Executive Pay – Trends and insights from Willis Towers Watson’s India CXO Roundtable – April 2018

July 12, 2018
| India

Executive pay remains a subject of intense interest among shareholders, government and the public around the world. It has become a lightning rod for criticism, and a symbol of how organisations both govern themselves and respond to stakeholder concerns.

There are many opinions on pay levels and practices today – along with proposed approaches to designing and delivering them. How do influencers of these decisions identify the path forward? Where can they get sound advice from? What is the best thinking on the unique complexities of individual organisations?

To discuss, debate and address some of these burning questions, Willis Towers Watson gathered 40 top HR Leaders representing a cross-section of industry, business maturity and size across India.

The sessions were led by Trey Davis, Director of Executive Compensation, Asia and Australasia, Willis Towers Watson. The themes that dominated the discussions within the broad subject of executive pay included – governance, principles and market best practices. It was interesting to note the clear shift over and beyond the question of – how much to pay?

Compensation guiding principles four overarching principles

Global megatrends are reshaping the Executive pay landscape in new ways. These include – digitisation and the rise of new technologies, demographic shifts, non-traditional competitors and emerging markets, political climate, increased demand for transparency and regulatory changes. While change is not new, technology and digitisation are accelerating the pace of change unlike anything we have experienced before.

In this new business environment, companies must review their performance and pay strategies:

  • Redefine performance and how it is measured
  • Explore non-traditional pay models particularly for critical talent
  • Balance a focus on the short-term to build long-term value with the requirement to retain key talent
  • Optimise reward programmes
  • Define and communicate their unique value proposition

Overview of executive compensation trends

Ongoing developments in long term Incentive (LTI) design

  • Asian LTI practices converging with the West
    • Emerging Asian markets catching up in terms of LTI design and usage
    • While stock options are still prevalent, each year we see increasing use of restricted shares and performance shares / units
    • Performance plans are more common in Australia, but tax changes will likely see the return of options

  • Rethinking performance measures
    • Increase in non-financial measures in bonus plans and widening performance ranges
    • Continued / increasing use of multiple performance measures
    • Ongoing evolution of TSR (Total Shareholder Return) related LTI plans

  • Increased focus on the longer term
    • Enhancing cumulative efforts over time, e.g., including strategic focus / goals
    • Bonus deferral into shares
    • Extended vesting and holding periods
    • More interest in share ownership requirements

  • New perspectives on risk and rewards
    • Emphasis on strategy alignment, policy and structure, and governance
    • Increased use of claw-backs, focus on post-employment benefits
    • Reduced upside (to reduce possibility of windfall payouts) and increased downside
    • Substitution of full value shares for share options

Evolving LTI approaches improve alignment with long-term results

  • Globally, nearly 80% of companies combine financial and non-financial metrics, with increasing focus on other stakeholders including employees, environment, etc
  • Increasing use of board discretion, already prevalent in Asia Pacific, is increasingly used in North America, less so in EMEA
  • Relative TSR remains the dominant measure in long-term performance plans, but is increasingly being combined with other metrics. Companies are looking to re-evaluate how they define performance. In the past, companies would often put in place a stock price hurdle or relative TSR performance goal for shares to vest, but today, they are tying the vesting of equity awards to the achievement of strategic goals and even non-financial goals such as customer-satisfaction or milestone goals such as opening a new facility or rolling out a new product / technology

Performance metrics vary significantly between industries and less so by country / region – but some regional variations do exist within general market practices:

  • Generally, Asia Pacific companies emphasise on profit (and less of cash flow) more than US and EMEA
  • Asia Pacific companies have been slow in adopting claw-back policies

Focus of performance metrics

Emergence of proxy advisors – in general, the influence of proxy advisors is evolving in light of say-on-pay votes and other governance matters. Often, they will be interested in pay for performance, disclosure, and setting of bonus and LTI targets and market positioning of executive rewards.

Role of remuneration committee

  • Materially more time commitment for members, most especially the committee chairman
  • More shareholder consultation needed – not just around changes but on an annual basis
  • Need to consider the wider workforce when making pay decisions
  • Need to stay ahead of emerging shareholder issues
  • Need to provide rationale for why the company is paying what it is paying – particularly around incentive pay
  • Need to balance the demands for transparency with commercial sensitivity
  • There is much greater personal reputational risk

What does all this mean for executive pay?
As we look ahead to 2018 and beyond, and reflect upon our collective conversations with clients, we highlight some interesting points of discussion:

  • With recognition that executive pay programmes have a number of elements and complexity, organisations are considering the optimal mix of the various pay elements. Informed by feedback from the broader executive team – this is intended to provide greater retention, engagement and performance within the same cost structure
  • As part of short term incentives, there continues to be focus on reducing the complexity of design and establishing a more rigorous process for setting company and individual performance goals
  • With the increasing strength and volatility of the stock market and overall economic developments, some companies are evaluating increasing the use and weight on stock options. Historically, there has often been a positive correlation between share price volatility and option grants. At a minimum the black Scholes value of an option is likely to be higher than past years, which may reduce the number of options granted, or increase the grant date fair value where the same number of options are issued year-over-year. Alternatively, companies may view share price performance at a peak and take caution with stock option grants
  • Traditionally, LTI grants have been delivered each year based on target policy; but there is growing interest to consider setting grant values with some link to past year performance and / or the current market and share price environment
  • Finally, companies are considering the links between pay design and retaining specific executives for purposes of succession planning

Key takeaways for your consideration of your executive compensation programmes policies and processes

The approach to executive compensation has evolved, and so has executive compensation consulting. Willis Towers Watson's market-leading service offering — grounded in our deep understanding of how business and talent issues affect reward strategy — is stronger than ever. Companies across the globe look to us for objective guidance across a broad range of executive compensation issues.

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