Getting exec remuneration right is no mean feat

Always a ‘hot issue’

There are few topics more controversial than executive remuneration. The media love nothing more than a sensational story on the inflated payslips of our top CEOs. It’s the first issue shareholders seize on when a company’s performance slides, and which regulators clamp down on as a ‘fix’ for governance failures.

The GFC may have thrust executive pay into the spotlight, but years down the track, it remains a hot issue and no less challenging for our corporations.

Companies are more accountable than ever before. They have to balance their public reputations and responsibilities to shareholders with the need to attract the best executive talent with the right compensation package that is market-competitive. 

Research finds that ‘less is more’

And it’s not an easy task. Recent research from two academics from Melbourne University and California’s Berkeley University revealed that excessive CEO pay, particularly in the form of badly designed incentives, can backfire and actually encourage poor performance. Specifically, the research found that uncapped bonuses can lead to CEOs making short-term decisions and pursuing strategies where outcomes are easier to measure, rather than working with the board to achieve what is in the longer-term interests of shareholders.

This research single-handedly dismantles the simplistic but widely-held belief that superior executive performance is impossible unless a hefty pay cheque is involved.

Demystifying a complex process

Clearly, developing an executive remuneration structure is a complex exercise. It requires an understanding of market benchmarks and how to link the right incentives with the right behaviours and outcomes. It is also a process that should be undertaken with a keen sensitivity to the interests of other employees, shareholders, institutional investors and even regulators.

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