Josh Black, Editor in Chief at Diligent Market Intelligence, examines the shift toward sustainable executive compensation
The debate over competitive executive pay has long been contentious, as companies and investors face the challenge of rewarding senior leadership while ensuring alignment with the long-term health of the organisation and stakeholder expectations.
Boards want compensation packages that reflect market standards, attract the best leadership, and enable companies to grow, innovate, and remain competitive. But they have to make choices about which peer groups to use, how to balance long- and short-term incentives, keep talent happy and align their rewards to strategic goals.
Recent data underscores the evolving dynamics of executive compensation. In 2023, the median granted pay for FTSE 100 CEOs reached £5 million, marking a 6% increase from the previous year, while median realised pay rose by 4% to £3.9 million. However, the picture is different for other executives. Median realised pay for non-CEO executives in the FTSE 100 saw a staggering 67% decline from 2022 to 2023, highlighting disparities within executive ranks and raising questions about the broader implications for leadership incentives.
Balancing short-term and long-term incentives
In theory, compensation should correspond to the complexity of the role and the responsibilities carried by top executives. Problems arise, however, when pay is overly tied to short-term financial metrics, such as stock price or quarterly earnings. These metrics create incentives that favour immediate results over the organisation’s long-term health. For instance, stock-based compensation linked solely to short-term share price movements can encourage executives to focus on market fluctuations rather than investing in areas like innovation, talent development, or sustainability – critical drivers of long-term success.
In the UK, we’ve seen a trend of companies adopting hybrid pay structures that combine performance-based and time-vesting components, balancing short-term outcomes with incentives for sustained performance. This approach aligns with the rising investor support for “say on pay” proposals, which climbed to 94.7% at FTSE 100 and FTSE 250 companies in the first nine months of 2023.
The increase in investor backing reflects a clear demand for compensation frameworks prioritising long-term value creation. Investors are increasingly vocal about the need to align executive compensation with a company’s broader strategic objectives, such as environmental sustainability, corporate governance, and market resilience. There is growing recognition that sustainable pay structures benefit both companies and investors. As a result, boards are under mounting pressure to design pay packages that reflect not just immediate financial performance, but the company’s long-term health and growth potential.
Competitive pay packages are typically benchmarked against peer organisations, a practice designed to reflect prevailing market conditions. However, boards should consider privately reviewing pay against multiple peer groups using a global mix of companies to avoid relying too heavily on a United States-centric approach that inflates pay levels without accounting for local factors such as domestic shareholders and the employee experience. To address this, boards can leverage a variety of tailored data that captures the nuances of their sector and business environment.
Shaping the future of sustainable executive compensation
Academic research and industry insights have become invaluable in shaping effective executive compensation strategies. While academic studies offer broad frameworks for understanding pay structures, industry insights delivered through market intelligence platforms provide more updated and actionable data on compensation, corporate governance, shareholder activism and ESG trends within particular sectors and geographies, and can be combined with benchmarking tools and proxy advisor insights for more powerful analysis.
These insights can also be delivered directly to boards in a format they’re familiar with. Timely, tailored data can help boards and leadership design compensation packages that attract top talent while reflecting the unique demands of executive roles and aligning with long-term company goals.
Looking to the future, executive pay will likely hinge on striking the right balance between rewarding leadership excellence and promoting long-term growth. While competitive pay remains a central tenet of executive compensation, there is an increasing recognition that pay packages must be forward-looking and nuanced.
Transparent, well-structured compensation plans that align with shareholder interests and the organisation’s long-term health can help mitigate risks, build trust, and drive sustainable performance. As investor pressure intensifies and calls for responsible governance grow louder, boards must rethink how they structure compensation to ensure that executive incentives align not just with short-term financial targets, but with the company’s broader, more enduring goals.
As stewardship demands evolve, companies adopting a balanced, well-reasoned approach to executive pay will be better positioned to attract leadership that values growth and ethical performance, laying a foundation for long-term success.
