As boards prepare for 2025, one of their biggest challenges will be aligning executive compensation with long-term value creation. Josh Black, editor-in-chief at Diligent Market Intelligence, writes
With FTSE 100 CEO pay reaching record highs and investor expectations around transparency growing, the conversation is shifting. The real question is no longer simply how much to pay senior leaders, but how to structure that pay to drive sustainable growth while addressing the shifting expectations of stakeholders.
Our recent data highlights the complexities at play. While median realised pay for FTSE 100 CEOs rose by 4% to £3.9m ($4.87m), other executives saw a stark contrast, with median realised pay for non-CEO executives dropping by 67% from 2022 to 2023.
This disparity within executive ranks raises questions about the broader implications of how leadership incentives are structured.
The task for boards is clear: move beyond simple market benchmarking and develop compensation packages that balance short- and long-term incentives. How companies approach and respond to these challenges will influence their ability to attract top talent, retain investor confidence, and drive sustained business growth.
Balancing short- and long-term goals
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 that are crucial for long-term success.
To avoid this pitfall, many UK companies are adopting hybrid compensation models that 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.
Rising investor expectations
Investor priorities are shifting. 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.
Leveraging data-driven insights
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.
The future of executive compensation
While competitive compensation remains a cornerstone, there is a growing recognition that pay packages must be forward-looking and aligned with the company’s broader goals. Transparent, well-designed compensation plans that reflect both shareholder interests and long-term organisational health are key to mitigating risks, building trust and ensuring sustainable performance.
As investor expectations continue to rise and calls for responsible governance intensify, boards will need to rethink how they structure executive pay. The focus should shift from short-term financial metrics to a more enduring set of goals: sustainability, innovation and resilience.
Companies that adopt a balanced and thoughtful approach to executive compensation will not only attract the right leadership, but also create a solid foundation for long-term growth and ethical performance. This will position them well for success in an increasingly complex business landscape.
