It is an undeniable trend: in an increasing number of companies, remuneration based on short-term results is giving way to a remuneration structure based on long-term performance. The remuneration of executive directors is one of the most important governance issues for companies. Companies should be able to indicate how the CEO’s remuneration contributes to long-term value creation, and they should be prepared to discuss their performance in this area.

Supervisory and remuneration committees are expected to have assessed whether the remuneration is in perspective, both in relation to comparable roles, but also with respect to relationships within the company itself. In various countries, legislation that forces companies to explain how the remuneration of a top executive relates to the salaries of average employees within the organization is now under consideration.

Losing ground

The long-term focus in remuneration structures is also reflected in our data. For example, excessive severance payments, golden parachutes (a prior agreement on the level of severance pay) and substantial signing bonuses are becoming less and less common. In some countries, this kind of remuneration is now even prohibited. In addition, companies are increasingly using performance criteria that are in line with the long-term development of the company’s value. For example, generated cash flow as a criterion for the remuneration of executive pay is losing ground. Instead, the executive director’s performance is measured against metrics that say something about long-term value development, such as earnings per share.

Especially in financial sector

In the Netherlands, these developments can be seen mainly in the financial sector. In recent years, several listed financials have wholly or partly converted variable remuneration for executives and management into fixed remuneration. Moreover, this fixed remuneration more often consists of a combination of cash and shares of the company. With remuneration in shares, there is a direct connection between the remuneration of the executive director and the performance of the company. A similar development, but on a much larger scale, can be seen in the United States. Companies in a wide range of sectors are opting for a remuneration policy that combines cash and shares. These shares account for an average of 55 to 60 percent of the total remuneration package.

Stakeholder pressure

So the Netherlands has not got as far as the United States yet. But the trend has been set and it is irreversible. Greater attention to reasonable pay is in line with the focus in society and the business community on sustainable growth. Not all companies make the turnaround on their own initiative.

Not uncommonly, it takes pressure from stakeholders − such as major shareholders or employees − to start a discussion in the boardroom about a more sustainable remuneration policy. Large investors in particular − pension funds and insurers − are driving the change in remuneration. CGLytics data show that they are increasingly exercising their control to influence remuneration proposals. Not only are they expressing an explicit opinion on management board remuneration, but they also discuss the structure of the remuneration policy itself and the performance metrics used. Investors are calling for a sustainable and socially responsible remuneration policy by including ESG statistics (with environmental, social and governance variables). Shell sets short-term targets to reduce CO2 emissions and ties executive pay to these targets. Other groups have to keep up with such trends. If they do not do so proactively, they expose the company to financial and reputational risks.

Long-term focus

More than ever before, executive and supervisory directors need to strike a good balance between corporate strategy, remuneration of talent and the interests of shareholders. So the question is not whether Dutch companies should focus their remuneration policy more on long-term value creation, but when.

For more information about how CGLytics’ executive compensation data and tools informs companies of how they compare to their peers reumuneration practices click here.

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