Fat Cats or Heroes? The Dilemmas of Executive Pay

By Helen Pitcher OBE, President of INSEAD Director Network, Experienced Chairman, NED and Board Committee Chair

The world is focused on the tragedy of the Covid epidemic and the horror stories of death, financial hardship and vulnerability within communities and ethnic groups.  As companies battle to survive by rapidly changing their operational management processes, and responding fairly and ethically to the challenges, there are few businesses untouched by this crisis.

As we gain more traction and control in the disease contagion phase, government and businesses are turning their attention to the looming economic crises which will follow in the aftermath of this pandemic.

Executives in the depth of the crisis are experiencing a peculiar maelstrom around the issue of executive pay.  At the same time these executives have worked harder and longer than ever before, focused on sustaining their businesses, often taking voluntary pay cuts, questions are being asked about the levels of their current and future pay.  These questions are primarily being driven by the Investment industry and represent a triple whammy; questioning bonuses to be paid for largely last year’s performance, questioning the validity of any bonuses to be paid for this year due to crystallise next year, questioning the short- and long-term award of ‘Long Term Incentive Plans (LTIPs) designed to focus on business sustainability.

While Boardrooms have been supporting and guiding their executive teams through the immediate threats and issues for their workforces, customers, and the broader stakeholders, there has been a growing dilemma for Boards and Remuneration Committees, as to how effectively they respond to the thorny issue of executive pay in both the short and longer term.

Even before this crisis there was an increasing groundswell for the re-alignment of executive remuneration to reflect the realities of performance and to introduce a concept of fairness.  This focused on executive remuneration being more in line with a defensible stance on the actual performance of the business.  Being more critical about whether the executive performance actually made a difference to the business and considering the general equality of pay levels within the company and society.  The ‘Fat Cats’ campaign has been gaining momentum leading more and more institutional shareholders to question executive remuneration, particularly in the pensions field, where the ‘special’ executive pensions are becoming increasingly exposed and Remuneration Committees are focused on aligning these with the company’s general pension provisions.

In the turmoil of this debate and the immediate threats to the business escalated by the Covid crisis and in the face of the immediate threats to the business, executives have been stepping up to the plate.  We have seen reductions in their pay and bonuses, with pay cuts of 20-40% and bonuses forfeited whilst individuals are working significantly harder to minimise the impact on their businesses and quickly develop new ideas, processes and creative solutions to tackle problems.

The nightmare for the Chair of any Remuneration Committee is how to balance these new realities and pressures, whilst anticipating the short- and long-term outcomes.  Nobody wants to do a ‘Persimmon’ by introducing schemes which cause a crisis of reputation and credibility and then having to explain themselves to a Select Committee in 18 months’ time.  This vortex of reputation even encompasses the ‘Covid-free’ businesses which have ‘boomed’, such as big pharmaceutical and healthcare companies, who continue to pay executives ‘top dollar’ with potential bonuses on the way.  Will they be seen as the ‘hero’s’ who saved us or ‘carpet baggers’ who profited from our woes.

In particular the Investment Association (IA) representing the biggest British Investors, has taken a very tough stance suggesting, “companies that have received government support to help them through the coronavirus crisis should cut executive pay and consider clawing back bonuses from bosses”.

The Remuneration Committee and the Board now have the responsibility under the revised ‘Code’ to consider all stakeholders in their decision making and are required to articulate and clearly communicate their approach.  So how will their actions look in the eyes of the shareholders, employees, suppliers, customers and broader society?  The government has also taken a stance; ‘a spokesperson’ for the government department for Business, Energy and Industrial Strategy warned that they would “expect companies to act in a socially responsible way and exercise judgment and discretion when considering executive pay”.

The reputational risk if you are furloughing people or making drastic salary cuts to rank-and-file workers while the executives continue getting big pay packages, is profound.  As always, timing is everything, with questions about this year’s bonus declarations, from last year’s performance occurring now and the equal dilemma of setting this year’s performance levels for bonuses to be paid in 2021 still being in flux.  It is perceived that the tone for bonus payments for 2021, will be pretty poor or possibly non-existent, just as executives should have a “maximum performance attitude” to deliver results and survive.  There is also a significant communication vacuum creating high levels of uncertainty for executives, with many boards saying, ‘let’s just see what it looks like’.

The granting of LTIPs is a particular dilemma at the moment.  Pervious grants have been dented due to the Covid economic winds, while new grants offered at a very low share price could potentially generate windfall gains, for little more than being there.  However, while there are challenges, Remuneration Committees do have much more ‘discretion’ written into their plans these days, which provides them with greater opportunity to fine tune bonuses and share grants more easily, never forgetting the imperative of effective communication to all stakeholders.

The bigger picture is also lurking in the background.  The Covid crisis will mean many businesses will be doing things differently with remote working as a good example.  They have been presented with the opportunity to radically rethink their approaches and processes with many grasping this will both hands.

Consequently, is it not the time to also rethink Executive Remuneration which has been stuck in a rut for many years with little innovation?  In particular as we respond to the gathering momentum for equality, inclusion, and diversity, the ‘old’ way of rewarding executives should be refined.  There is little resistance for true performance reward, but it is how you decide what is to be rewarded and the proportional scale of the reward that is crucial.  There is the sense that it is commercially and morally right for Boards to reduce very high levels of pay.  While many of the current actions on executive pay might be necessary they are a temporary measure in unprecedent circumstances, but could also be the trigger for a more permanent change in attitudes to both the levels and make-up of executive pay.

The following pronouncements have been made from the IOD, “Ideally, pay policy during a crisis would be designed to encourage the whole organisation to pull together” and the IA “During this exceptional period we expect companies to adopt an approach that is appropriate to their business and the specific impacts of Covid-19, being careful to ensure that executives and the general workforce are treated consistently. ”Where does that take us?”

Maybe this is the opportunity for Remuneration Committees to ‘move the dial’ by incentivising performance on a wider range of targets including, diversity, climate change, gender and team performance.  What are your executive doing which is different?  Have they grasped the new challenges and solutions for the future or just fallen back into their old ways?  While it is easy to be cynical that the IA for example, is taking the opportunity to ‘have a go at the executives’ their members such as Blackrock, have for some time been calling for wider changes in business, recognising the broader stakeholder responsibilities to society.

Never before have the ‘collective wisdom’ of Boards and the Remuneration Committees been of such potential value.  While there are no magic solutions, the careful communication out to all stakeholders and executives will be a significant performance factor for the Committee itself.   The challenge for executive teams is that people will need to make a huge contribution to the business during the crisis, and use innovation and ingenuity to navigate their companies through difficult times. The ability to sensitively reward key executives who will be the current and future sustainability drivers of the business is a key role of the Board and Remuneration Committees.

While there will be little commiserating with relatively well-paid executives in these testing times, it is however, the executives in the commercial sector who will lead our businesses to survive and flourish in the immediate post contagion economic crunch.  The commercial sector shareholders (pension funds), employees, and suppliers will be hardest hit during the financial phase of the crisis, this includes the executives of those businesses who slim down or fail.  Boards will need to continue to retain, motivate, and reward those executives who perform and innovate successfully to accelerate their business through this retrenchment.

Ensuring executive reward is effective, progressive and not just a slash and burn exercise on executive pay, will require Boards and Remuneration Committees to exhibit the ‘Art of the Possible’ and the ‘Art of the Wise’.

First published here.

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration

This blogpost is shared as part of a series of insights from INSEAD Directors Network, based on roundtable discussions held during INSEAD Directors Forum October 2018. The Directors Forum Round Table Discussions were held with IDN members led by IDN board members or IDN Ambassadors. Other Blogpost in Series shared last. 


(Photo: Pixabay) 

The round table discussion “Align Risk Management with Strategy and Operating Performance, but also Reward and Remuneration” was led by Susana Gomez-Smith, NED and IDN Ambassador for Portugal with the introduction

As the ultimate steward of value and overseer of risk, the board must grasp the relationship between strategy and risk and assist management, in gaining that understanding but also in putting it to practical use. The Board must also ensure that remuneration policies/practices are consistent with and promote sound and effective risk management and in line with the business strategy.

  • Why should the Board consider and discuss strategy and risk appetite in tandem? How to do it in practice?
  • What can the board do to drive greater awareness of the risks to the strategy throughout the organization?
  • “Remuneration forms part of the culture and governance priority as set out in our Business Plan. As a key driver of behavior, remuneration of senior and risk taking staff is an important area of focus for the FCA to ensure that risk and reward are aligned in firms that we regulate through our Remuneration Codes (the Codes). Whilst our remuneration rules only apply to specific groups of firms, remuneration is a key driver of behavior for all firms and individuals. Implementing appropriate remuneration policies and practices helps to ensure appropriate outcomes and reduces the likelihood of harm from occurring “
    Financial Conduct Authority, Remuneration Codes

    How can Boards satisfy themselves that firms remuneration practices lead to appropriate outcomes and risk and reward are aligned?

Strategic Risk Management: A Primer for Directors, Harvard Law School Forum on Corporate Governance and Financial Regulation
The UK Corporate Code, Financial Reporting Council (from page 16)

Roundtable discussion

The strategy and risk areas has historically kept as quite separate topic, as the risk focus has tended to be quite operational in focus. As the strategic risk has been in steep increase for many companies the boards needs to find more appropriate ways to work with the topics in tandem.  Some key insights from the board members were noted as;

  • The strategy of the firm is and has to be the starting point of all the considerations
  • The Strategy should comprise the areas of the core business and potential new business areas
  • The risk appetite for both areas has to be set and will be overseen by the Board (in a regular exercise)
  • The risk culture is set at the top of the company!
  • The second line of defence (Risk Management, Compliance) as well as the third line of defence are supporting the first line (operations) – clear definitions needed
  • Especially the Risk Management and Compliance functions must be filled with experienced and independent staff
  • With regard to risk measurement and risk identification, the right KPIs (which are rather backward looking) and KRIs have to be defined (better start with few but the most telling ones). Monitor not only your risks but also how the probability, impact of such risk is evolving.
  • The Risk Management process is not static, it is a constant effort. Risk managers should be incentivized to identify emerging risks. Some companies on the side of the regular Risk Committees perform regular exercises to reflect on emerging risks. It is advisable to include in such exercises different areas of the company and not only a closed inward exercise of the risk department.
  • At Board level, a trade-off between investments in new business areas and investments to mitigate/eliminate existing risks has to be found
  • The remuneration should be linked to
  1. Implementation of the strategy (s-t, m-t, l-t) and hence parts of the variable compensation be deferred
  2. Accomplishments in the core business areas as well as in developing new business areas
  3. Risk taking and risk management
  4. Implementation and living the risk culture in the firm
  • The Remuneration Committee should be given the power to override formulaic outcomes of bonus schemes
  • Remember: The Management is responsible for Risk Management, the Board is responsible for Risk Oversight.

Conclusion: Strategy and risk needs a framework to be jointly considered as the strategic risk is increasing for many companies, and it needs to be fully aligned also with new and balanced remuneration schemes.

Recommended additional reading;

Enterprise risk Management – Integrating with Strategy and Performance, (COSO)

Using a Risk Appetite Framework to Align Strategy and Risk, (Moody’s)

Letters to Remuneration Committee Chairs (FCA UK)


By Susana Gomez- Smith,

Certified Independent Director IDP-C and IDN Ambassador Portugal



Other blogpost in this series: 

Governance in a Disruptive World by IDN Board Member Liselotte Engstam

From Board oversight of Strategy, to creating a Sustainable Business, by Helen Pitcher OBE, IDP-C, Vice President IDN

Anticipate and manage for geopolitical trade, corporate governance codes and regulatory changes by Cleopatra Kitty, IDN Cyprus Ambassador 

The impact of technology on​ Strategy & Business Models by Mary Francia, IDN Board Member

Align Risk Management with Strategy and Operating Performance, Reward and Remuneration by Susana Gomez- Smith, IDN Portugal Ambassador

Accelerate Board Effectiveness by IDN Board Member Thomas Seale


More insight from INSEAD Directors Network, will be shared based on INSEAD Directors Forum 2018, Round Table Discussions – Look out for more upcoming blogposts!