesign during times of crisis leadership. Such long-term deliberation contrasts starkly with reactive, impulsive changes to pay in times of crisis.
As we emphasize in Risk of Reward:
Remuneration committees can focus remuneration design on the long term by tailoring it for the firm’s risk-return goals, its strategic roadmap, and the behavioral tendencies of the executive in question… Remuneration committee directors have a balance to strike between encouraging long-term growth and providing stability along the way. Tailoring remuneration design can signal this balance to executives and influence the risks that they accept or avoid. Investors can support this balance through the remuneration engagement.
| Participants | |
|---|---|
| Chris Barnes, KPMG | Summer Belden, Bunge |
| Lindsay Blitstein, Wellington | Margot Fransen, Unilever |
| Gabriel Hasson, BlackRock | Allen He, FCLTGlobal |
| Randall Hopkins, Nasdaq | Michael Horne, Dow |
| Jonas Jølle, Norges Bank | Gregory Kopp, KPMG |
| Puneet Lath, Expensify | Matthew Leatherman, FCLTGlobal |
| Tanya Levy-Odom, BlackRock | Ric Marshall, MSCI |
| Caitlin McSherry, Neuberger Berman | Bridget Murphy, WSIB |
| Joel Paula, FCLTGlobal | Ashok Pillai, bp |
| Joel Posters, Future Fund | Veena Ramani, FCLTGlobal |
| Sam Rooke, Baillie Gifford | Prem Samtani, FCLTGlobal |
| Anna Schaller, Syngenta | Paul Schneider, OTPP |
| Sara Simonds, FCLTGlobal | Velika Talyarkhan, Federated Hermes |
| Eszter Vitorino, Kempen | Jonathan Wendt, Dow |
| Sarah K. Williamson, FCLTGlobal |
Long-term investors and corporations have ample opportunity to drive change in CEO remuneration design. Putting a priority on the issue will remain a challenge because so many others compete for attention at moments of CEO turnover, M&A activity, IPO, or crisis leadership. Risk of Rewards can help ease that challenge by helping long-term investors and corporations to prepare in advance, and the FCLTGlobal team welcomes the chance to engage with any investor or corporation that is ready to implement these tools. Please reach out to [email protected] for further information.
Incentive Alignment | Report
8 March 2021 - The Risk of Rewards presents practical approaches that companies and their investors can use to frame their decisions about corporate executive remuneration to support long-term value creation
Press Release
22 March 2021 - FCLTGlobal’s latest report explores the efficacy of current remuneration plans for corporate executives
Governance, Incentive Alignment | Toolkit
8 March 2021 - These tools empower companies to tailor long-term remuneration by replacing some elements now, reflecting on their long-term needs, and finally by using key decisions to redesign pay packages