Reputational Risk – is Reward your Achilles Heel?
There was a time when corporate reputation wasn’t something Reward professionals needed to lose much sleep over. Companies had Corporate Affairs, Risk Management experts, and Company Secretaries to worry about that sort of thing.
Nowadays, though, corporate reputation is very much on the Reward professional’s desk. Much of the adverse publicity, aimed at Corporate Head Office, centres on senior executive ‘pay’ and, even where it doesn’t, reward often comes as the follow-up punch to a story about something else. Take the recent row over water companies and sewage, for example. It might not have started off as a story about reward, but it soon became one, when politicians demanded that executive bonuses be banned until the sewage spills stopped. Reward might not always be the source of the reputational risk, but it will often be used as a stick to beat a company with when other things are perceived to be wrong.
Companies are subject to significantly greater scrutiny than they were even before the pandemic, during which reward policy for senior executives was totally dependent on the approach adopted for the wider workforce. Wider social concepts like Corporate Purpose and Stakeholder Value (vs shareholder value) had risen up the corporate agenda and the 2010s saw both a broadening and a deepening of the overall approach to corporate governance.
Directors, both Executive and Non-executive, are now being held responsible not only for the financial performance of the company but also for ensuring that it is run with broader social and environmental interests in mind. ESG is the acronym of the moment. In 2019, Blackrock CEO Larry Fink spoke of “the importance of serving stakeholders and embracing purpose”.
The events of 2020 turbocharged these developments. Not only the Covid pandemic but international movements like Black Lives Matter and #MeToo sent shockwaves around the business world. Many companies were blindsided by the expectation from customers and employees that they should have a clearly articulated policy on critical social issues of the day. With many companies having relied on government support of one kind or another, the pressure on to ‘do the right thing’ has never been greater.
These pressures will only increase over the coming years as the economic headwinds set in, as the environmental and cost-of-living pressures start to make headlines, and as the huge challenge of Carbon Net Zero starts to hit company profits and government budgets.
When adverse stories break (of any kind), companies must be prepared with a considered and appropriate narrative – often on topics wider than the initial story. In such circumstances, it will no longer be good enough for senior executives just to ‘wing it’. Thinking on their feet in response to employee, shareholder, or media challenge will be at best, embarrassing or at worst, career ending. The KPMG boss who told his staff to ‘stop moaning’ during the Covid crisis and the Microsoft CEO who told female employees to ‘trust in karma’ to level the gender pay gap are among the more famous executive gaffes in a world where making policy on the hoof can get you into serious trouble.
For this reason, it is important to consider in advance what are the range of topics in the wider reward space on which a company might reasonably be expected to have adopted a considered position – endorsed at Board level.
PARC has adopted the term ‘Reward Manifesto‘ to describe how a company might pull together an appropriate list of topics – in each case outlining where it stands, and (where necessary) what it will and will not tolerate. In many cases, this is just a further iteration of its corporate values. The word ‘Manifesto’ comes from the Latin word for clarity. In an environment where challenge is the norm, gaining a shared clarity around the critical aspects of your organisational reward values, principles, and practices has never been more important.
Future, if not already current, questions that a senior business leader might reasonably be asked include, for example:
- How do you decide what is fair and what is excessive in reward decisions affecting senior executives?
- How is your Reward Strategy aligned with your company’s stated purpose and values?
- How does your reward strategy drive organisational performance – and what percentage of reward for senior executives is truly variable?
- What are your ESG goals – and how do they affect reward outcomes? What comes first?
- Do you have a flexible approach to retirement – and how do you support your employees in their preparation for later life?
- Do you tolerate gender and ethnicity pay gaps? And what are you doing in practice to mitigate and eliminate them?
Over the next few months, we will be interviewing a range of senior business leaders, including Company Chairs, RemCo chairs, CEOs, CPOs, and top reward professionals. Our aim is to identify:
- The key topics that relate to reputational risk;
- The range of positions that companies might realistically adopt in relation to those topics; and
- The pros and cons of adopting such positions.
Clearly, we will NOT seek to identify right or wrong. We have no role as moral arbiters. We will use this information as the basis of a report and PARC event in October.
UPCOMING PARC EVENT:
Reward Manifesto: Anticipating the Challenges of a Turbulent Decade
19 October, Central London
This debate will enable you to decide the extent to which you wish to put your company on firmer ground when you are publicly challenged over the detail and implications of your executive reward policies and practices, as is increasingly likely. The stakes have risen, as ESG goals are forced to be more transparent and their measurement more robust, and as incentive pay forms an ever-greater proportion of reward. Technical expertise and solutions will not be enough on their own. Boards and their Committees need a sharp sensitivity to the shifting rules of the game and the invisible red lines beyond which their decisions cross the line of stakeholder acceptability. Your Reward Manifesto will give you the framework to do that.