Align executive compensation to the post-pandemic world

25 January 2022 Consultancy-me.com 4 min. read

The Covid-19 crisis is reshaping the way companies operate and remunerate their leaders and employees. Christopher Page and Paul Lalovich, partners at consultancy Agile Dynamics, explore the shifts being seen (and required) in the executive pay segment.

The world is now a global village, thanks to technology. Today, people can work anywhere in the world, and companies can leverage online marketplaces to hire talent – including digital nomads – from all corners of the globe. Meaning people can now work and create value differently.

In the same vein, businesses are now operated differently. The traditional brick-and-mortar companies are paving the way for Grab and other asset-light companies. Forward-thinking organisations are scaling and capitalising on the best methods of management and talent hiring and in order to address customer needs.

Christopher Page and Paul Lalovich, Agile Dynamics

A changing executive compensation landscape

The disruption in organisations and work management has also triggered a transformation in the modes of compensation. One trend expected to emerge out of the post Covid-19-era is the growing importance of more long-term incentives for executives and boards.

One of the crucial organisational performance issues arising from the pandemic-induced crisis is its effect on incentive-based pay for executives and senior management. Paying executives and senior management based on their performance has become the bedrock principle of efficiency and effectiveness over the past decades.

The idea behind this organisational management approach may have been simple and driven mainly by the aspiration to align the interests of the business leaders and shareholders on the assumption that the organisational performance will be better if they are incentivised. That said, as organisations are pivoting out of the crisis and changing their operating models, a smart design is required to ensure that incentive-based pay doesn’t fall victim to bureaucratic sprawl or miss the target altogether.

As economies gradually reopening, it will still take time for a return to ‘normality’. From a compensation & benefits perspective, companies will search for strategies to help them achieve a competitive edge by overhauling their pay models. The key reason for this change is that executive pay is now a significant factor in guaranteeing organisational stability and the ability to rebound from the crisis.

As the pandemic has also altered the approach for structuring executive pay, listed companies will have to ensure buy-in from their shareholders and make sure they are supportive. All this will require the organisation to prove that executive pay remains commensurate with the business’s performance.

Fully listed companies will need to consider the guidance on executive pay issued by the various bodies representing institutional shareholders, including the influential Investment Association (IA), which recently stated implications of Covid-19.

Aligning the incentives framework

For the longest time, there has been a common consensus among executives, boards and shareholders that executive pay cannot be understood with ease. During the post-Covid-19 pivot, it is essential to ensure that the incentives framework is simplified and streamlined.

The best place to begin is by translating the business strategy into the target operating model (TOM) and then deconstructing the outcome into the key building blocks (i.e. organisational model, financial model, human capital model, etc.) to truly understand value creation.

Furthermore, the incentive plans’ primary goals should be revisited based on the stakeholders’ broader perspective going beyond the shareholders. A good starting point could embrace the stakeholder theory that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others.

To ensure success in cascading objectives, it will be important that executives oversee compensation for employee performance from the participant’s context. This can be achieved by enhancing overall know-how among executives on topics in and around strategic rewards.

On the other hand, ensuring that executive incentives are aligned with shareholder experience becomes crucial for the shareholders. If these goals might clash, incentives design will be a balancing act, where the structure and outcomes of the plan should strive to the expectations of both parties.

In summary

In summary, the Covid-19 pandemic has compelled businesses to determine how they can increase agility, including building an agile talent pillar. This backdrop provides an excellent opportunity for forward-thinking organisations to set clear strategies for achieving long-term pay and performance facilitators.

In addition, companies need to make gradual changes aimed at enhancing the efficiency and effectiveness of executive pay and strategic rewards. In so doing, they will be able to meet their priorities and measure up to the demands of their industries.

Planting the executive pay decision-making process on the data derived out of the TOM elements such as organizational model, financial model, human capital model will only enhance the perspective and enable effective implementation of solutions based on the stakeholder theory.