The recipe to successful executive remuneration

Chris Blair, CEO at 21st Century

To kick things off, what is the blueprint for a robust incentive plan? Let's delve into the architecture of an incentive plan that doesn't just throw money at the problem but truly inspires executives to aim high and achieve their best. According to our gleanings at 21st Century, such a plan should meet a few critical criteria:

1. Understanding expectations

Executives must have a crystal-clear understanding of what is expected from them, akin to providing a well-detailed map in a treasure hunt. This means setting out specific, measurable objectives that align with the strategic goals of the company.

Transparency is key; executives should not only know what the targets are but also understand how these targets contribute to the company's broader objectives. This could involve regular strategic alignment sessions and detailed documentation that explains how their roles impact company performance.

Clarity in expectations prevents misdirection and ensures that executives are pulling in the same direction.

2. Achievable goals with influence

Setting goals that are ambitious yet achievable is crucial for maintaining motivation and engagement. When executives see a target as within their reach and within their sphere of influence, they are more likely to commit fully to achieving it. This is about finding the sweet spot between challenging and realistic.

To ensure goals are within the executive's control, they should be based on outcomes they can influence directly through their actions and decisions. For example, tying bonuses to company-wide performance might seem logical, but if the executive's role only impacts a part of the business, their ability to influence the overall outcome might be limited, making the goal feel arbitrary and unachievable.

3. Trackable progress

Feedback mechanisms are essential for keeping executives aligned with their goals. Like a navigation app that provides real-time traffic updates and reroutes, a good incentive plan includes regular performance check-ins that allow executives to know where they stand relative to their targets.

These updates should be frequent enough to prevent significant off-course deviations and to reinforce positive behaviours continuously. Moreover, the feedback should be constructive, providing not just a status update but insights into what is working, what isn't, and how things can be improved.

4. Meaningful rewards

The rewards offered need to be desirable enough to motivate high performance. This doesn’t always mean monetary compensation; it can also include non-financial perks such as professional development opportunities, recognition, additional autonomy, or resources to support personal and professional growth. The key is to align rewards with what is genuinely valued by the executives.

Also, the size and nature of the reward should be proportionate to the effort required and the importance of the outcome achieved. For instance, major strategic achievements that can significantly impact the company's direction or financial status might warrant substantial bonuses or stock options.

5. Awareness of negative outcomes

Finally, while aiming for high performance, it's critical that the incentive plan discourages detrimental behaviours that could undermine long-term company health for short-term gains. This involves implementing safeguards like clawback provisions or malus adjustments that can reverse bonuses or punish unethical behaviour.

Moreover, the criteria for rewards should be structured such that they promote sustainable and ethical business practices. For example, tying part of the incentive to compliance metrics, customer satisfaction scores, or employee well-being can help balance the focus between financial results and long-term value creation.

Incentive criticism

Now, onto the murky waters of incentive criticism by cracking the nut of critical analysis. There’s a perennial whisper in shareholder meetings that goes something like, “Why are we paying them extra just to do their job?” This points to a critical flaw in many incentive designs – they are perceived as either too easy or disconnected from meaningful outcomes.

The real pickle is when incentives are seen as entitlements or, worse, as "fixed pay in drag". If achieving the target is as likely as finding a parking spot at a supermarket on a Saturday morning, then it's not really an incentive, is it? The essence of an incentive is its uncertainty—the 'at-risk' component. If there is no risk, then it’s just a fancy way of saying “here’s some extra cash, don’t spend it all at once”.

Shifting gears, let’s consider whether external governance guidelines on remuneration are the haute couture of corporate governance or just last season's fads. This is where our handy Board checklist comes into play. It is a litmus test for discerning whether these guidelines are gold standards or just glitter.

• Is it simple to communicate? If it can be summed up in a snazzy acronym, it might be too simplistic.
  
• Is it overly prescriptive? If it leaves no room for tailor-made strategies, it's like wearing someone else’s suit—uncomfortable and probably a bit awkward.
  
• Does it have universal relevance? Just because it works for Silicon Valley start-ups doesn’t mean it’ll fit a century-old manufacturing firm.
  
• Is it backed by solid research? If it’s just a collection of buzzwords endorsed by industry celebrities, it might as well be a diet fad.

The goal is to ensure that governance practices are not just a fleeting trend but are actually effective and can withstand the test of time and market volatility.

Designing an incentive plan isn’t just about keeping up with the Joneses or blindly following the latest corporate governance fashion. It's about understanding what truly drives your executives and aligning that with the company's long-term goals.

So, whether you're a shareholder scratching your head at the AGM or a board member poring over remuneration reports, remember: a well-designed incentive is not just about the pay - it’s about the play. And in the grand theatre of business, the best performances are always those that are well-rehearsed, strategically sound, and, most importantly, effectively incentivised.