Executive Compensation

Pay usually has fixed and variable parts. Variable pay rewards short-term results through annual bonuses and longer-term results through share awards that vest over several years. The board's remuneration committee sets the policy, often with outside advisers, and many countries require disclosure and a shareholder vote, called say on pay. The core problem is that pay shapes behaviour: bonuses linked to revenue or share price can reward excessive risk, short-term thinking or manipulation of results. Controls therefore include deferral, performance measures that include risk and conduct, holding rules and clawback. Public concern centres on the gap between executive and employee pay. Read together, the pay policy and its performance measures show what the board truly wants leaders to prioritise.

A bank pays its trading head a large annual bonus based on trading profit alone. Traders take bigger positions each year. The remuneration committee changes the scheme so that half of the bonus is deferred for four years, is measured against risk limits and compliance results, and can be cut if later losses appear.