Aligning executive pay with strategy

Understanding of one’s own pay helps in consistency of actions and business

The global socio-economic and political climate is undergoing tremendous change. Organisations are trying their best to adjust strategies while leveraging opportunities and mitigating risks. Those who are driving business strategies to success or failure are the CEOs, executive directors and key management personnel. Their selection, remuneration and job conditions have naturally come into focus. Volatile performance, corporate governance issues, scarcity of top management talent, complex environments, have underlined the need for a robust compensation strategy for executives.

Based on our research, the total pay has increased for India-based CEOs by over 70 per cent in the last three years and close to 50 per cent for executive directors. Although there is a positive relationship between increase in the executives’ pay and increase in revenue, the growth isn’t proportional. Also, it varies across sectors in India. The pay for CEOs and executive directors in the private sector far outstripped that of public sector executives in the last year. A related issue is the sense of equity on how pay varies between and across levels in big organisations.

From an overall context, the issues are scarcity of talent at the CSuite level and the risk of wrong selection at this level. There is a need for talent who can manage and consistently deliver shareholder value. Regulators have also tried to build guidelines to manage executive pay to protect shareholder interest and pay-equity transparency.

The Companies Act 2013 has laid down some important guidelines for the appointment and remuneration of key managerial personnel. It links whole-time directors’ pay with company operations, profit and size. It also talks about various disclosures a listed company has to provide on directors’ remuneration. Sebi has also issued guidelines around executive pay focusing on equity-based compensation. Mandatory disclosures call for more transparency.

Different countries are either thinking of or enacting laws to encourage disclosures of not only quantum but also pay devices, the rationale for pay decisions and pay ratios. In developed countries, regulations have brought the focus on transparency through corporate disclosures. In India, there were historically no mandatory requirements on pay ratios but companies have started providing these disclosures in their annual reports in line with Section 197 (12) recently inserted in the Companies Act.

Well-designed performance incentives including equity compensation can improve manager/shareholder alignment. Organisations are focusing on “pay for performance” and equity compensation ensuring executive and shareholder gains are aligned. We are seeing a trend in companies working to personalise broad employee compensation plans by function, level, geography and increasingly individual. They are working to improve the communication and understanding of those plans — senior executives are included in these.

Without a proper understanding of their own pay, employees and managers will not be properly incentivised or know what behaviours and actions are consistent with the overall business strategy. Director, rewards, talent and communication, Willis Towers Watson India Executive practice leader, Asia Pacific talent and communication, Willis Towers Watson