Board Agility – Oiling the Machine

Since 2008, the charged executive remuneration debate has been a constant. It is not going to get any easier and may be about to get even tougher, with the AGM season this year promising to be the most difficult so far.

Against this backdrop, we focus here on the attributes that best-in-class HR Directors and Heads of Reward display in shaping the remuneration agenda with the Chair of the Remuneration Committee (‘RemCo Chair’).

Purpose and pay

Companies are now expected by stakeholders, and society at large, to demonstrate their values and purpose and fairness in pay is often the forerunner for judging whether they live those values. Meanwhile, as the UK faces a challenging economic environment and grapples with the impact of high inflation, politicians and investors are urging companies to show pay restraint.

The global battle for talent

Yet UK businesses face fierce global competition for talent, particularly in a post-Brexit environment. Businesses in every industry must transform to be relevant in a digital world, whilst also demonstrating ESG credentials. The pressure towards pay restraint in the UK, along with the current exchange rate, put UK PLCs at a severe disadvantage – particularly, for instance, when seeking to hire talent from the US. Add relatively new challenges into this complex mix – such as how to tie compensation to the attainment of ESG targets and improvements in corporate culture, rather than linking pay solely to financial metrics – and the RemCo Chair has an extremely demanding, if not near impossible, task.

It is therefore more important than ever that HR Directors and their Heads of Reward step up to help confront these new challenges. We have observed that the best individuals display four qualities that set them apart in their work, as they deliver tangible value to the Remuneration Committee. Their value to their organisations will only increase over the next few years.

“…the best individuals display four
qualities that set them apart…”

1. Strong independence

   The HR Director/Reward Director needs to be trusted by the CEO, RemCo Chair, and other key executives, but it is crucial they are not seen to be in anyone’s pocket.

   One criticism commonly made of HR Directors is of being too close to the CEO. The independent HR Director, coupled with first class judgement, is key. The HR Director, in conjunction with the Reward Director, must be a person who has an exceptional understanding of the internal and external landscape. They must be able to perceive, for example, when a proposal for CEO pay is likely to go down poorly; and brave enough to speak up. In other words, they need to be the conscience of the company when it comes to reward: able to advise not just on what’s possible, but also ‘fairness’ between an Executive Directors’ compensation and the wider workforce.

2. Best-in-class insights: bringing the outside in

   The RemCo Chair is now expected to opine on a broader range of topics: not just on what the CEO and senior executives should be paid, but on how compensation drives a sustainable culture and outcomes.

   More than just the figures
   HR Directors/Heads of Reward must be able to contribute more than just numbers and metrics about the financial factors that have traditionally determined compensation. They should be able to articulate a philosophy of pay, and the practical application of it, which accounts for priorities that include ESG, diversity, and employee well-being in remote-enabled environments. These are not straightforward to devise and measure, in comparison with more traditional financial metrics, but are increasingly expected by both internal and external stakeholders. Picking the right performance measures, and target setting for these measures that determine incentive payouts for the CEOs single figure, is critical.

   Connection across the market
   The best HR Directors/Heads of Reward are exceptional at leveraging their networks, and are differentiated by the quality of their market insights. In an increasingly global talent pool – and with challenging markets such as the US and Asia continuing to dominate – the quality of perspectives and data they bring to the table have a direct impact on their influence with the RemCo Chair.

3. Building a trusted partnership with the RemCo Chair

   A subservient relationship is too often the default, but is really in nobody’s interest

   The Board want their annual report on remuneration to receive 80% of votes in favour; anything less invites a negative headline and a return to shareholders. HR Directors, and their Reward Director, have a pivotal role in helping the RemCo Chair understand the dynamics and politics in play internally and externally around performance and pay and the resulting quantum.

   Besides the annual remuneration report, there is the matter of the three-yearly remuneration policy. Policies will need to reflect a strong alignment of pay with the strategy of the business while also being motivational for the participants. Getting the balance right requires strong strategic and commercial awareness coupled with a trusting relationship with the CEO. Best-in-class HR Directors work with their Reward Directors and build a relationship with the RemCo Chair which, in this reputationally sensitive area, is based on high trust and a recognition of mutual dependency.

4. Astutely navigating the chain of influence

   In many organisations there is an intricate chain of influence that needs to be navigated, running from the Reward Director to the HR Director to the RemCo Chair to investors, proxy agencies and, of course, including the CEO.

   The best-in-class Reward Director understands the importance of careful planning to navigate this chain. They act as a bridge between the CEO, the HR Director, and the RemCo Chair. By operating skillfully and well ahead of time, they partner with the RemCo Chair for multiple discussions with investors, anticipating expectations. However, they also recognise that RemCo Chairs may only have one chance to sell the proposal to investors; and they need time to craft a compelling argument to maximise success in conversations.

Market analysis

We have analysed the market for Group HR Director and Group Head of Reward talent below, with the following key findings:

This is the second piece in our series looking at the role the Company Secretary, Head of
Internal Audit and HR Director/Head of Reward play in facilitating smooth decision making
at Board level. Read about the Company Secretary here.