The post The World of Executive Compensation Governance Has Shifted. What’s Next? appeared first on GECN Group.

The post ERX Consulting Expands GECN Group into Latin America Strengthening Executive Compensation and Governance Expertise appeared first on GECN Group.

• Increase in commercially led decision making: 25% of new Remuneration Policies in the FTSE 350 changed the structure of incentives, demonstrating an increase in companies adopting bespoke pay structures, driven by what works commercially for the business. The use of positive discretion has also become more prevalent, with three companies applying positive discretion to bonus outcomes and two to LTIP awards.
• Adoption of hybrid incentive plans: 50% of companies that made structural changes as part of their new Policy implemented a hybrid LTIP (consisting of annual grants of performance shares and restricted shares). We believe this trend will continue in 2026.
• Greater flexibility in governance rules: the discontinuation of the Investment Association (IA) Public Register was recently announced, which is one of the governance changes we called for over the last year.
• Uplift in quantum: 58% of new policies proposed an incentive increase. Of those companies that proposed a new Policy, 41% increased incentive opportunities by more than 100%, with the median LTIP increase being 150% of salary for FTSE 100 companies.
• Contentious AGM season: The 2025 AGM season saw an increase in the number of companies receiving a vote below 80% for their Remuneration Policy votes. In addition, two companies withdrew their proposed policies due to shareholder concerns.

Farient believes that these trends will continue into the 2026 AGM season, when we expect more than half of FTSE 350 companies to put their Remuneration Policies to a shareholder vote. Against the backdrop and the ongoing debate around UK competitiveness, we have set out our predictions for the 2026 AGM season below:

1. Hybrid Adoption Will Continue to Increase

Hybrid incentive plans are expected to remain the most common emerging approach in the market. This is already evident, with one of the first 2026 Policies already proposing a hybrid. With more companies now adopting hybrid plans, we expect their use to increase further this year.

Hybrids balance performance alignment with retention by combining performance share plans (PSPs) with restricted share plans (RSPs), allowing PSPs to remain genuinely performance-based and focused on rewarding outperformance. In contrast RSPs provide a safety net during periods of cyclical, industry-specific, or broader economic challenges. Implementing a hybrid would be suitable where companies face sustained uncertainty, seek closer alignment across senior employee populations, or look to remain competitive in global talent markets. While shareholder caution remains, we expect familiarity with these structures to increase where proposals are clearly explained and aligned with company strategy.

As hybrid plans become more established and better understood within the UK market, investor sentiment appears to be evolving. The IA has stated they assess proposals on a case-by-case basis, focusing on what is right for the company. Accordingly, Remuneration Committees considering a hybrid plan should be clear about why the approach is appropriate for their specific circumstances, rather than relying on using generic ‘boilerplate’ rationale. As such, a strategy-led approach is vital when making remuneration decisions, as is ensuring that the disclosure reflects the strategic drivers behind the approach.

ISS has opposed proposals that introduce an increase in the overall quantum alongside the adoption of a hybrid structure. This suggests that opposition has been driven not by the hybrid structure itself, but by concerns around increased quantum combined with increased certainty. By contrast, hybrid proposals that maintain overall quantum and apply a 50% haircut when introducing an RSP have received more shareholder support. This highlights the importance of clearly articulating the rationale for each change independently — both the introduction of a hybrid structure and any adjustment to quantum — to ensure that shareholders and proxy advisers can assess the appropriateness of each element.

2. There Will Be a Step Change in Quantum

Only a third of FTSE 350 companies adopted a new Policy in 2025, resulting in little impact on median incentive opportunities across the market. Therefore, if you just look at the quartiles across the entire FTSE 350, it looks like quantum has remained relatively stable. However, when isolating the companies that adopted a new Policy, the median LTIP increase across the FTSE 100 and FTSE 250 were 150% and 100% of salary respectively.

As we expect approximately 50% of FTSE 350 companies will put forward a new Policy this year, we anticipate significant increases in market data. These uplifts are likely to be material and, in many cases, represent a step change from previous Policy limits.

3. Some Companies Will Get It Wrong

As Boards become increasingly focused on doing what is right for the business, we have seen them to take a more aggressive approach to remuneration. This trend has become evident over the past year, with a rise in Policy votes below 80% and an increase in proposals for bespoke incentive structures. We expect this will continue in 2026.

Recently, a number of listed companies have chosen to withdraw or amend shareholder resolutions in response to investor opposition, reflecting the continued influence of shareholder feedback in public markets. In contrast, those companies with support from major and/or anchor shareholders have proceeded with their proposals, despite opposition from institutional investors and proxy advisory firms.

We expect more boards to continue pushing initiatives they believe are in the best interests of the company, even in the face of mixed or negative shareholder sentiment. In contrast, in response to evolving investor expectations, some companies will move quickly to follow emerging trends without fully considering how proposed changes align with their underlying strategy. When this occurs, decisions are more likely to miss the mark with investors, increasing the risk of declining shareholder support and, in some cases, failed Policy votes. This reinforces the importance of a considered, strategy-led approach to remuneration design, rather than reactive adoption of market trends.

4. Non-Executive Director Fees Will See a Significant Increase

Recent IA guidance has highlighted the need for companies to regularly review Non-Executive Director (NED) fees to ensure they appropriately reflect the complexity, responsibility and time commitment of the role. This is particularly relevant as the demands on NEDs continue to increase, with greater regulatory scrutiny, heightened stakeholder expectations, and more complex operating environments.

Despite this guidance, NED remuneration has not increased materially in recent years, in part due to continued sensitivity around pay levels amid the cost-of-living crisis. As a result, the gap between NED fees paid in the UK versus those available internationally has continued to widen, increasing the risk that companies may struggle to attract and retain experienced NEDs, particularly when competing with international markets where NED remuneration is more competitive.

We believe many companies could justify meaningful increases in NED fees, potentially in the range of c.150% to 200% over time. In addition, companies should review the structure of NED remuneration. In the US, almost all companies deliver a portion of fees in shares, compared to less than 10% of companies in the UK. Consistent with recent IA and FRC guidance, providing a greater proportion of fees in shares, purchased at market value, would strengthen alignment with shareholders and bring UK practice closer to international norms.

5. Greater Focus on Pay-for-Performance Alignment

Another key theme that has emerged is an increase in incentive outcomes versus historic norms. This pattern has persisted since the pandemic, when increased uncertainty likely led to more achievable targets being set. Current outcomes are significantly above the historical averages typically seen for annual bonuses (60%–70%) and LTIP (40%–60%).

In the FTSE 100, the median annual bonus reached 79% of the maximum, and LTIP outturns were at 75% of the maximum, both exceeding prior year levels. The FTSE 250 also reported strong vesting, with a 70% median annual bonus outturn and the LTIP vesting at 59% at median. These figures represent notably high outturns, particularly in the FTSE 100.

As companies continue to increase the quantum of incentives in the coming years, Farient anticipates that shareholders and proxy advisory firms will increasingly scrutinise pay for performance, the stretch of incentive targets, and the target-setting process. With increased scrutiny on target setting, Remuneration Committees will face growing pressure to ensure incentive plans are both competitive and defensible.

Conclusion

This year’s developments and expectations for the upcoming year, show that both the environment and advisors must adapt to the changing market. Ensuring remuneration decisions are aligned to the long-term strategy of the company is vital to support the company in achieving its long-term strategic objectives and to receiving the necessary support from shareholders.

Farient’s approach is strategy led. We consider what works best for each company by carefully considering its strategy, challenges, and future ambitions. This allows us to provide a fresh perspective, informed first and foremost by the commercial requirements. If you would like to discuss these predictions or your specific situation, please contact Stephen Cahill (stephen.cahill@farient.com), David Cohen (david.cohen@farient.com), or Alex Styles-Morris (alex.styles-morris@farient.com)

The post Top 5 Predictions for Remuneration Committees appeared first on GECN Group.

Looking ahead to 2026, we expect ongoing challenges related to economic growth, driven by both geopolitical and technological developments. Current projections indicate that salary budgets for 2026 may be lower than those of previous years and fall short of initial estimates. Labour markets remain relatively flexible, with most organizations reporting low to modest levels of voluntary turnover. These factors are collectively contributing to the emergence of distinct compensation challenges.

Our 2026 Predictions

• Customized executive compensation packages — Growing focus on varying compensation arrangements within senior leadership teams to recognize differentiated talent markets.
• Individual investors becoming more influential — The role of the traditional proxy advisor (ISS/Glass Lewis) is changing.
• Distinct compensation for technology roles — Recognition that tech-related positions require unique compensation packages to attract and retain top talent.
• More emphasis on entry and exit pay — Increasing scrutiny and structure around onboarding and severance compensation for executives.
• Ongoing debates over one-time awards — Continued discussions between companies, investors and proxy advisors about the purpose, size, and transparency of exceptional, non-recurring compensation awards.

RECAP of 2025 Predictions

2026 Predictions

We continually monitor the market for emerging trends and best practices and gather insights from our clients. Our top five predictions for 2026 include:

1. Customized executive compensation packages

With the growing variability in executive compensation across industries and regions, organizations are increasingly utilizing multiple reference points to address the unique talent markets relevant to their leadership teams. For instance, certain positions may be more closely aligned with industry demands on a global scale, while others require skills that are more transferable within local labour markets.

Additionally, access to talent insights enables companies to differentiate compensation for executives possessing critical expertise, demonstrating higher performance, exhibiting greater future potential (such as succession candidates), or occupying roles with significant value creation opportunities.

Our proprietary compensation databases further indicate that market premiums can vary by job function. For example, there is frequently a premium for operational or divisional executives due to their broader scope of responsibilities, whereas many corporate functions tend to have narrower and more specialized roles.

2. Individual investors becoming more influential

There is growing regulatory attention on the influence proxy advisors wield within the market, particularly with respect to issues related to Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) criteria. This follows increased direction from the U.S. administration to moderate the role of proxy advisors in shaping market practices and outcomes.

In October 2025, Glass Lewis announced two critical changes to its proxy voting practices that are expected to shape how institutional investors approach governance decisions in the coming years.

• Glass Lewis will support clients in transitioning from benchmark policies to tailored voting policies that more accurately reflect their individual investment philosophies. While many Glass Lewis clients currently use customized or thematic guidelines, the company’s stated goal is to enable all clients to vote in accordance with their own, distinct policies.
• The firm will also move away from single-policy research and recommendations, instead providing multiple perspectives that resonate with the diverse viewpoints of their clients. Starting in 2027, clients will be able to access these various viewpoints to inform their proxy voting decisions.

Institutional investors are increasingly adopting more individualized approaches to proxy voting. While they continue to rely on proxy advisors for research and data, many are developing customized policies that allow for independent vote recommendations, especially in unique or contentious situations. This trend is indicative of a broader shift towards more nuanced and context-specific decision-making in proxy voting.

These changes collectively point to a greater emphasis on investor engagement and transparent disclosure by companies. There is an increasing focus on clearly articulating the rationale behind decisions, particularly when those decisions deviate from established norms or benchmarks. Companies must be prepared to explain the “why” behind their actions, reinforcing the importance of proactive and strategic communication with investors.

3. Distinct compensation for technology roles

The technology sector consistently ranks among the highest paid industries worldwide. Recent research released by the GECN Group indicates that median CEO compensation in this sector reaches $16.8 million, compared to approximately $9 million in other sectors. Beyond executive roles, technology-related positions—especially those focused on business technology and transformation initiatives such as AI—typically command higher compensation than traditional hardware and software roles.

Technology organizations generally:

• Emphasize equity-based compensation for employees at both startups and established firms
• Allocate a smaller proportion of total compensation to cash payments
• Provide increased flexibility and contemporary benefits packages
• Exhibit significant variation in pay levels, offering substantially higher rewards to top talent

As a result, companies are exploring segmenting their technology workforce to better tailor compensation programs and strategies. This approach is especially relevant when specialized roles require unique skill sets unavailable elsewhere within the organization. Often, these teams may operate as separate divisions and be managed under distinct expectations.

4. More emphasis on entry and exit pay

The executive lifecycle starts with selection and hiring and concludes with termination and offboarding. Upon hiring, contracts are negotiated to establish the terms and conditions that will govern the entire duration of that lifecycle. When challenges arise later in the employment relationship, the costs associated with hiring (such as sign-on incentives) and termination (including severance packages) can be substantial. At these critical moments, the underlying terms are often scrutinized, though opportunities for meaningful adjustment may have passed.

HRCs are placing increasing emphasis on all aspects of employment terms and conditions, including:

• Implementing more tailored severance provisions that account for individual circumstances and evolve over time, rather than relying on standard multiples that may exceed common law benchmarks for specific executive positions.
• Establishing clearer termination language within incentive plans that distinguishes between termination without cause and retirement, with the aim of promoting genuine retirements. There is a prevailing issue where executives anticipate being “terminated” upon retirement to secure severance and preferential long-term incentive plan (LTIP) treatment.
• Structuring sign-on awards as equity with multi-year vesting schedules to align with share price performance and promote share ownership. The award amounts should closely correspond to what is forfeited and remain distinct from ongoing compensation. Organizations may wish to consider extending beyond the standard three-year period by utilizing treasury-issued shares and potentially structuring these as “inducement awards” under TSX guidelines in order to bypass shareholder approval requirements.

  5. Ongoing debates over one-time awards

HRCs face a variety of internal and external factors that can influence executive team retention and engagement. Sometimes, the standard executive compensation program may not suffice, presenting an opportunity to implement a special or one-time award in addition to regular compensation.

Because such awards are often met with skepticism by investors and their advisors, organizations should be prepared for scrutiny of the rationale and circumstances surrounding their use. In 2025, the CCGG issued additional guidance regarding special awards in its Executive and Director Compensation Guidebook. The guidance recommends that special awards:

• Should be tied to company and/or individual performance
• Be avoided during periods of industry-wide cyclical downturn
• Promote long-term strategic focus, utilizing higher performance targets, extended vesting periods, and settlement in DSUs or shares to be retained until retirement

Given the current environment of increasing geopolitical uncertainty and the need for companies to make bold changes, it is anticipated that companies will more frequently consider using special awards to facilitate business transformation initiatives, support executive retention, further differentiate compensation for key roles and foster greater share ownership.

The post Five Executive Compensation Trends That Will Shape 2026 appeared first on GECN Group.

Two thirds of this year’s respondents were investors, most of them with a global market focus (62%), followed by a US focus (21%).

Investors and non-investors continue to disagree on almost everything, including on PSUs versus RSUs.

In the US, where “hybrid” plans (granting RSUs that vest based on service only and PSUs that vest based on performance hurdles) are common, companies face pressure to increase the proportion of PSUs versus RSUs. In the UK, many companies have put hybrid plans to vote following the release of new corporate governance principles enabling greater flexibility in remuneration frameworks (see HERE). The Australian market permitted RSUs to companies complying with prudential regulations, and subsequently allowed others to introduce them if the grants met certain conditions. Recently, however, pushback from proxy advisers ACSI and Ownership Matters which, combined with ISS’s consistent pushback, will likely limit further Australian adoption.

Yet, on a global basis, only a small proportion of investors expressed a hard ‘no’ to hybrid plans in this year’s ISS survey. How this translates for an ASX listed company will depend very much on who its investors are, their guidelines, and their source of proxy advice.

Time-based vs. performance-based long-term executive equity grants

Last year’s ISS survey asked whether a high proportion of time-vested equity versus performance-hurdled equity should continue to be a negative voting factor. Asked in this way it was unsurprising that a high proportion of investors wanted ISS’s voting recommendations to favour PSUs. This year’s survey line of questioning varied and focussed on when time-based equity might be ok.

Only a fifth of investors thought RSUs were never appropriate. The highest number of respondents among investors and non-investors accepted time-based equity only as part of a hybrid plan. Approximately a third of investors noted approval was industry and case specific.

Less than 5% of both investors and non-investors thought that other factors (such as grant size, underpins, clawback etc) were more important than whether the grants had performance measures.

Investors preferred longer vesting holding periods for RSUs (at least 5 years combined vesting and holding period).

In the UK, only 15% of investors said that long term equity awards should always be PSUs. Approximately a third of investors said hybrid plans were alright depending on the terms of the plan (including the mix of PSUS and RSUs), and approximately a third believed the plans were alright if not adopted in addition to increases in opportunity. Approximately 20% believed the plans should only see adoption for companies that strongly compete for talent in the US. This may reflect investor views if ASX listed companies were to shift towards having a higher proportion of hybrid plans.

Board executive and workforce diversity in the times of Trump

Approximately a third of investors remain focussed on diversity and diversity targets and continue to expect disclosure of diversity approaches from US companies. Another 15% remained focussed on board diversity.

Approximately 45% of investors recognised the changing landscape, with some considering changes on a case-by-case basis and others expecting disclosure as to how the company is changing its programs in the current environment.

NED pay

When asked about US NED practices, roughly equal numbers of investors and non-investors expressed concern about:

• Inadequate disclosure for unusual NED payments
• Excessive perquisites, performance awards, option grants or retirement benefits
• Large NED pay

The second category is a large bucket – hopefully next year will look at perks, option grants and retirement benefits separately.

The post Eighty percent of investors supportive of hybrid plans appeared first on GECN Group.

These changes mean that outcomes on ISS quantitative tests for 2026 might be different than what companies expected under the 2025 methodology. The longer time horizons also suggest that proxy readers will expect the Compensation Discussion & Analysis (CD&A) disclosure to provide context about past pay and performance that companies might have otherwise considered history.

The Changes: Expanded Time Horizons for RDA, MOM, and FPA

RDA, which measures rank in CEO pay versus rank in relative total shareholder return (TSR) performance against peers, moves from a three- to a five-year look-back. MOM, which assesses CEO pay versus the median pay of peer companies, moves to include a three-year window that gets averaged equally with a one-year look-back. FPA focuses on financial performance across four EVA metrics, incorporating EVA performance and CEO pay from five years.

While the RDA and MOM generally apply to every company, the FPA only impacts companies that have an elevated level of concern surfaced by other quantitative tests. In those cases, the FPA could either lower or raise the initial P4P concern.

ISS Changes to 2026 Pay-for-Performance Metrics

Source: ISS

Concerns and Implications

While some companies may see different outcomes than expected under the time horizons in effect for 2025, pay-for-performance methodology changes like the ones ISS will implement for 2026 tend to affect companies at the extremes of pay or at the margins of performance. We anticipate that most companies will fare no better or worse under the longer timeframes incorporated into RDA, MOM, and FPA in 2026.

Some companies, however, will see effects from the time horizon changes. Farient anticipates cases like the following could produce a different outcome on the ISS quantitative tests this year:

• A new, lower-paid CEO in the most recent years and much higher-paid CEO in the older years. In these cases, the high CEO pay from the past might result in an elevated level of concern and signal a potential pay-for-performance disconnect
• Poor TSR performance except in the most recent year. In situations where stock-price performance turned around only recently, companies will have a harder time avoiding concerns from the RDA test
• Spikes in CEO pay due to triennial equity grant cycles or mega-grants. Companies that provide big stock awards only once during the review period might see the magnitude of those grants spread across more years and not necessarily result in elevated concern levels
• COVID recovery impacts affecting TSR and/or financial performance in 2021. The post-pandemic recovery will be part of the five-year look-back, which could help or hurt companies given potential distortions in stock price, financial performance, or CEO pay over that time. Compensation Committees will need to review the history of their pay programs to understand whether decisions and outcomes from five years ago will influence current test results, as even discontinued legacy pay practices may raise scrutiny

Guidance for CD&A Drafting

Compensation Committees should ensure that the CD&A addresses any pay or performance concerns from four or five years ago which the longer time horizons for these ISS tests might surface. The CD&A may need to include more history and rationale for pay decisions, with reference to five-year performance and pay data, and the disclosure should certainly highlight improvements or adjustments made to better align CEO pay with long-term shareholder value.

Companies must ensure disclosures include clear and accurate details that provide the context necessary for proxy readers to understand any concerns raised by ISS quantitative tests. The CD&A should anticipate questions from shareholders and proxy advisors about legacy compensation arrangements, and provide answers in the current disclosure and not just reference prior proxies.

The CD&A will also need to justify decisions that may appear appropriate in a three-year context but seem less favorable when viewed over five years. Companies may need to provide disclosure that explains the Committee’s rationale for decisions made not just in the most recently completed fiscal year but also over the last five years.

Open Questions and Corner Cases

Whenever proxy advisors make methodology changes, questions always come up about special circumstances and unique situations. Farient identified a couple of scenarios where companies may need to consider how shareholders would interpret outcomes from the updated ISS tests:

• Two to four years of disclosed performance. In its mechanics document, ISS indicates that it will use years of available data for the RDA and FPA tests; for MOM, ISS will use three years if available but otherwise default to one year. New and recently public companies should understand the scope of these tests and whether adverse outcomes may occur
• Legacy performance data for companies coming out of a spin or business divestiture. Depending on circumstances, ISS may attach legacy CEO pay and stock-performance to what might technically be a new company. For example, a public company that spins out several businesses and emerges as a new public entity may be profiled by ISS with pay and TSR of the former firm. Companies facing this kind of situation may need to query ISS to understand which pay and performance figures the quantitative tests will use

Act Now to Avoid Surprises Later

As with every proxy season, companies should review the pay program and CD&A against current shareholder and proxy advisor expectations. This year’s review will need to include a look at pay and performance data for the past five years, not just the last three. More than before, the CD&A will need to address legacy practices and provide clear explanations for pay-for-performance misalignment, whether recent or in the last five years.

The post Resurrecting History: ISS Lengthens P4P Tests appeared first on GECN Group.

When making investment decisions, investors tend to give primacy to who the CEO is and who may be the successor, not to who sits on the company’s Board of Directors (the “Board”). Typically, the CEO is perceived as more determinative for company success than the Board or any of its members.1

At the same time, who serves on the Board is far from inconsequential. First, in many jurisdictions the Board plays a final or at least a critical role in selecting and dismissing the CEO. Wrong decisions here could lead to a low-achieving or even value-destroying CEO being chosen or tolerated.

Second, with the duty to provide oversight, the Board has to perform a daunting ongoing balancing act, often under shifting business conditions. It has to monitor the CEO closely enough to detect early any signs of underperformance or mismanagement. But it has to do this in a way that does not unduly curtail the CEO’s operational latitude or stifle entrepreneurial initiative.

Third, in the task of looking after the company’s long-term interests, Board members enjoy a privileged vantagepoint. This derives not simply from their independence, experience, or healthy distance from the company’s daily ups-and-downs. It also relates to the often-longer office tenure of Board members compared to CEOs.2

Fourth, as the company’s highest organ, the Board has ultimate accountability for company strategy and performance. When a company fails – even when the failure may be more attributable to actions by executives – investors and regulators are prone to ask, “Where was the Board?”3 Paradoxically, when a company succeeds, few are those who applaud the Board’s contributions.

Own-Work Cognition

Given these formidable Board accountabilities, investors and other stakeholders have an interest not only in how a company chooses its Board members. They also care about how well these Board members deliver once in office.

In light of this, it should also matter to stakeholders how self-aware a Board is of how good a job it is doing and how it evaluates its progress. Shortcomings in this regard could result in the Board recognizing too late a particular weakness or misjudging the overall quality of its work.

Yet this angle of corporate governance continues to be insufficiently explored. Post-mortems of company failures typically point to Board deficits such as inadequate oversight of management, misguided decisions, or poor Board composition. But the analyses rarely probe deeply enough into the degree of self-cognition by the Board of the caliber of its work or the robustness of the methodology it employs to monitor and appraise its actions and accomplishments.4

For example, following the 2019 WeWork scandal commentators criticized the Board for having failed to challenge the CEO sufficiently on his financial assumptions, to recognize his conflicts of interest, and to bring members with more diverse experiences onto its ranks.5 But the analyses did not explore the extent of Board performance self-awareness or the nature and quality of the Board assessment process. Might WeWork Board members have thought they were doing a good job?

More rigorous approaches in this area can also aid a Board to deal timelier with internal differences. This can prevent disruptive outcomes such as in a real scenario playing out at the time of the writing of this article.6 In this case, a Board member of a major company carried out in effect a “noisy withdrawal”7, accusing fellow Board members of ignoring serious problems at the enterprise. Some reports suggest that personal interests may also be involved.8 But once the dust settles, it will be revealing to see what the Board had been doing to identify and address any own-performance weakness areas.

The Five Step-Ups

The author’s work with Boards around the world suggests five essential “step-ups” when the Board is looking to elevate its performance self-awareness and earnestly answer the question, “How do we know how well we are doing?”

1. Make the Sporadic Regular

Boards of regulated or quoted companies in many jurisdictions are required to conduct periodic own assessments. How often and in what depth can differ. Even where no such rule exists, a Board eager to enhance its own-work cognition recognizes the value of regular assessments.

In some instances, carrying out the exercise every two years suffices,9 while in others a yearly process is de rigueur. Factors that support higher frequency include:

• A higher company risk profile
• Material new business challenges
• Changes in the company’s strategic direction
• Frictions in the Board-Management relationship
• Significant alteration in Board composition such as a new Board Chair or investor representative
• Evidence of unresolved Board internal tensions
• Evidence of any Board members not carrying their own weight
• Company or market changes requiring new skills or experience on the Board
• Need to increase Management or Board succession readiness

One effective practice for bringing discipline to the self-assessment cycle is to define it in the Board’s operational rules, multi-year plan, or similar Board document. This has the advantage of securing a place for assessments on the Board’s calendar.

To bring more value, the timing of assessments is aligned with other major Board activities. For example, if the tenure of one or more Board members is expiring, it is sensible to hold the assessment well in advance of such expiration. The findings can help inform what qualities and expertise to look for in the search for a new Board member.

Another benefit of regularity in Board assessments is that it permits multi-year tracking of Board progress. In this regard, it is important for the Board to establish the means to preserve each year’s findings, learnings, and methodology employed. This will ensure that the company’s future Boards will also benefit from the insights.

2. Pivot to Active Performance Management

Board assessments traditionally have been positioned as an assurance check that the Board is meeting its legal and other prescribed obligations. Some call this a hygiene or boundary condition test. But this approach detracts from the equally important question, “How much added value is the Board’s work generating?”.

Thus, a fundamental mindset shift is needed, from mere duty fulfillment to performance mindfulness. This requires a will by the Board to probe into the extent and quality of its work. But this shift is incomplete if limited to the formal Board assessments carried out annually or with other frequency.

Here the Board can learn from the discipline of performance management long established in human resources practice. This discipline itself is undergoing considerable change. Whereas earlier it was acceptable practice to assess an employee yearly or semi-annually, today it is generally recognized that better results can be achieved with more active performance management.

Among other things, this involves pursuing more conscious engagement with the employee and not postponing comments or suggestions for improvement to some future point. Ideally, such input is delivered in real time, such as immediately after a presentation, project delivery, or other event displaying the employee’s prowess and performance. Such early steering helps the employee know where to course correct in his or her way of working.

Board members, of course, are not employees. Care has to be exercised to make the process in content and tone appropriate for a Board context. Yet the insight that assessing performance is not an event but an active, ongoing process, transfers well to Boards.

Practically, this has two implications. First, it means that the Board needs to reserve time at the end of or immediately following each Board meeting to reflect on how well it did at such meeting. This is different from recapping the agenda items or action steps from the meeting. Instead, it is a session focused on the Board’s own performance.

To promote more candid exchange, the above is done at a Board-only session, without Management presence. It is helpful to pose each time a few standard questions to guide discussion, such as “How did we do compared to our last Board meeting?”, “Where were we insufficiently critical?”, “In which way were we helpful/not helpful to Management?”.

Second, active performance management at the Board level also means recognizing the special role of Board leaders and of all Board members, as described in points 4 and 5 below.

3. Look Beyond Collective Board Performance

Of all the appellations one may attach to a Board, there is probably none more fitting than “team”. The Board is a team and, to be effective, it has to work collaboratively as such. Thus, there is considerable value in probing the collective Board awareness of its performance and evaluating the Board’s work as a whole.

But a Board also consists of single members. Each has a duty to think and carry out his or her responsibilities independently. Each has also to contribute singularly. In addition, a Board has sub-teams in the form of committees. If performance is to be thoroughly evaluated, it has to be measured also at each of these levels.

With regard to committees, Boards today are increasingly including questions in the periodic Board assessments exploring the dynamics and quality of work in committees. Here a fitting methodology is also essential. For example, it is helpful to distinguish between how the members of a committee view the committee’s performance and how those outside that committee perceive it.

It is also of value to assess a committee’s interaction with the full Board and with other committees. For example, there are topics—such as data protection and privacy—that may cut across the work of the Audit, Risk, and Compensation & Human Resources committees. How well these committees share information and collaborate can impact overall Board effectiveness and merits appraisal.

Far more challenging for many Boards, however, is addressing the topic of individual Board member performance. The hesitancy is understandable. Given the senior composition of a Board and the collegial relationship among its members, there can be a tendency to simply count on each member’s sense of duty to deliver. From this angle, any evaluation of individual performance may be thought of as superfluous or even inappropriate. It may also be believed that the contributions of individual Board members will anyway tend to equalize in the long run.

But similar to employees, the performance of individual Board members in reality can vary considerably. For one, there are often notable differences in the degree of energy and time members devote to the task.

One factor that can affect the time spent by a Board member is the number of additional mandates he or she exercises, whether on another Board or as an executive at another enterprise. In the market there is growing appreciation that an otherwise brilliant prospective addition to a Board may make less sense if the Board will not be able to reliably count on such person’s full participation and contribution.

Competing external time demands can also adversely affect a Board member’s willingness to volunteer for tasks, to engage in “in-between-meetings work”, and to contribute to the work of committees. The latter has been on the rise in recent years.10

The above also includes the quality of preparation for Board meetings. For example, it is not infrequent that Board evaluations reveal one or more members perceived by peers as skimping in the advance study of Board meeting materials.

Of course, there can also be wide variance in the quality of individual Board member performance in the boardroom itself. Some members shine more than others in asking the right questions of Management, in distilling insights, in generating ideas, and in contributing to fashioning solutions for the company’s central challenges.

The above-mentioned differences make a compelling case for assessing individual Board member performance.11 After all, the contributions of each individual member can substantially enhance or detract from the overall Board performance.

Practically, this means incorporating in Board evaluations a safe means for members to provide their frank views on the individual contributions of their peers. Another technique is a self-assessment by each Board member. The latter encourages personal reflection and a sense of ownership for one’s work, but it comes up short on objectivity. More importantly – different from peer input – self-assessments do not help a Board member identify any personal performance blind spots.

4. Recognize the Special Duty of Board Leaders

In promoting Board self-awareness and on-going appraisal of its work, Board leaders play a special role.

First, the Board Chair bears the main responsibility for setting the right tone. This may include persuading unconvinced Board members of the utility of Board feedback sessions and periodic formal assessments.

Second, as head of the Board, the Chair works to gain and maintain an overview of the Board’s performance. He or she remains vigilant of any tensions or deficits—whether at the Board, committee, or individual performance level—and acts to timely address them. This may include holding targeted performance discussions with individual Board members. These are most productive when they are constructive in tone but do not shy from pointing to areas where the individual can be more effective.

Third, the Board Chair ensures that suitable formal Board performance assessments are held in accordance with the agreed cycle. He or she also helps shape decisions on the methodology to use and on the potential use of an independent party to facilitate or carry out the assessment12.

Fourth, the Board Chair guides the Board discussion on drawing lessons from the assessments and ensures they lead to action. Without visible follow-through, the process can quickly lose credibility. In the case of an individual Board member who continues to underperform despite being granted multiple opportunities to improve, the Chair may face the arduous task of recommending a resignation.

Where a Board has a Vice-Chair or a Lead Independent Director such person may share some of the responsibilities outlined above. At minimum, those in these roles step up when the Chair is not carrying out the performance management responsibilities satisfactorily. The Vice-Chair or Lead Independent Director offers an alternative voice, one that is also useful for ensuring that the Board Chair’s own performance is also subjected to assessment. In some Boards, the lead for Board assessments may lie with the Chair of the Nominations Committee.

Committee chairs similarly have special responsibilities. Their focus is committee-level performance. They work closely with the Board Chair to align assessment approaches and serve as conduits between committee-level and full Board improvement actions.

5. Bake into the Board Culture

The efforts of Board leaders to elevate Board performance cognition and active performance management constitute a necessary but, alone, an insufficient condition. Ultimately, staying focused on continuous improvement requires contributions from each Board member.

The contributions by each Board member break down into four main action areas:

• Accepting accountability for one’s own performance and improvement
• Supporting fellow Board members with their own development, such as by providing timely constructive bilateral feedback
• Vigilance that Board appraisals also include confidential means to provide input on the leadership of the Board Chair and the chairs of each committee
• Supporting an ethos of open dialogue within the Board where members feel supported when pointing to where the Board could do better

Together, the above demonstrate why active performance management can best be achieved when it is viewed as a shared responsibility to be built into the Board culture.

Practically, the embedding process begins with an explicit articulation of continuous self-improvement as a Board value. Some Boards now include such commitment in their charters or other internal Board principles.

Promoting a Board learning culture also requires transparency. While individual feedback is confidential, the assessment process and cumulative outcomes are shared within and owned by the entire Board.

Cultural embedding takes time and consistency. It requires regular reinforcement through Board discussions, development opportunities, and leadership messaging. But when successfully established, a culture of self-examination creates a foundation for the Board’s continuous growth.

Conclusion: From Self-Awareness to Sustained Board Excellence

By implementing the five “Step-Ups” suggested above, a Board can stimulate a mindset shift in support of Board excellence. This includes moving from the notion of Board “duty fulfillment”, to “performance self-awareness”, and ultimately to “performance optimization”.

Board leaders, particularly the Chair, play a central role in this effort. They view assessment as an ongoing responsibility, not a periodic event. This means continually monitoring Board progress, providing real-time feedback, and addressing issues as they arise rather than waiting for formal assessment cycles.

In managing Board performance, multi-layer assessments bring the most value. They provide a richer picture of how the Board is doing and help with the early identification of improvement opportunities. This approach recognizes that different issues may require different interventions – some at the individual level, others at the committee level, and yet others at the full Board level.

With respect to individual Board member performance, better results are generated when multiple methods are used, including self-evaluation and peer input. This allows insights from different angles. Whatever the method, the assessment of the individual Board member encompasses his/her performance on the Board both in substantive areas (e.g., financial analysis, strategy development, risk assessment, etc.) and in behavioral areas (e.g., constructive challenging, collaborating, managing conflict, etc. ) .

The journey to higher performance self-awareness – a kind of metacognitive understanding of how the Board learns and improves – is not instant. It moves from sporadic to regular assessments, from passive to active performance management, from a collective to a multi-tiered focus, and from a leaders-only to a shared- accountability mindset.

The post Five Step-Ups for Boosting Board Performance Self-Awareness appeared first on GECN Group.

The post Hong Kong–Based Pretium Partners Joins GECN Group, Expanding Executive Compensation Expertise Across Greater China and Asia appeared first on GECN Group.

The post Global CEO Pay: U.S. Leads, Tech Titans Surge, Performance Equity Prevails appeared first on GECN Group.

They have been a common risk alignment tool among European banks and other financial institutions since their introduction in the EU regulatory landscape after the 2008 financial crisis. Most recently, in 2023, clawbacks became mandatory for executives of listed companies in the US.

Market insights in Switzerland

While in other jurisdictions, including the US and the EU (merely for the financial industry), clawbacks are legally required, in Switzerland, the provision of a clawback is to some extend recommended1 but not (yet) mandatory from a legal perspective. Still, large international proxy advisors already expect companies to have clawbacks in their toolbox for effective risk alignment.

In fact, clawbacks are more and more frequently observed in Switzerland with 29% of listed companies having clawbacks in 2021 vs. 22% in 2019. Notably, larger companies are at the forefront in this regard – potentially also because they are in the spotlight and under public scrutiny when it comes to governance best practices. For example, around 80% of the SMI companies have this mechanism in place. In contrast, there are fewer medium and smaller companies which include clawbacks, but with a strong positive trend between 2019 and 2021 (SMIM: from 44% to 63%; SPI Mid: from 15% to 23%; SPI Small: from 8% to 13%).

Typically, clawbacks are foreseen for executives and majorly apply either to their entire variable compensation (51% of clawbacks), or solely to the long-term variable elements (44% of clawbacks). They usually enable the Board of Directors to reclaim the relevant compensation elements for up to three years if certain trigger events occur, such as severe misconduct (61% of clawbacks), illegal activities (54% of clawbacks) or in case of financial restatements (49% of clawbacks).

Despite the focus and scrutiny by proxy advisors, some investors and the public, there are very few publicly known cases where a clawback was actually enforced in Switzerland. This can lead to the question: Are clawbacks an effective tool to achieve the goals regarding accountability and risk alignment mentioned above? Or is it like riding a toothless tiger?

Precedence in Switzerland

A Federal court decision from 2015 has provided some precedence for clawbacks. The main question to assess whether an award would be considered recoupable from a legal perspective is:
• Is the award considered a gratification, i.e., a discretionary element and not a variable compensation element?

This differentiation has actually been a challenge for labor law experts for a while, but the precedent case also offers some guidelines in this regard, along the following questions:
• How relevant is the variable part in the individual’s overall compensation package on a relative basis and, specifically, does it exceed five times the median Swiss salary?

Depending on these conditions, a potential clawback is enforceable – given the pre-determined trigger conditions occurred.

International considerations for Swiss companies – SEC clawback application

In 2023, the Securities and Exchange Commission (SEC) in the US introduced a new clawback rule which will become effective on December 1, 2023. This rule applies to all listed companies in the US, incl. Swiss companies with a dual listing and foreign issuers. Under this rule, a clawback is required in case of a financial restatement of accounts which impacts any variable compensation granted, vested or paid out during the previous three fiscal years from discovery of the restatement. The recoverable amount refers to compensation that an Executive would not have been entitled to, had the financial statements been accurately presented.

Effectiveness beyond legal enforceability

Despite the Swiss Federal ruling in 2015, concerns regarding enforceability still remain. However, this does not mean that clawbacks are not effective per se.

A clawback could be considered to be most effective due to its preventive character, i.e., when it does not have to be enforced because a trigger event did not occur in the first place. Rather than looking at it as a punishment tool, a clawback could also be understood as a signal to employees that conduct and risk-aligned behavior is key for a company. The low number of cases of (public) enforcement might indicate a positive impact on risk alignment and prevented events that would have triggered clawbacks.

In this context, the determination of relevant trigger cases is key. While companies in other countries (especially in the US) are more limited by the prevailing rules and regulations, Swiss-based firms still have the flexibility to select the trigger events that are key in light of their individual risk management strategy. One fundamental consideration for decision makers in control functions is the following: Should the clawback be targeted towards conduct and compliance from

1. an individual point of view, or should the approach be
2. collectively based on risk management failures or restatements or should it be
3. both? In addition to its main benefit as serving as an effective preventive tool, there are other advantages.

In particular, clawbacks:

• put compensation at risk for longer which increases the alignment of interest with stakeholders;
• are deemed best practice from a corporate governance perspective to hold decision makers accountable;
• are increasingly aligned with market developments;
• are powerful for communication to comfort shareholders and other stakeholders that the company disposes of appropriate means under exceptionally adverse circumstances.

Complementary measures

Clawbacks are important elements shaping the risk culture of a company, but they should be accompanied by other relevant instruments and compensation design aspects. Research has shown that a clawback is most effective in terms of impact on risk when it is applied in combination with other elements.

Some examples throughout the entire determination process of variable compensation are: incorporating risk considerations in the funding approach, integrating conduct and compliance in the performance assessment process as well as installing deferral schemes, which may anyway be required from a regulatory perspective for many industries.

HCM’s recap and point of view

In summary, clawbacks may bring many benefits:

• they are an effective instrument to align executives with stakeholders’ interests;
• in addition to other design aspects, they are seen as a preventive mechanism that impact risk culture;
• they act as a safeguard in case the company needs to respond to a crisis such as fraud, misconduct, or financial restatements.

Key considerations in this regard for decision makers are:

• how can a clawback complement the measures we already have in place for our risk management and risk alignment?
• what are the adequate trigger events that are relevant for our envisioned risk culture, also from an accountability point of view?
• how do we communicate it internally and externally so that it unfolds its full potential?

The post Strengthening Risk Awareness and Accountability in Compensation Practices: Clawbacks appeared first on GECN Group.