How do you manage the risks of executive pay controversies and activism?

1 Understand the stakeholder landscape

One of the first steps to manage the risks of executive pay controversies and activism is to understand the stakeholder landscape and their expectations, interests, and influence. Stakeholders include not only shareholders, but also employees, customers, regulators, media, and society at large. Each stakeholder group may have different views on what constitutes fair, reasonable, and responsible executive pay, and how it should be linked to performance, sustainability, and social impact. You need to monitor and engage with your stakeholders regularly, and communicate clearly and transparently about your executive pay philosophy, policies, and outcomes.

3 Incorporate ESG factors into pay design

Environmental, social, and governance (ESG) factors are becoming increasingly important for executive pay governance, as they reflect the broader impact and contribution of your organization to society and the planet. Stakeholders are demanding more accountability and transparency from executives on how they address ESG issues, such as climate change, diversity and inclusion, human rights, ethics, and compliance. You need to incorporate ESG factors into your pay design, by setting relevant ESG objectives and metrics, and linking them to your pay outcomes. You also need to report and disclose how your ESG performance affects your executive pay decisions, and how you align with best practices and standards.

4 Benchmark and review your pay practices

Another best practice for executive pay governance is to benchmark and review your pay practices regularly, to ensure that they are market-competitive, internally equitable, and externally defensible. You need to compare your pay levels, structures, and outcomes with those of your peers, competitors, and industry norms, and adjust them as needed to reflect changes in the market, strategy, or performance. You also need to review your pay practices for any potential gaps, biases, or anomalies that may undermine your fairness, consistency, or alignment. You need to document and justify your benchmarking and review process, and share the results and actions with your stakeholders.

5 Anticipate and respond to pay challenges

Despite your best efforts, you may still face pay challenges from your stakeholders, such as shareholder proposals, proxy advisory recommendations, media criticism, or employee feedback. You need to anticipate and respond to these challenges proactively, by identifying and assessing the sources, motives, and impacts of the potential pay issues, and by developing and implementing appropriate strategies and solutions. You need to communicate and consult with your stakeholders effectively, and address their concerns and expectations. You also need to learn from the feedback and experience, and improve your pay governance accordingly.