Tuesday, 8 September 2009

CIPD issues guidelines on executive reward

Followers of HR Case Studies will be aware of the debate that has been buzzing around concerning the calls for regulation of the salaries of the highest paid UK executives, particularly within the banking and finance sectors. The CIPD (the organisation that represents the interests of the UK's HR professionals) has this week issued guidelines to its members to assist them in developing sensible and fair remuneration policies and practices. The CIPD has commented that, “Unfortunately, the issue has degenerated into a slanging match around how much executives earn, rather than about what organisations need to consider to ensure that the way they reward their executives supports the needs of the business.” Echoing the views of EU finance ministers, the CIPD recommends that variable pay, such as bonuses, should be linked to financial and non-financial objectives and deferrals of cash payments should be considered if necessary. In particular, the principles address the issue of linking reward to business performance, and advises that variable elements of the executive's pay (e.g. the annual bonus) should ensure that the value of the package, in its entirety, will vary with business performance. In simple terms, if the business performs, the exexutive is rewarded with a bonus, but if it doesn't the bonus is reduced or withheld.

Read the CIPD Principles of Executive Remuneration guidelines and answer the following questions:

  • What does the CIPD mean by a Remuneration Committee?
  • Why does the CIPD recommend that at least one member of the Remuneration Commitee is independent from the company?
  • What is meant by fixed and variable elements to a remuneration package?
  • What is meant by an incentive scheme?
  • Principle 4 states, "Incentives should reward outcomes that lead to, and reflect, sustainable and measurable value creation." What does that mean in simple English?
  • The principles talk of deferring cash bonuses. What does that mean and why might an organisation consider it?
  • The CIPD is seeking feedback on its proposals. What would your comments be?

Further reading from Management Today: Ten Top Tips: Designing bonus schemes

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