A Question of Priority: How Should Remuneration Committees be Spending Their Time?
Posted by Gerard Leider and Tom McNeill on January 5, 2025 in Thought Leadership
As seen in Chief Executive Officer Magazine 2025 – Solving the Remuneration Riddle Feature
It often feels as if many constituents have their eyes trained intently on the work of the remuneration committee, each with its own perspectives and concerns. Shareholders, proxy advisors, regulators, competitors, media outlets and other stakeholders each look through their own unique lens when seeking alignment of executive pay and company performance.
The goal of the remuneration committee is to balance each of these perspectives and make decisions that support key company objectives – strategy, culture and retention and recruitment needs. So, how should the committee operate to ensure it is focused on achieving this outcome effectively? According to Gerard Leider of Meridian Compensation Partners, the challenge is no different today than in the past.
“Fundamentally, there are several components for a committee to be effective – process, collaboration and knowledge,” he explains. “How well a committee structures its processes is a key characteristic of an effective committee. Another is how its members collaborate with each other, with management and with their advisors. Finally, how it builds an understanding of market practices and governance standards defines its ability to make informed decisions.”
“If the committee members understand the complexity of the issues at hand, they will ask the right questions,” he says. “It’s about putting in place the processes to review and evaluate the committee’s effectiveness on a regular basis.”
Construct a Clear Process
Simple planning is the starting point. “All companies and all committees face a unique set of situations over time, but the one constant – the primary measuring stick of a committee’s performance – is the process they use to come to their decisions,” says Meridian’s Tom McNeill. “Are they following a good process, the requirements of which are enshrined in the committee charter? If they are, then it sets them up for good decisions and good outcomes.”
The first step is to structure a timetable to discuss the committee’s key concerns. A clear process enables the committee to come to educated and informed decisions that align remuneration programs with the needs of the business. This may differ between organizations, as the activities of peers and the market may not reflect a company’s own circumstances, but there are simple core elements – such as a schedule of regular meetings – that create a basic structure.
According to McNeill, one fundamental ingredient is an established annual calendar of meetings, with a predictable and appropriate cadence that allows all stakeholders to anticipate discussions and prepare ahead of time. The result is that committee members will be set up to take multiple bites at the apple, by separating the processes of reviewing the relevant information and approving the concepts that determine a program.
“The chair, management and the advisors set the agenda to ensure the key items are addressed, and there should be a debrief process to clarify what decisions were made and what remains to be decided,” adds McNeill. “The elements of a good process begin with understanding responsibilities defined in the charter – a plan, with an annual calendar of expected activities, broken down into assigned topics for each meeting and flow of topics across meetings. Then you must move to a more granular level of planning and preparation for each meeting.”
When he talks about multiple bites at the apple, McNeill is describing an iterative process that allows for some back and forth between stakeholders. This is essential for issues that are not routine, especially when people have a natural tendency to impose their own thoughts and expectations. Rigor and clarity are essential.
Frequent meetings and debriefs, solid communication processes, getting everyone on the same page before discussions – all are vital. So, too, is a cooling off period to let all discussions integrate before any decision is made. This is particularly true for unique situations that may not immediately present obvious answers. “Always let the emotions settle but also check the technical considerations and the implications of any unique fact pattern,” notes McNeill.
“Avoid surprises,” agrees Leider. “No one likes surprises, so allow for ample discussion and dialogue, including the vetting of topics on the agenda. Review the facts and deliberate before approving any concepts.”
Beyond that, distinct sessions, in which executives have an opportunity to think and discuss openly without management – possibly in consultation with external remuneration advisors – can be invaluable. Subsequently, planning and debrief sessions outside of the established meeting cycle, and the distribution of materials in advance to ensure committee members have time to review and study the relevant data, will ensure a solid basis for informed decision-making.
Collaboration is the Key
Communication and collaboration become far easier once the right structures in place. The remuneration committee can liaise effectively with management on matters of compensation, and they can more easily bring in the broad experience of external advisors to influence program design.
Remuneration committee members will all bring their own experiences and perspectives. Their experience and their expectations can be a burden or a benefit, which is where remuneration advisors such as Meridian deliver real value. External advisors can introduce different ways to make decisions. They can take an objective view of the facts and provide insight into market practices. They will have seen what works and what doesn’t, and they can share experience of how to structure a committee’s activities and set up the best decision-making processes.
“The complexities of a global executive remuneration plan are greater than ever before,” observes Leider. “Legal issues differ by country, and there are different approaches to disclosure, accountancy, tax, proxy advisor situations and more. We want to ensure there are no surprises, so each decision must be vetted in the right way for each jurisdiction.”
Remuneration consultants can also help with selecting the right metrics to evaluate program performance, as well as remuneration risk assessments, comparisons of different pay elements and long-term incentives, benchmarking tools, regulatory issues, compliance and much more.
“There are many different ways to encourage the right dialogue, to challenge each other and challenge management, but from a process perspective the world of remuneration has become more technical and is evolving quickly,” says Leider. “By bringing real-time trend lines together, asking difficult questions, and leveraging our experience to make real-time decisions possible, we can bring a different lens to the discussion.”
“At Meridian, we see all the relevant topics on a regular basis,” adds McNeill. “This is not our first rodeo. We have the tools and the experience to bring the right information to the committee, tee up the right topics for discussion and help manage that discussion.”
Having the right processes and schedule in place not only allows external advisors to add their unique insight but also helps to optimize the strengths and expertise of each committee member. Decisions on remuneration are always a team effort. Responsibility must be shared, compromises must be made, and different perspectives must influence the outcome.
“The value of the team means two things,” says Leider. “Firstly, someone needs to lead the discussion around how management, the committee and the remuneration advisor interact. That is typically the head of executive remuneration, head of HR, or someone from the legal team, the head of HR, or someone else. Their role is to ensure everything is shared in the right way, including the setting of agenda, the schedule of meetings and so on. Someone needs to be quarterbacking it.”
The second is collaboration. Neither the committee, the remuneration consultant, nor the management team can operate in isolation. They must work together and understand the different roles and skills they bring to the discussion to make educated, informed decisions.
“Management representatives must keep the committee informed as business cases evolve for certain proposals,” Leider says. “As business strategy evolves, there needs to be a process for making the necessary adjustments to remuneration in real time. Everyone must know what they bring to the table, and everyone must have a clear role. They will have different experiences, but they must all have a structure to come together to make effective decisions.”
Leveraging the team’s strengths relies on creating the right environment for team members to collaborate. Someone needs to facilitate the dialogue, and that person needs to understand the strengths and weaknesses of everyone around the table. The person who takes on the responsibility of liaising consistently with all stakeholders also helps to put in place a process for continuous evaluation of how the committee is performing. Then the decision-making process can be consistently improved because management and consultants are constructively challenged along the way.
Continuous Improvement
A culture of on-going dialogue, which includes the opportunity to challenge any process and any decision, allows everyone to come together, collaborate and contribute according to their experience. Furthermore, it ensures there is a common language for all discussions, and that everyone fully understands the conclusions that are reached.
In such a culture, the art of listening must be practiced skillfully. That means committee members must be open to learning from others and to embracing alternative perspectives. They must also ask the right questions and show no fear in probing and encouraging different opinions. “Encouraging the sharing of perspectives and counter-perspectives is essential, and everyone must be open to learning about current market practice,” says Leider. “They must also be clear in articulating what problem they are trying to fix.”
“It is all about setting the right climate for the discussion,” adds McNeill. “It is rare that there is any absolute right or absolute wrong with executive remuneration, so the issue is to fully vet the facts and the opinions that lead to the decision to ensure it is as good as possible. A good listener is open to other perspectives, as well as the application of market data, and regulatory or technical factors.”
Often the best negotiations will result in neither party walking away 100% happy, as their assumptions will have been challenged along the way, but this is the essence of successful collaboration and compromise.
An attitude of openness to alternative perspectives and a willingness to learn from others whose unique experience will unlock fresh insight into each issue. Asking challenging questions of other committee members – and of management – is essential to focus minds on the key issues at hand. Everyone involved in the decision-making process should constantly be checking that they understand what problem they are trying to solve.
The intent of continuous evaluation of the remuneration committee’s performance is not to puncture anyone’s pride or deflate egos. It is to ensure the best outcome for the business, so this process of evaluation should be embraced for it to have meaningful impact and create a cycle of continuous improvement.
While much of what is described above may seem obvious to many at first blush, all too often committee chairs do not consider such matters, which only ever leads to suboptimal results for the organization and its shareholders. A good remuneration committee wants to be asked the difficult questions. External consultants like Meridian can ensure that happens within the right framework, and in an environment that inspires collaboration and a healthy exchange of ideas. Remuneration is an emotional topic, so setting the right boundaries and establishing clear processes can ensure a constructive approach rather than catastrophe.
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