Executive compensation: aligning pay, purpose & performance

Josh Black at Diligent Market Intelligence explores how boards can navigate investor demand for transparency and accountability, and design compensation packages that drive sustainable growth and investor confidence

 

With FTSE 100 CEO pay reaching record highs and demands for transparency growing, the discussion surrounding executive compensation is evolving. It’s no longer just about setting pay levels for senior leadership; the focus has shifted to structuring compensation in a way that drives sustainable growth while meeting the changing expectations of stakeholders.

 

As boards look ahead to the next year, one of their key challenges will be aligning executive pay with strategies that deliver long-term value.

 

Our recent data paints a striking picture: while FTSE 100 CEOs saw their median realised pay rise by 4% to £3.9 million, median realised pay for non-CEO executives dropped 67% from 2022 to 2023. This disparity raises important questions about how leadership incentives are structured and whether current compensation practices truly support long-term corporate health.

 

For boards, the solution lies in moving beyond simple market benchmarking. The goal is to design compensation packages that balance immediate results with long-term objectives—critical for attracting and retaining top talent, maintaining investor confidence, and ensuring sustainable business growth.

 

Immediate results and lasting impact

A key challenge is finding the right balance between rewarding short-term performance and driving long-term organisational growth.

 

While it may be tempting to tie compensation to immediate financial metrics such as stock prices or quarterly earnings, this often creates perverse incentives that prioritise immediate results over long-term health of the organisation. Stock-based compensation, when linked solely to short-term share price movements, can inadvertently divert attention away from areas like innovation, talent development, and sustainability—investments which are crucial for long-term success. 

 

To avoid this pitfall, many UK companies are adopting hybrid compensation models. These models combine performance-based incentives with time-vesting elements. By doing so, companies can ensure that leadership teams remain focused on driving sustainable performance, while still rewarding immediate achievements that contribute to overall business objectives.  

 

Shifting investor expectations

In the first nine months of 2023, nearly 95% of FTSE 100 and FTSE 250 companies received strong backing for "say on pay" proposals, highlighting a growing demand for executive compensation packages that align with long-term value, corporate governance, and sustainability. Investors increasingly take a longer-term view on governance practices that promote strategic goals, such as sustainability or market resilience. 

 

Accordingly, boards need to design compensation packages that align executive incentives to long-term stock performance, in order to share the investor experience, while promoting the underlying practices that promote sustainable growth. These adjustments should reflect not only immediate financial performance, but also the long-term health and growth potential of the company.

 

The key will be developing strategies that strike a balance between these evolving demands and responsible governance, all while maintaining shareholder trust.

 

Data for smarter pay decisions

Data analytics and market intelligence platforms are becoming increasingly crucial in shaping executive compensation strategies. By integrating quantitative insights on corporate governance, shareholder activism, and ESG trends, boards can access more timely, actionable data. These insights can be delivered directly in familiar formats, enabling boards to design compensation packages that not only attract top talent but also reflect the unique demands of executive roles. 

 

When benchmarking executive pay, many companies rely heavily on US-centric models, which can result in inflated pay levels. Boards should consider reviewing compensation against a broader mix of global peer groups. By using a variety of tailored data that accounts for the specifics of their sector and local market conditions, this creates more accurate pay structures that reflect factors such as domestic shareholders and the employee experience. 

 

Planning for future success

As the business landscape evolves, the need for strategic and transparent compensation frameworks has never been more pressing. Beyond regulatory compliance, pay structures must support organisational health, foster sustainable growth, and align with the broader interests of shareholders.

 

While competitive pay remains crucial for attracting c-suite talent, investor expectations are increasingly shifting. To meet the growing focus on responsible governance and long-term value creation, boards must move beyond short-term financial metrics and focus on forward-looking, strategic goals.

 

By adopting compensation models that incentivise ethical performance, companies can secure the right leadership and establish a solid foundation for long-term stability. This approach will help businesses successfully navigate an increasingly complex and competitive environment. 

 

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Josh Black is Editor in Chief at Diligent Market Intelligence

 

Main image courtesy of iStockPhoto.com and wutwhanfoto