Remuneration Committee = A Balancing Act
The ultimate goal for any reward strategy is to provide a linchpin in attracting and retaining the right talent to the company. This seems like a no-brainer to an HR pro, especially one working for a company in hyper growth, but you should never forget to consider your shareholders. Nirvana for a shareholder is to find the sweet spot when you invest exactly the right amount in people to be able to hit maximal long term share growth.
Having a remuneration committee (remco), means that you can design a reward strategy with creativity, but always having the perspective of a shareholder and the board in mind. Essentially, it will allow you to make quicker decisions as you’ll spend time with the shareholders getting creative and will get instant feedback. It’s really efficient and motivational to be creative as no time is wasted on ideas that they’ll disagree with.
You might be wondering, what exactly a remuneration committee of the board does. To put it really simply, it works with the compensation of the company’s executive officers, providing guidance and carrying out work that is deemed the Board’s responsibility. Check out the Spotify Investor site if you want to dive into the nitty-gritty a bit more.
At Spotify, one of the main benefits we get from having a remco is the allowance for us to pressure test new ideas. It helps bring diversity of opinion and expertise to our decisions, and gives us the freedom to explore trends in the world of rewards, whilst anchoring them to other things happening throughout the business. It means we can have off the wall ideas, but with the safety net that we’ll never be able to go totally rogue!
For any company serious about being bold in their HR, and especially compensation and benefits decisions, it’s a great way to understand the market, and then find your own way of doing things. But it takes guts from your CHRO and executive team. It’s key that they have the vision and audacity to allow for more creativity. Without this dynamic it simply won’t work.
Spotify’s Remco Set Up
Spotify’s remco was founded in 2015 and looking at the long term, we wanted to avoid swapping people in the committee too often. It made a lot of sense to us to have three permanent shareholder members. And it also made sense to assign those who have the most influential and voting power, because at the end of the day, they are the ones that need to support the committee’s recommendations at the AGM (Annual General Meeting, aka shareholder meeting).
Our remco also has three guest members, who attend many but are not obliged to attend all of the meetings. They are executives from various parts of the business (more often than not, it’s HR, Compensation and Legal) who can add value to the discussion and decisions.
The work carried out by the committee falls into two buckets:
- the annual cycle that needs to be followed in a timely manner, and
- the long term strategy for the company
Annual Remco Work
The remco’s yearly cycle typically starts in June with a dialogue and proposal of a peer group, which is composed of approximately 20 other companies that as a group, represents your entire company. The peer-group should have similar business, market capital, revenue, number of employees, growth, and so on. We then use data from this peer-group as a benchmark for our decision-making. The benchmark is there to inspire us and set the scene, but we always have in mind that it can not guide us when it comes to our own competitive advantage.
The second meeting is usually in September. This meeting is focussed on understanding how the benchmark group compensates their executives. For example, we explore questions like: what’s the ratio between cash and equity and benefits amongst the peer group? How do they compensate for the different skill sets in their executive team? The committee also looks at both median and the extremes regarding how the incentive schemes are constructed.
In this meeting, the committee also analyzes what makes sense regarding equity for the wider organisation. For example, how much does the peer-group dilute their shareholders? At the same time the company officers present their bottom up calculations (a detailed calculation where the market rates for each job aggregates up to a total cost for the company the coming year). This exploration includes different scenarios and different competitive stands.
The third meeting is typically held in December, and is when all the decisions and delegations should happen. And you’d be surprised about how many of these decisions and delegations need to be made in order to run a public company smoothly for another year! So, the time for board members and company officers to debate has well and truly passed. This meeting is all about execution and any back-and-forth between shareholders and company officers should have already occurred by this point.
The fourth, and final meeting in the normal cycle is at the end of the first quarter of the year. This is when you look back on what you executed in the compensation review and you start to prepare for the next cycle.
Long Term Company Strategy
On top of the annual cycle described above, the committee should also have their eyes set to (at least) 2-3 years into the future. The members should be abreast of remuneration trends, and bring them to the committee to consider whether they will have an inescapable impact on the company, or whether there is a proactive choice to be made that they should have a positive impact on the company. The committee should also evaluate previous decisions, strategies and implemented programs – did they have the intentional effect or did they pay out too much or too little?
An example of where a remco makes these decisions is Spotify’s Incentive Mix. Introducing this approach started with several committee discussions at these meetings around what motivates people. The expertise of the company officers who specialise in this subject, combined with the experience and viewpoints from the board members, and projections on what was affordable, meant it was possible to make a calculated evaluation on what the program could and should look like to be attractive across the globe and to a wide range of potential and current employees. This unique combination hashing out this idea together gave us the ability to balance polarities and come up with a unique way of compensating employees. One that felt perfectly in tune with Spotify’s culture and was 100% aligned with our values.
The Ying and The Yang?
A remco acts as the perfect tool for harmonizing share owners and company officers, balancing the short term and the long term, and for synthesizing creativity and convention. At the end of the day, they are in the same boat with the same overarching goal: grow a successful company. And when the company succeeds, shareholders and company officers are satisfied.
It’s not an easy or quick process to set up but through having space for creativity, being able to thoroughly benchmark, and openly but respectfully challenging (each other and the industry norms), a remco can lead a company to breed creative remuneration solutions that can give your company an edge. One that is right for your people, and never ever compromises or comes at the expense of your shareholders.
