Public scrutiny and executive compensation

Public scrutiny and executive compensation are topical issues for corporate stakeholders, and a part of corporate governance essentials. 

They are far less likely to hover under the radar nowadays than twenty or thirty years ago. Back then, compensation was viewed as a far more private matter under the exclusive jurisdiction of corporate leaders with little external influence. 

Things have changed; we now regularly see healthy discussions around compensation: Is it enough? Is it too much? Who is getting paid what, and how do their rewards compare to each other? Discussions can quickly get complex, especially when there are many more opinions to deal with. 

This guide unpacks public scrutiny and executive compensation, showing how to deal with it.

Executive compensation means the salary, bonuses, stock options, and other benefits provided to senior executives, including CEOs and other top-level managers, in payment for their work.

The board of directors is responsible for this; if you’re unfamiliar with the process, it’s more complicated than it may initially seem. 

The board must negotiate compensation for the CEO and other executives. It must consider varying factors, such as what it feels the payee is entitled to, their experience, workload, shareholder views, public perception of compensation, and the type of business in question. 

Usually, the board forms a compensation or remuneration committee to develop policies in this area. This committee usually suggests compensation rates and explores other avenues to balance rewards with corporate necessities.

Compensation is often significant, far more than the national average remuneration. The scale alone is enough to warrant attention. But it stands out even more in the context of other issues like the company’s performance, market conditions, employee welfare, or any general decline in the world economy. 

In the wrong light, compensation can appear ill-thought, inconsiderate or downright stupid. 

These environments are when scrutiny starts.

• Investors and Shareholders: They want to see the company perform well and will ask questions if compensation packages are high in times of underperformance. Activist investors, in particular, will apply intense scrutiny to issues like compensation. 
• Employees and unions: Discrepancies between executive and employee compensation can fuel dissatisfaction and criticism.
• The media: The media have international outreach and will often have little problem stoking discontent if they report on executive compensation, given its stark differences from the average wage.  
• Regulators: Government personnel have historically had little interest in compensation, but things have changed as new standards have emerged.

The number one thing to remember is that you can’t get rid of it. Scrutiny will come and go as the level of interest rises and falls. The goal is simply to know how you handle scrutiny once it becomes heavy. What strategies are in place? 

1. You can ensure transparency: Clear, accessible reasoning around compensation should be available in regular reports to those entitled to see it. In public companies, absolutely everyone is entitled. 
2. Be sure to link pay to performance, and be thorough: Boards should do their homework when assessing compensation against company performance. It’s hard to do in practice, but that’s what being a director is all about: objective, impartial judgement that’s in the company’s best interests. 
3. Engage with stakeholders: Seek feedback as part of your assessment. How do other people think the company is faring, and, by extension, how do they think executives should be compensated? Deciding this behind closed doors will not gain much approval.
4. Set clear limits and conditions. This will avoid any accusations of picking arbitrary numbers for compensation every year and demonstrate that sold principles have been factored in.

You can’t eliminate the risk of public scrutiny around executive compensation. Any information stakeholders want in this area, they will probably get.

Your job is to make sure that when stakeholders do start asking questions, your compensation policies are clear, measured, and can be backed up with solid reasoning. This is the key that prevents scrutiny from becoming outrage.