Walking the tightrope: Why remuneration has become the boardroom’s toughest job

Serving on a remuneration committee has quietly become one of the hardest jobs in the boardroom. Directors aren’t just weighing numbers anymore, they’re managing executive egos, investor expectations and a public that’s paying closer attention than ever. 

“It’s a genuinely high-stakes environment and directors serving on these committees really need to be across their briefs,” says Kylie Hammond MAICD, CEO of Tiger Boards. 

“In some respects, it can also be a fairly thankless job. You’re benchmarking against available Australian and international data, and considering shareholder and proxy adviser expectations, internal relativities and broader community sentiments. At the same time, you’re also trying to attract and retain very senior executives who may have opportunities anywhere in the world.” 

That public sentiment has grown increasingly personal. Executive pay now sits inside a broader debate about inequality, performance and corporate leadership, where a CEO’s package is scrutinised alongside news stories about the property they’ve just bought.  

“You can have somebody’s remuneration being criticised on one page while another story is circulating about the house they’ve bought in Mosman or Toorak. Whether that’s relevant or not, it shapes perception,” says Hammond. 

“Executive pay is no longer considered in isolation from the personality, company performance and broader community sentiment.” 

Global talent trap  

She explains that retaining top talent for the long term has also become a major consideration for remuneration committees, but as boards increasingly look overseas, international candidates come at a premium. 

“Boards don’t just want to recruit the right CEO or senior executive, they want to keep them through a meaningful part of the strategic cycle,” says Hammond. 

“Boards are also thinking much harder about retention because replacing a top executive can be enormously disruptive and expensive. There’s a balancing act here. You need enough at risk to satisfy shareholders that executives are accountable for performance, but you also need a package that an outstanding executive will accept.” 

This requires remuneration committees to maintain flexibility while continuing to demonstrate how the individual and package create value. 

“The best people are genuinely mobile, highly sought-after and sometimes available for only a very short window in their career cycle. They may also be walking away from substantial deferred remuneration to move,” says Hammond.  

“You cannot say you want the world’s best candidate and then insist on paying according to a rigid Australian benchmark. Equally, paying a substantial premium simply because somebody has an international CV is not enough.”  

A balancing act

Structuring the pay itself is another tightrope. While a 50/50 split between financial and non-financial metrics has long been standard, some committees are shifting weight back to financial outcomes. 

“If the financial performance is acceptable, they then look to the other metrics as being important, but if the financial performance is poor, that’s where they put all their focus,” says Michael Ullmer AO FAICD, a non-executive director of Westpac and a former director of Woolworths, Foster’s Group and Lendlease. 

When it comes to non-financial targets like environmental, social and governance (ESG) scorecards, Hammond warns against letting them become soft bonus guarantees. 

“In some businesses, they are fundamental indicators of whether management is doing its job. But the measures must be specific, measurable and genuinely capable of being missed,” she says.  

“There shouldn’t be a generic ESG scorecard pasted across every company. The measures need to reflect the risks and strategic priorities of that particular business.” 

Sensitive areas

Clawbacks are another tricky territory.  

“They sound very straightforward when they’re written into a remuneration policy. In practice, they’re anything but,” says Hammond. 

Boards are generally reluctant to trigger them unless the circumstances are undeniable, such as severe misconduct or financial restatements.  

“You’re potentially dealing with misconduct, financial restatements, serious risk failures or a bad-leaver situation. And once a board starts discussing clawbacks, there are inevitably other uncomfortable questions sitting around the table. What did the board know, what oversight was in place and could this have been dealt with earlier?” 

However, backed by rising public scrutiny, boards are far more willing to overrule formulaic bonuses when a payout fails the “pub test”. But the danger is alienated leadership. As Ullmer notes, committees must exercise discretion without destroying executive trust. The goal, therefore, is getting the CEO to understand and accept why their pay was cut.

Standing behind the call

Ullmer points out that the remuneration committee’s work spikes when developing new frameworks, enforcing complex clawbacks or heading off an anticipated vote strike on a remuneration report. As such, early engagement with proxy advisers and total transparency are essential. 

Ultimately, remuneration committees need experienced directors with the spine to challenge management and stand by controversial calls. 

“They must understand the market and have the confidence to speak up and challenge management, advisers and sometimes their fellow directors,” says Hammond.  

“Ultimately, whatever decision you make, somebody will probably think you’ve got it wrong. That’s part of what makes the role so difficult. The board still needs to stand behind the decision and explain why the package is appropriate for the executive, the business and its shareholders.”