The diverse skills of a good remuneration committee chair are in demand, writes Christopher Niesche.
A new specialist board role is emerging as boards try to better align pay and performance, and simplify incentive schemes. “It’s a specialised skill set,” says non-executive director Dr Kirstin Ferguson FAICD, chair of remuneration committees at the ASX-listed SCA Group, private company Hyne Timber and the Australian Broadcasting Corporation. “Boards are increasingly saying they need a ‘rem’ chair.”
It’s a skill set that requires strong technical knowledge around short-term pay incentives, long-term incentives and retention bonuses — and the mathematical nous to understand bonus scheme modelling, as well as a high degree of emotional intelligence. “You need to know how to get the best from management while dealing with the expectations and demands of shareholders, community and proxy advisors,” Ferguson says. “Often, you’re having challenging conversations with management about their performance or working with the chair on performance reviews.”
Experience as a line or operation leader is also helpful in understanding issues around human resources management and is useful on the remuneration committee. Penny Bingham-Hall FAICD, chair of BlueScope’s remunerationcommittee and on the Dexus committee, says being on a board for a year or two before taking on the role of remuneration chair is helpful in understanding how to align remuneration with company strategy.
Quantum of pay is also a major issue. There is downwards pressure on executive remuneration and a closer focus on how incentives relate to performance. “There’s a lot of talk about the fact that incentive schemes, particularly short-term ones, tend to just pay out around 70–90 per cent every year, so there’s a lot more scrutiny on variability around incentive outcomes and the link to performance,” Bingham-Hall says.
Companies are considering whether total shareholder return (TSR) is a relevant measure, because most executives feel the bonus is just a lucky dip. While TSR is obviously an important focus for shareholder and fund managers, it’s doubtful it drives executive performance. Bingham-Hall says directors need to “have the courage” to employ their discretion when handing out bonuses.
Simplicity Organisations are making bonus schemes easier for stakeholders, investors, board and executives to understand. Bingham-Hall says there is a move away from complex remuneration structures, which “you need a rocket-science degree to understand”. Aside from confusing shareholders, sometimes they also confuse executives, which reduces their effectiveness.
“Complexity reduces value for the executives, who don’t understand it and aren’t sure it will pay out.”
Variability There is a move away from one-size-fts-all remuneration schemes to those that better align with an organisation’s strategy. “Directors need to think more about first principles when they’re designing a structure of key drivers of shareholder wealth or value for the company,” says Bingham-Hall. “A very cyclical company is quite different to one with more steady income. I see this at Dexus, a real estate investment trust with far steadier earnings than BlueScope, which is in a very cyclical, tough industry.”
Internal measures Companies are adding internal measures to remuneration schemes because they can better drive executive performance than TSR. “You’ve got to ask, well, the shareholders haven’t had a good year so can we really pay out executives what their scorecard says they deserve?” says Bingham-Hall. “That’s an interesting conversation between board and management.”
Community expectations Boards more often are incorporating measures to encourage executives to meet community expectations. “It ties into the increasing interest in environment, social and governance,” says Ferguson.
“It’s making sure that the remuneration structures you have in place deal with those expectations. The role of the remuneration chair is to keep abreast of what’s going on in the wider community and other organisations — to continually assess if the remuneration structure is ft for purpose.”
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