Executive compensation: complexity and challenges

Executive compensation is a topic of extreme importance and interest in the corporate world. Considering that executives are primarily responsible for defining an organization's long-term vision and strategy, the way they are compensated can have a significant impact on both the organization's performance and their own motivation to create shareholder value.

However, defining remuneration policies for executive directors is a complex process that requires a careful and strategic approach by Remuneration Committees and/or Human Resources Directors, as well as shareholders.

At this early stage of the year, preparations are already underway for the general meetings after the results presentation, where new executive remuneration policies are usually approved. This is therefore a good time of year to reflect on the main trends and practical challenges related to this type of remuneration model, allowing for a more effective decision-making process. In recent years, the discussion on executive remuneration has gained increasing prominence, especially in relation to three crucial themes: transparency, gender equity and sustainability.

First, transparency and regulation of executive pay has been stepped up in Europe. New EU directives require listed companies to disclose the ratio of executive pay to average employee pay. This measure aims to increase transparency on top executive pay packages and promote greater corporate accountability.

Secondly, gender pay equity in senior management positions remains a significant challenge. With the implementation of European policies, such as EU legislation on gender quotas for boards, there is increasing pressure to ensure that women executives are paid on a par with men in the same roles. Specific studies, such as the one presented in the “ Mercer UK Board Remuneration Handbook ” (2024), provide detailed analyses of the pay gap in senior roles, highlighting the need for more effective action to reduce the pay gap that still exists. Increased transparency also provides greater visibility into existing gaps .

Finally, sustainability and ESG -linked compensation is becoming common practice. The integration of ESG metrics into compensation packages is gaining prominence, with companies being pressured to align C-suite variable compensation with sustainability goals such as carbon emissions reduction, workplace diversity, female leadership, and social impact. This alignment not only reinforces companies’ commitment to sustainability, but also encourages executives to adopt more responsible practices.

Regarding the remuneration structure, the study “ Board and CEO Remuneration in Europe ” (Mercer, 2024) also highlights an emerging trend in the use of long-term incentive plans, which is not yet seen in Portugal, but is beginning to gain traction in the United Kingdom and other European countries. In the United Kingdom, the use of Restricted Stock has increased significantly in recent years. In 2019, only 5% of FTSE 350 companies used Restricted Stock at Board level, but this figure has now risen to 9%.

Companies wishing to replace Performance Share Plans with Restricted Stock must present a clear business case and a solid justification, including robust mechanisms to prevent payments in the event of non-achievement of results, since restricted stock is not associated with a performance assessment, as is the case with Performance Shares. Furthermore, the use of Restricted Stock is also observed in French companies, being present in 34% of CAC 40 companies. In Portugal, this practice is still non-existent.

It is therefore essential that companies carefully consider these trends and adopt strategic approaches to ensure that their pay policies are transparent and fair. By addressing these challenges effectively, companies will be better able to foster a healthy, trusting and motivating work environment.