In this third and final part of this year’s ExCo Insights, we discuss new methods of pay design and communication with shareholders (and we clarify some misunderstandings regarding established “best” practices). Moreover, we recommend that board members and executives take a broad view of governance matters. We offer the following “Rethinks”:
1. Compensation design is fraught with “best practice” approaches that are actually often not appropriate. Companies should recognise the drawbacks of popular high-powered incentive systems with caps, should reflect on possible unintended side effects of the apparently intuitive use of “relative performance evaluation” (RPE, such as benchmarking to indices), should be wary of the risk-taking incentives of currently fashionable performance shares, and should consider using debt to complement standard equity-based incentives. Simplification – for example, granting straight-up shares rather than complex instruments such as performance shares – also has important advantages.
2. Ongoing communication with shareholders throughout the year, not just ahead of the Annual General Meeting (AGM), is essential to build trust and understanding regarding a company’s specific situation. This is particularly important given that a company also has to deal with powerful proxy advisors who sometimes use checklists and policies that management may regard as inadequate in the context of the concrete challenges a company needs to solve with incentive systems and governance choices.
We look forward to engaging in dialogue with you.
Dr. Robert Kuipers
Partner People & Organisation PwC
+41 58 792 45 30
Partner People & Organisation, PwC
+41 58 792 46 08