Here are some of the common pitfalls we have encountered when talking to organisations about Executive Pay decisions. 

Misalignment with company strategy

Focussing on the wrong targets can drive the wrong behaviours.  If you are using short term performance measures this will potentially drive short term behaviours.  For instance, if an increase or bonus is dependent on a short term increase in financial targets, that might encourage financial decisions that achieve the target and get the increase but are not sustainable in the longer term.

Too much focus on financial metrics

Financial performance is undoubtedly important, but other factors should also be considered.  Financial performance wont be maintained if there is no employee engagement (high turnover and related costs), or innovation is stifled (inability to build and grow the business).  Have metrics that look across the business from alternative perspectives.

Targets are not stretching enough

Just because they are the most senior team, does not mean that your Execs are not at risk from demotivational reward packages.  Poorly designed targets that are not stretching enough can be demotivating.  Once the target is achieved, what is there to aim for?  Likewise, targets that are unachievable are also demotivating, what's the point of even trying? 

Complexity

Overly complicated pay packages can be difficult to understand and manage, resulting in Execs not knowing what they have to achieve or how they will be rewarded for it.  Simplicity and clarity are key here.

Ignoring market benchmarks

If you don't test the market from time to time your reward package can come adrift of the expected market ranges.  Paying too much is as risky in its own way as paying too little and both can cause reputational damage, disaffected stakeholders, disillusioned Execs, and more. 

Failure to recognise performance and/or address performance issues

If the Execs aren't delivering and the reason is related to their performance or something they can directly affect, then you need to be clear about expectations, just as you would with everyone else.  Underperforming Execs can only hide for so long before other stakeholders, like staff, begin to notice.  And, of course, failure to recognise that your Execs are achieving/meeting expectations will be demotivational for them.

Failure to understand what motivates your Execs

This is quite an issue.  We've attended meetings before when RemCo have awarded significant pay increases that their Execs had expressly stated they did not want.  We have also been asked to help put in bonus schemes that the Chair thought were necessary but the Execs were not interested in and so would not engage with.  Find out first hand what their thoughts are before the meeting.  That way you can manage expectations all round.

These are just a few of the pitfalls we have encountered over time.  Hope they prove helpful.