The complex role of the board in setting executive compensation

In conjunction with Deloitte’s Chief Executive Program, this edition of On the board’s agenda reviews recent developments in how boards set executive compensation, outlines challenges related to market volatility, and illustrates how variations across countries may impact compensation strategy. Much has happened since the last time we discussed this topic in September 2019. In the intervening period, boards and executives have contended with a global pandemic, the Great Resignation, a return to business normalcy marked by not-so-normal historic inflation, geopolitical conflict, and sundry other challenges. For directors, the current state of the executive compensation landscape might be characterized as a mix of the familiar and altogether different.

Why it matters

The pay of both CEOs and others in the C-suite is a recurring subject of interest for a company’s shareholders, employees, the media, and government regulators. Perhaps in part due to this high visibility, the complexity of compensation governance has continued to increase over time. Ideally, an executive compensation strategy provides incentives to management that drive performance, aligns pay levels with shareholder returns, encourages long-term decision making, and is congruent with the goals of other board stakeholders. When crafting a strategy for this area of governance, a few developments in recent years could be important to keep in mind.

^a DEI refers to diversity, equity, and inclusion; ESG means environmental, social, and governance.

Questions for boardroom discussion

• Is there clear alignment between the company’s overall strategy and individual compensation metrics? How are metrics, individually and collectively, tied to overall strategy goals?
  
• Do the company’s executive compensation philosophy and implementation plan balance the need to be competitive, risk management concerns, and longer-term strategic objectives?
  
• Should commitments to stewardship, DEI, and ESG be incorporated into executive compensation plans? If so, are the metrics applicable and reflective of the company’s current strategic priorities in this area?
  
• Has the board or the committee analyzed executive compensation for both internal and external equity? Should (or have) the results of those equity assessments be shared with stakeholders?
  
• Under what circumstances can (or should) the board or compensation committee update pay strategy in response to feedback from shareholders and other stakeholders?
  
• How much input should executives have into the process of setting pay metrics? Does the current process allow for a sufficient level of input to check for?