Executive Remuneration

Executive remuneration — encompassing base salary, short-term incentives, long-term incentives, pension arrangements, and severance terms — is one of the most scrutinised aspects of corporate governance, with direct implications for company performance, risk-taking behaviour, and stakeholder trust.

The design of executive pay packages should align the interests of executives with those of shareholders and other stakeholders, incentivise long-term value creation, and reflect the company's performance and strategic priorities. The G20/OECD Principles emphasise that remuneration should be sufficient to attract and retain qualified directors and key executives, while being structured to align their interests with the long-term interests of the company and its shareholders.

Remuneration Components

Base salary provides fixed compensation reflecting the executive's role, responsibilities, and market benchmarks. Short-term incentives (STIs) typically take the form of annual bonuses linked to financial and operational performance metrics. Long-term incentives (LTIs) usually involve share-based awards (stock options, restricted shares, performance shares) vesting over three to five years, designed to align executive interests with long-term shareholder value. Pension and benefits provide retirement and other benefits. Severance arrangements define terms for departure, including change-of-control provisions.

ESG Metrics in Remuneration

The integration of ESG metrics into executive remuneration has accelerated significantly. Over 70% of S&P 500 companies now include at least one ESG metric in executive incentive plans. Common ESG metrics include emissions reduction targets, safety performance (lost-time injury rates), diversity targets, employee engagement scores, and customer satisfaction. ESRS 2 GOV-3 requires disclosure of whether and how sustainability performance is integrated into incentive schemes.

Say-on-Pay

Say-on-pay provisions give shareholders a vote on executive remuneration, either advisory or binding depending on the jurisdiction. The UK requires a binding vote on remuneration policy at least every three years and an advisory vote on the annual remuneration report. The EU Shareholder Rights Directive II requires a say-on-pay vote at least every four years. Say-on-pay has proven effective in moderating excessive pay and improving the alignment of pay with performance.

Further Reading

• ICGN Executive Remuneration Guidelines — Investor expectations on pay
• G20/OECD Principles — Remuneration governance

Related Topics

• Board Committees
• Shareholder Rights
• Equitable Treatment

References

• OECD Principles (2023), Chapter VI — responsibilities of the board