A SERIES OF ARTICLES FRoM THE 2011 EMEA CoMPENSATIoN ...

THE PAY-FOR-PERFORMANCE CHALLENGE
The financial crisis that began in late 2007 heightened
the need for remuneration committees to make
discretionary decisions outside the established
annual bonus and LTI plan rules due to flaws in target
setting, unanticipated events and volatility of business
performance. The new, revised, country-specific
corporate governance codes and institutional investor
guidelines in Europe provide that remuneration
committees should no longer rely only on the formulaic
incentive pay outcomes but should instead make
appropriate adjustments to align pay-for-performance
linkages.
The Corporate Governance Code in the Netherlands,
for example, clearly states that if a variable
remuneration component conditionally awarded in
a previous financial year would, in the opinion of the
Supervisory Board, produce an unfair result due to
extraordinary circumstances during the period in
which the predetermined performance criteria have
been or should have been achieved, the Supervisory
Board has the power to adjust the value downwards or
upwards.
In Germany, the Act on the Appropriateness of
Management Board Compensation (VorstAG) that
came into force in 2009 provides that the Supervisory
Board should (previously the word “may” was used)
reduce the Management Board’s compensation to an
appropriate level, if the company’s situation deteriorates
to such an extent that maintaining the previous level
of compensation would be unfair. Therefore, by
incorporating corrective mechanisms and a judgement
element, remuneration committees’ decisions gain
a deeper sense of integrity and reasonableness and
deliver a more comprehensive executive remuneration
message.
CONCLUSION
Pay-for-performance analyses are not likely to be
a cure-all, and they won’t eliminate all instances in
which outside groups perceive a disconnect between
performance and rewards. Instead, they are a tool
that should be considered as a supplement to other
best practices that represent sound governance
and process in compensation planning. Paying
for performance, and being perceived to pay for
performance in all situations, can be a significant
challenge. However, using a structured evaluation
process and applying sound judgement and corrective
mechanisms can continually reinforce the alignment of
pay and performance.
Piia Pilv is Mercer’s Executive Rewards Service Segment Leader for EMEA.
Based in Amsterdam, she can be reached at +31 20 431 3864 or piia.pilv@mercer.com.
Kimmo Sollo is Mercer’s Human Capital Business Leader in the Nordics.
Based in Espoo, Finland, he can be reached at +358 9 8677 4315 or kimmo.sollo@mercer.com.
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