European Reward Conference 2017- "Back to the future: the rediscovery of the organisation in...

The Future of Executive Compensation

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Richard Belfield, Hazel Rees and Damien Teisseire

10 February 2017

Back to the future…

2© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Are we returning to the 1950s?

© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 3

How did we get here?

Key assumptions until recently

1970s

Jensen

Agency

theory

1980s

Rosen

‘The economics

of superstars’

2000s

Gabaix and Landier

Increasing firm

size explains

increasing pay

1930s

Berle and Means

‘Separation

of ownership

and control’

Why should senior executive reward be distinctive?

Shareholder interests are

paramount (and undifferentiated)

Reward is primarily a function of the

external market in executive talent

But these assumptions are now increasingly under challenge from different quarters…

Evolving investor views and government action are producing three distinct and potentially

competing viewpoints on executive pay


Pay for performance focus Political pressures

‘Consider other stakeholders’

Involvement of employees and

shareholders

Potentially binding votes on

pay

Publication of pay ratios

Awareness of inequity/

differentiation across groups

De-leverage and align

‘Look to the long term’

Focus on fixed pay and

variable maximum reductions

Lack of trust in performance

target setting

Greater regulation of pay /

governance

Encourage longer-term vesting

‘Performance is primary

consideration’

Higher quantum in return for

performance

Trust board regarding targets

Less regulation of pay/

governance

Return to shareholders = success

At the same time, a more nuanced understanding of risk and reward is

driving company decisions

© 2017 Willis Towers Watson. All rights reserved.

Risk management by boards

Multiple lenses can provide a comprehensive

assessment of strategic alignment and inherent risks of

pay programmes

1. Strategy alignment

Is pay aligned with long-

term business strategy?

2. Remuneration policy

Does policy mitigate risk

and increase strategic

alignment?

3. Remuneration structure

Balance between fixed and

variable pay, short- and

long-term objectives?

4. Pay plan design

Does pay plan encourage

excessive risk taking?

5. Performance metrics

Reflect reward for desirable

behaviours and outcomes?

6. Governance

Is there effective

governance in place?

Are roles clearly defined?

Succession planning

Evidence of internal candidates being superior include

1) Lower employment costs

2) Performance

Pay package for new hire typically 16%

larger than departing CEO

Package for internal promotions

typically 12% lower than departing CEO

33% of FTSE 100 CEOs appointed in

last 3 years

External hire

+1.0%External hire

-3.9%

Internal

-1.0%Internal

+16.4%

Day 1 Year 1

Share Price on day

of announcementTSR Outperformance

Alignment across organisation?

5

The new agenda


Board and

corporate

governance/

regulatory

framework and

structures

REST OF

ORGANISATION

TOP

TEAM

REST OF

ORGANISATION

TOP

TEAM

FROM TO

What can you do to respond to the new agenda?


Update role of the RemCo

Develop and apply relevant analytics Clarify governance structures

Articulate framework for whole organisation

Monitor implementation of framework via

analytics

Stewardship of human capital investments –

NOT micromanagement of reward

Understood by employees

Applied consistently to reward across whole

organisation

Reflect EVP(s)

Pay ratios

Group differentials (e.g., by gender)

Cost of employment/revenue

Who makes decisions on what?

Whose interests are considered along the

way?

How to consult with different stakeholder

groups?

Segment employee population clearly and transparently


Case Study: Experian

WTW - European Reward Conference 2017

Back to the future: the rediscovery of the organization in executive compensation

February 2017

Experian plc – European Reward Conference | February 2017

Experian Restricted10

Agenda

- Experian – ‘At a Glance’

- Noticeable Changes – Past Decade

- Clarity Of The Governance Structure

- Evaluation Of Performance

- Blip or Turning Point?



• Experian – ‘At a Glance’



• Revenue: US$4.6bn

• EBIT: US$1.2bn

• Market Cap*: c.£16bn / c.$20bn

• In Top 50 of FTSE-100

• Employees: c.17,000

• C&B : Revenue Ratio: c.39%

• Offices in 37 Countries

• Largest Markets: US, Brazil, UK

• Corporate Headquarters: Dublin


Snapshot of Experian

Experian is the world’s leading global

information services company. Our roots

lie in assessing credit risk; today we do

much more.

For the year ending 31 March 2016

* At 13 January 2017




Overview - Experian business segments

Decision

Analytics• Value-added

products

• Used to convert data

into valuable

decisions for

businesses

• Provides expert

consulting, analytical

tools and software

Credit

Services• Large databases of

information, used to

manage risk

• 17 consumer credit

bureaux

• 11 business credit

bureaux

• Automotive

information

• Health

Marketing

Services• Data quality

• Targeting

• Cross-channel

marketing suite

Consumer

Services• Direct to consumer

credit monitoring and

credit matching

services

• Identity theft

protection services

• Affinity (white label)

credit and identity

monitoring services

50% 13% 16% 21%



• Investment in customer service

• Agile development, technology, security and innovation

• Building enduring relationships with consumers

• Aimed at sustainable growth

Strategy

Focus Growth Improve

Performance

Efficiency Capital

Optimisation


Developing direct long-

term relationships with the

one billion people whose data we

hold on file



• Noticeable Changes – Past Decade



Past Decade:

• Regulation and transparency around executive pay has increased with the introduction of annual reporting

• Shareholder involvement (through activist representatives on boards and otherwise) and media scrutiny has also increased

• The major financial crash in the global economy may, at least in part, be responsible for additional regulation and increased shareholder involvement

• The digital revolution has impacted and disrupted almost all sectors, markets and how they do business; and

• The speed and scale of change is faster than ever before

Evolution seen at Experian:

• Remained coherent with the business strategy

• Improved Directors Remuneration Report

• Strong Board Governance

• Strong link of pay for performance (limit the number of performance measures for the annual bonus and LTI)

• Introduction of clawback and malus provisions

• Strong shareholder engagement


Noticeable Changes



• Clarity of the Governance Structure




Strong Board Governance

Collaborative culture, independent structure and focused approach drive Board effectiveness

• Company and Board culture of consensus, mutual accountability and meritocracy

• Highly effective Board structure:

• Robust lead director role

• All independent directors on all Board standing committees

• Frequent and regular interactions with senior management

• Key areas of focus:

• Long-term prospects of constituents

• Business strategy and risk management

• Management performance, depth, diversity and succession

Within the framework of our compensation philosophy, our Remuneration Committee considers

multiple factors when determining the appropriate level of compensation for our Executives




Compensation Philosophy

These four key elements of our philosophy guide our Remuneration Committee in its review and

determination of executive compensation

We believe that an effective Reward strategy and practices should:

• Encourage a real sense of teamwork and communication, binding individual short term interests to Experian’s long-term interests

• Evaluate performance and potential on both a yearly (Bonus Awards) and multi-year basis (LTIP)

• Recognise that rewarding an individual’s performance must be constrained within the overall limits of the Company and not be out of line with the competitive market for the relevant talent and performance

• Allow Experian to attract and retain proven talent – this is fundamental to our long-term success as an innovative and global player

• Allow to reward an individual’s ability to identify and create value, enhance Experian’s reputation and build and nurture a dedicated client base

Pay for Performance &

Recognition

Strong Governance & Risk

Management Culture

Attract / Retain a

Talented and Diversified

Workforce

Align to Experian’s

Strategy and

Shareholders’ interests



• Evaluation of Performance




Performance for Growth: Firmwide Performance Management Process

PERFORMANCE

• Having meaningful and regular

performance conversations

• Performance conversations

• Development conversations

• A more equal balance between what

we do (our objectives) and how we do

it (our behaviours and capabilities)

• Leadership and People Standards

provide more guidance and clarity on

performance expectations

• Ratings are completed on a 1-5 scale

at both Mid-Year and End of Year

Reviews

TALENT

• We believe that everyone has got

talent.

• Our Global Talent Review focuses on

identifying this key talent through

succession planning to build a pool of

high performing people in leadership

roles with significant potential for rapid

growth.

• The Talent Review process includes an

assessment of:

• Performance over time

• Potential

• Readiness for next move

• Talent assessment based on 9-box grid

• Rigorous assessment of future potential

called JDI (Judgement, Drive, Influence)

REWARD

• Our philosophy “pay for performance”

• Senior levels (top c1%) pay is linked

to short or long-term financial targets

• For other levels pay is determined

using a matrix of performance rating

and position in pay band

• Bonuses are determined by financial

performance with final payments

being uplifted by performance ratings

• Guidelines for LTIP awards at all

levels are based on a matrix of

sustained performance rating and

potential assessment

• Performance for Growth is our way of driving and measuring performance goals to meet our strategic plans.

• It ensures we all know where we stand, how we can continually improve our performance and best prepare for future roles.

• It’s about making sure we all have the opportunity to make a real difference as individuals, within teams and as an organisation.



Support company strategy and objectives

Promote sustainable underlying

performance

Align with shareholders’ interests and value creation


Clarity with the objectives

What it is that our CEO and Executives pay package are expected to deliver?

Be consistent with the pay practices for the rest of the

workforce

Allow executives to

respond quickly to changing

market conditions

Motivate executives,

providing an incentive to outperform

This may seem like a complex mix of objectives, but approached thoughtfully, most of them do essentially compliment one another.



• In Summary



Collaborative culture, independent structure, and focused approach drive Board effectiveness

– Diverse and talented directors oversee our growing business

– Board succession planning builds an effective, well-rounded, technology and financially literate, and diverse Board

– Effective legal, compliance and risk management is critical for success

Paying for performance, encouraging a long-term focus, maintaining the safety and soundness of the Company and, attracting/retaining diverse talent

– Consideration of many different factors to determine executive compensation

– Long-term perspective on performance with a focus on operating metrics in the main

– Strong relative returns to shareholders despite a challenging macro environment

– Alignment of executives’ and shareholders’ interests through compensation structure

– Prudent use of discretion

Advice to Remuneration Committees and Management teams is simple

– Be informed, be bold, do ‘not’ aspire to be market followers

– Provide context and solid evidence for true performance

– Put your money where your mouth is

Continuing to rely solely on market ‘best’ practice is not only ineffective, but an opportunity lost to building a competitive advantage by using reward as a catalyst.


Blip or Turning Point?

What immediate steps can you take?


Update role of the RemCo

Segment employee population clearly and transparently

Develop and apply relevant analytics

Clarify governancestructures

Independence

External focus

Internal focus

Understand employee profile and pay models

Balance consistency and tailoring

Consider EVP

Provide data

Total spend vs Return on investment

Manage pay differentials

Agree RACI for reward decisions

External approvals

Report on good governance practice

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