HR directors and remuneration committees can dip into draft guidance on executive pay published by the Chartered Institute of Personnel and Development (CIPD).
The set of principles, produced following wide consultation with reward industry experts, is designed to act as a framework to aid those developing executive remuneration policies, practices and structures.
They test executive remuneration practices, and represent the CIPD’s view on how executive remuneration should be structured, irrespective of an organisation’s sector or business model.
According to the CIPD, the guide rises above some of the excessively heated aspects of the current debate on executive reward, but without losing sight of the crucial issues around risk and reward.
Charles Cotton, CIPD reward adviser, said: “There’s been an awful lot of heat, and not a lot of light in the debate about executive pay and bonuses. Unfortunately, the issue has been reduced to a slanging match around how much executives earn.
“We need to move beyond this – organisations should focus their attention on what they need to do to ensure their reward packages support the needs of the business and its stakeholders, and to attract and retain the talent the business requires.”
The 10 principles
1. The design of remuneration plans should be clear, appropriately simple and relevant.
2. The mix of fixed and variable remuneration should be commensurate with each executive’s role and level in the organisation.
3. Variable elements of the remuneration package should ensure that the value of the package, in its entirety, will vary with business performance.
4. Incentives should reward outcomes that lead to, and reflect, sustainable and measurable value creation.
5. Remuneration committees should act independently and be able to demonstrate that in approving remuneration policy, they have taken into account the:
- market(s) within which the organisation operates for talent
- short-term objectives and long-term strategy set by the organisation
- organisation’s structure, financial situation and foreseeable future prospects
- expectations of the organisation’s owners and other relevant stakeholders
- total remuneration package
- approach to remunerating other employees.
6. Members of the remuneration committee should have the appropriate skills, current knowledge, independence of thought and experience of performance management and reward.
7. The time line(s) over which performance and value creation is measured should be considered by the Remuneration Committee in designing the remuneration package.
8. Remuneration Committees should seek to understand the potential cost of remuneration arrangements over the short, medium and long term, assessing these under different performance and value scenarios, taking into account any share dilution impact if relevant.
9. Remuneration Committees and those making remuneration decisions in general, should have access to and, if necessary, call upon appropriate independent expert advice, whether that be external or internal to the organisation.
10. When agreeing remuneration decisions, Remuneration Committees should have the discretion to exercise judgement and take the broader context of an organisation into account alongside its performance, as appropriate.
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