Executive reward arrangements are critical to driving performance, yet these are often the most complex – and consequently the most difficult – to understand. Having a well-designed executive reward strategy is not enough – it must be communicated effectively.
Executive remuneration can be worth many multiples of salary, which, alongside the potential value of outstanding long-term incentive plan (LTIP) awards, should be a great motivator and retention tool for companies. Yet how many executives fully understand the make-up of their reward packages, let alone understand their true value, what drives this value and when it’s likely to pay out?
Executives already receive a plethora of reward communications covering pay reviews, payouts on last year’s annual incentive, this year’s incentive targets, LTIP awards, vesting of past LTIPs, etc. A high-quality executive reward statement would help them pull it all together to get the full picture, and could even be used to replace some of the traditional annual reward communiques.
Having rolled out executive reward statements for two global companies in the past, I am acutely aware of the challenges faced in undertaking such an exercise, including:
- The board and remuneration committees tend to focus on reward strategy, plan design and quantum. Implementation and communication are rarely given the same attention.
- Producing bespoke executive reward statements is a notoriously difficult exercise, not least because of the complexity of executive reward and the number of decisions and assumptions that need to be made.
- Executive reward data will likely be held in several systems, including those outsourced to external providers.
- The value of an executive’s reward can go down as well as up, because of the impact of performance reward. This throws up some interesting communication challenges, which some companies might prefer to avoid. It is better to tackle this head on, to ensure that the changes needed to improve future performance are made.
- The company may not have the internal expertise or resources to manage the exercise.
None of these challenges are insurmountable with the right support.
While there is no set template for what an executive reward statement should look like, it should ideally cover:
- the value of each element that makes up the package;
- how this value varies under differing levels of performance;
- the timing of when the payments are made;
- additional information on how the various plans work; and
- the current status of the various performance conditions.
This could be achieved by evaluating last year’s reward, this year’s reward and the value of all outstanding LTIPs. Having an example statement to act as an initial template on which to build can be very useful and provides a helpful framework for the various decisions that need to be made. The statement should be tailored to the individual executive so that it only covers those reward elements the executive has – a boilerplate approach will not work.
As an annual exercise, executive reward statements are an invaluable tool to aid executives’ understanding of their own reward, but can also provide the basis for other improvements in communications; for example, in helping to explain how the reward strategy supports the corporate strategy and thus aligns the executive’s interests with those of the company and its shareholders.
They can also be used to aid recruitment, act as a retention tool and even help explain changes in reward strategy and plan design.
Graham Middleton is a director of G & C Middleton