How getting your company pay structure right is the first step to good governance

Corporate pay structure

It seems as if we cannot go a couple of weeks without executive and C-level pay in the news as another scandal hits. But why is the pay structure of organisations so newsworthy?
The reason why this has become such big news is that it happens all too frequently at companies of all sizes, but it’s the big boys that really make headline news.

In 2017 alone we saw companies like Thomas Cook and RBS in the UK and Wells Fargo and Bombadier in the US face a backlash over their bonuses in the wake of very public scandals and bad press. Last year, BP failed to win the support of their investors over bonus pay because of a lack of link between pay and performance in the aftermath of some very public disasters.

Good governance has become a hot topic in business over the past few years, and continues to be a pressing concern. But with scandals and outrage over executive pay continuing to hit the news even with this renewed commitment to improving corporate governance, what is the answer?

A particularly popular route to improving governance is to demonstrate a clear link between pay and performance by restructuring pay and bonuses. Without this, you’re creating a culture of pursuing short-term gain over long-term sustainability.

This is something that the UK government are beginning to introduce with the new corporate governance code coming into effect in by June 2018. The code states that all publicly listed companies must now publish the pay ratio between their chief executive and their average worker. The aim of this, although still only under a ‘comply or explain’ basis, is to shine a spotlight on companies to dissuade against directors feathering their own nests whilst the worker bees struggle to make ends meet, as has so often been the case.

If a company is just starting to recover from a global scandal that severely hit both profits and their reputation then issues its bonus structure for executives based on achieving 2/3rd of the profits of the previous financial years, does this make sense?

Is this right?

This scenario may sound slightly far-fetched, however it is exactly what’s going on right now with VW, according to Corporate Governance expert Christian Strenger ahead of the Volkswagen AGM on May 10.

At the end of February, the VW Supervisory Board announced a new remuneration system for directors, limiting them to earning a maximum of €10 million a year, and with lower bonuses available, however Strenger believes this isn’t enough. “The system is right, but the hurdles for the board members are still too low,” says Strenger to “It’s too easy for you to reach your bonuses. If a group has regularly earned 15 billion euros, bonuses cannot be paid from 9 billion euros.”

A lot has been written about the ‘Dieselgate’ scandal so I won’t go into the details here, but even now, the scandal continues to rumble on with law suits still ongoing in the US. Whilst 2016 saw VW return to profit, with profits announced of $5.4 billion, does this really entitle the bosses to this level of bonus when they presided over such a damaging scandal?

The solution

By getting your company’s pay structure in line with promoting long term success, you are fostering a work ethic and culture that will make good governance easier, and by making this whole process transparent, you are creating an environment where you become more in-tune with your stakeholders and employees alike. This approach then filters down through the operation, and as the company grows, if you get your recruitment right, can then foster a ‘bottom-up’ approach too. Then, if any changes are needed to be made, these are likely to be minor and easier to implement and take onboard from an already engaged board and workforce.

But if you ignore this and continue to reward your executives for mismanagement and negligence, then that culture of pursuing short-term gains continues to grow and quickly spreads through the whole organisation and will eventually seep out into your public perception and image. This culture leads to risk taking which is inconsistent with good governance best practices.

But what is good governance and how do you manage this?

A paper published by Deloitte said: “The sheer complexity of governance and the huge number of related procedures and other mechanisms in a global financial institution may indicate a need for a governance operating model. The elements of such a model may exist within many large FSI companies. However, those elements may not have been connected, rationalized, and organized to provide the consistent guidance and incentives that executives, risk managers, and business unit leaders require. A governance operating model has the potential to address this need and thus enhance management’s ability to implement governance and the board’s ability to exercise proper oversight”

Whilst this feature focuses on the financial services industry, it rings true for all industries and businesses. One thing is for certain though, it’s a big subject and you cannot tackle everything at once.

But if you’re serious about your public image and corporate responsibilities, then there can be no half measures. However, with the right structure and tools, this can be done and you will soon be reaping the benefits.

I guess that what this really boils down to is one simple word – transparency.

The economic crisis that shook the business world in 2008 was possibly the catalyst that businesses needed to reshape and reform and today companies have more reasons than ever to be transparent.

eShare have created a 2 part guide to the key principles of ensuring good corporate governance, which you can download here if you want to know more on the subject.

Have companies gone far enough?

A recent survey conducted by eShare showed that 39% of UK employees couldn’t name a single member of their board, with a further 17% saying that their board are not visible at all.
Analysis by the Equality Trust showed that the average FTSE chief executive earns 386 times more than a worker on the national living wage, taking home on average £5.3 million each year, compared to the £13,662 for someone on the £7.20 per hour national living wage. Are the executives of these companies truly earning their keep and justifying this salary gap?

There is no doubt that these execs have worked very hard to reach these positions, have build up a great amount of knowledge and respect in their industry and have to manage huge pressures in the work that they do. But can more be done to make their positions and the value that they bring to the organisation more visible, our study would certainly seem to strongly indicate that. This is what the UK corporate governance code is aiming to highlight further and will hope to reduce the pay gap, although this is yet to be seen.

This isn’t a new phenomenon though. Modernisation and technology hasn’t changed the role of the board drastically. Nor has it changed the type of information that’s being shared amongst board members and in leadership meetings. What it has done is change the quantity of information that’s available but also provided the tools to navigate, organise and collaborate around that vast amount of information.

Having a board portal solution such as BoardPacks that can integrate with an entity management platform like EntitySquared for larger organisations is a good start on the road to greater transparency and good governance. Having a real-time dashboard to your data and being able to store and distribute large amounts of documents securely not only saves time, but also reduces the risk of human error.

It’s easy to misplace paperwork, it’s even easier to have an email go into your spam folder or to mistype the email address and potentially send highly confidential documents to the wrong hands. Using a board portal helps to eliminate these risks by creating a transparent audit trail of communication.

What is clear is the need for greater transparency in business needs the right tools, alongside the training and commitment to change. For many, success will be very hard to come by.

Good luck in taking the first step. We’re here for you every step of the way.

posted on & filed under Corporate Issues.