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Transcript of European Reward Conference 2017- "Back to the future: the rediscovery of the organisation in...
The Future of Executive Compensation
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
Richard Belfield, Hazel Rees and Damien Teisseire
10 February 2017
Back to the future…
2© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
Are we returning to the 1950s?
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 3
How did we get here?
Key assumptions until recently
1970s
Jensen
Agency
theory
1980s
Rosen
‘The economics
of superstars’
2000s
Gabaix and Landier
Increasing firm
size explains
increasing pay
1930s
Berle and Means
‘Separation
of ownership
and control’
Why should senior executive reward be distinctive?
Shareholder interests are
paramount (and undifferentiated)
Reward is primarily a function of the
external market in executive talent
But these assumptions are now increasingly under challenge from different quarters…
Evolving investor views and government action are producing three distinct and potentially
competing viewpoints on executive pay
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 4
Pay for performance focus Political pressures
‘Consider other stakeholders’
Involvement of employees and
shareholders
Potentially binding votes on
pay
Publication of pay ratios
Awareness of inequity/
differentiation across groups
De-leverage and align
‘Look to the long term’
Focus on fixed pay and
variable maximum reductions
Lack of trust in performance
target setting
Greater regulation of pay /
governance
Encourage longer-term vesting
‘Performance is primary
consideration’
Higher quantum in return for
performance
Trust board regarding targets
Less regulation of pay/
governance
Return to shareholders = success
At the same time, a more nuanced understanding of risk and reward is
driving company decisions
© 2017 Willis Towers Watson. All rights reserved.
Risk management by boards
Multiple lenses can provide a comprehensive
assessment of strategic alignment and inherent risks of
pay programmes
1. Strategy alignment
Is pay aligned with long-
term business strategy?
2. Remuneration policy
Does policy mitigate risk
and increase strategic
alignment?
3. Remuneration structure
Balance between fixed and
variable pay, short- and
long-term objectives?
4. Pay plan design
Does pay plan encourage
excessive risk taking?
5. Performance metrics
Reflect reward for desirable
behaviours and outcomes?
6. Governance
Is there effective
governance in place?
Are roles clearly defined?
Succession planning
Evidence of internal candidates being superior include
1) Lower employment costs
2) Performance
Pay package for new hire typically 16%
larger than departing CEO
Package for internal promotions
typically 12% lower than departing CEO
33% of FTSE 100 CEOs appointed in
last 3 years
External hire
+1.0%External hire
-3.9%
Internal
-1.0%Internal
+16.4%
Day 1 Year 1
Share Price on day
of announcementTSR Outperformance
Alignment across organisation?
5
The new agenda
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 6
Board and
corporate
governance/
regulatory
framework and
structures
REST OF
ORGANISATION
TOP
TEAM
REST OF
ORGANISATION
TOP
TEAM
FROM TO
What can you do to respond to the new agenda?
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 7
Update role of the RemCo
Develop and apply relevant analytics Clarify governance structures
Articulate framework for whole organisation
Monitor implementation of framework via
analytics
Stewardship of human capital investments –
NOT micromanagement of reward
Understood by employees
Applied consistently to reward across whole
organisation
Reflect EVP(s)
Pay ratios
Group differentials (e.g., by gender)
Cost of employment/revenue
Who makes decisions on what?
Whose interests are considered along the
way?
How to consult with different stakeholder
groups?
Segment employee population clearly and transparently
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 8
Case Study: Experian
WTW - European Reward Conference 2017
Back to the future: the rediscovery of the organization in executive compensation
February 2017
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Agenda
- Experian – ‘At a Glance’
- Noticeable Changes – Past Decade
- Clarity Of The Governance Structure
- Evaluation Of Performance
- Blip or Turning Point?
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• Experian – ‘At a Glance’
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• Revenue: US$4.6bn
• EBIT: US$1.2bn
• Market Cap*: c.£16bn / c.$20bn
• In Top 50 of FTSE-100
• Employees: c.17,000
• C&B : Revenue Ratio: c.39%
• Offices in 37 Countries
• Largest Markets: US, Brazil, UK
• Corporate Headquarters: Dublin
Back to the future: the rediscovery of the organization in executive compensation
Snapshot of Experian
Experian is the world’s leading global
information services company. Our roots
lie in assessing credit risk; today we do
much more.
For the year ending 31 March 2016
* At 13 January 2017
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Back to the future: the rediscovery of the organization in executive compensation
Overview - Experian business segments
Decision
Analytics• Value-added
products
• Used to convert data
into valuable
decisions for
businesses
• Provides expert
consulting, analytical
tools and software
Credit
Services• Large databases of
information, used to
manage risk
• 17 consumer credit
bureaux
• 11 business credit
bureaux
• Automotive
information
• Health
Marketing
Services• Data quality
• Targeting
• Cross-channel
marketing suite
Consumer
Services• Direct to consumer
credit monitoring and
credit matching
services
• Identity theft
protection services
• Affinity (white label)
credit and identity
monitoring services
50% 13% 16% 21%
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• Investment in customer service
• Agile development, technology, security and innovation
• Building enduring relationships with consumers
• Aimed at sustainable growth
Strategy
Focus Growth Improve
Performance
Efficiency Capital
Optimisation
Back to the future: the rediscovery of the organization in executive compensation
Developing direct long-
term relationships with the
one billion people whose data we
hold on file
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• Noticeable Changes – Past Decade
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Past Decade:
• Regulation and transparency around executive pay has increased with the introduction of annual reporting
• Shareholder involvement (through activist representatives on boards and otherwise) and media scrutiny has also increased
• The major financial crash in the global economy may, at least in part, be responsible for additional regulation and increased shareholder involvement
• The digital revolution has impacted and disrupted almost all sectors, markets and how they do business; and
• The speed and scale of change is faster than ever before
Evolution seen at Experian:
• Remained coherent with the business strategy
• Improved Directors Remuneration Report
• Strong Board Governance
• Strong link of pay for performance (limit the number of performance measures for the annual bonus and LTI)
• Introduction of clawback and malus provisions
• Strong shareholder engagement
Back to the future: the rediscovery of the organization in executive compensation
Noticeable Changes
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• Clarity of the Governance Structure
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Back to the future: the rediscovery of the organization in executive compensation
Strong Board Governance
Collaborative culture, independent structure and focused approach drive Board effectiveness
• Company and Board culture of consensus, mutual accountability and meritocracy
• Highly effective Board structure:
• Robust lead director role
• All independent directors on all Board standing committees
• Frequent and regular interactions with senior management
• Key areas of focus:
• Long-term prospects of constituents
• Business strategy and risk management
• Management performance, depth, diversity and succession
Within the framework of our compensation philosophy, our Remuneration Committee considers
multiple factors when determining the appropriate level of compensation for our Executives
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Back to the future: the rediscovery of the organization in executive compensation
Compensation Philosophy
These four key elements of our philosophy guide our Remuneration Committee in its review and
determination of executive compensation
We believe that an effective Reward strategy and practices should:
• Encourage a real sense of teamwork and communication, binding individual short term interests to Experian’s long-term interests
• Evaluate performance and potential on both a yearly (Bonus Awards) and multi-year basis (LTIP)
• Recognise that rewarding an individual’s performance must be constrained within the overall limits of the Company and not be out of line with the competitive market for the relevant talent and performance
• Allow Experian to attract and retain proven talent – this is fundamental to our long-term success as an innovative and global player
• Allow to reward an individual’s ability to identify and create value, enhance Experian’s reputation and build and nurture a dedicated client base
Pay for Performance &
Recognition
Strong Governance & Risk
Management Culture
Attract / Retain a
Talented and Diversified
Workforce
Align to Experian’s
Strategy and
Shareholders’ interests
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• Evaluation of Performance
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Back to the future: the rediscovery of the organization in executive compensation
Performance for Growth: Firmwide Performance Management Process
PERFORMANCE
• Having meaningful and regular
performance conversations
• Performance conversations
• Development conversations
• A more equal balance between what
we do (our objectives) and how we do
it (our behaviours and capabilities)
• Leadership and People Standards
provide more guidance and clarity on
performance expectations
• Ratings are completed on a 1-5 scale
at both Mid-Year and End of Year
Reviews
TALENT
• We believe that everyone has got
talent.
• Our Global Talent Review focuses on
identifying this key talent through
succession planning to build a pool of
high performing people in leadership
roles with significant potential for rapid
growth.
• The Talent Review process includes an
assessment of:
• Performance over time
• Potential
• Readiness for next move
• Talent assessment based on 9-box grid
• Rigorous assessment of future potential
called JDI (Judgement, Drive, Influence)
REWARD
• Our philosophy “pay for performance”
• Senior levels (top c1%) pay is linked
to short or long-term financial targets
• For other levels pay is determined
using a matrix of performance rating
and position in pay band
• Bonuses are determined by financial
performance with final payments
being uplifted by performance ratings
• Guidelines for LTIP awards at all
levels are based on a matrix of
sustained performance rating and
potential assessment
• Performance for Growth is our way of driving and measuring performance goals to meet our strategic plans.
• It ensures we all know where we stand, how we can continually improve our performance and best prepare for future roles.
• It’s about making sure we all have the opportunity to make a real difference as individuals, within teams and as an organisation.
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Support company strategy and objectives
Promote sustainable underlying
performance
Align with shareholders’ interests and value creation
Back to the future: the rediscovery of the organization in executive compensation
Clarity with the objectives
What it is that our CEO and Executives pay package are expected to deliver?
Be consistent with the pay practices for the rest of the
workforce
Allow executives to
respond quickly to changing
market conditions
Motivate executives,
providing an incentive to outperform
This may seem like a complex mix of objectives, but approached thoughtfully, most of them do essentially compliment one another.
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• In Summary
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Collaborative culture, independent structure, and focused approach drive Board effectiveness
– Diverse and talented directors oversee our growing business
– Board succession planning builds an effective, well-rounded, technology and financially literate, and diverse Board
– Effective legal, compliance and risk management is critical for success
Paying for performance, encouraging a long-term focus, maintaining the safety and soundness of the Company and, attracting/retaining diverse talent
– Consideration of many different factors to determine executive compensation
– Long-term perspective on performance with a focus on operating metrics in the main
– Strong relative returns to shareholders despite a challenging macro environment
– Alignment of executives’ and shareholders’ interests through compensation structure
– Prudent use of discretion
Advice to Remuneration Committees and Management teams is simple
– Be informed, be bold, do ‘not’ aspire to be market followers
– Provide context and solid evidence for true performance
– Put your money where your mouth is
Continuing to rely solely on market ‘best’ practice is not only ineffective, but an opportunity lost to building a competitive advantage by using reward as a catalyst.
Back to the future: the rediscovery of the organization in executive compensation
Blip or Turning Point?
What immediate steps can you take?
© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 26
Update role of the RemCo
Segment employee population clearly and transparently
Develop and apply relevant analytics
Clarify governancestructures
Independence
External focus
Internal focus
Understand employee profile and pay models
Balance consistency and tailoring
Consider EVP
Provide data
Total spend vs Return on investment
Manage pay differentials
Agree RACI for reward decisions
External approvals
Report on good governance practice