How to Benchmark Executive Remuneration

Executive remuneration benchmarking is different from benchmarking most other jobs.

If you are benchmarking an Accountant or HR Business Partner, you can usually find a reasonably comparable role in the market.

Executives are more difficult because the same title can represent very different levels of responsibility.

A CFO of a $150 million Australian business is not necessarily comparable with the CFO of a $5 billion ASX-listed company. A Chief Operating Officer responsible for one business unit is different from a COO running operations across several countries.

This is why executive benchmarking should never begin with the title alone.

The objective is to identify organisations and executives with genuinely comparable responsibilities and then understand how their total remuneration is structured.

Start by understanding the executive role

Before looking at market data, document the actual scope of the position.

For a CEO, useful information might include:

• company revenue;
• market capitalisation for a listed company;
• number of employees;
• geographic footprint;
• industry;
• business complexity; and
• stage of development.

For other executives, consider both company size and functional responsibility.

When benchmarking a CFO, for example, establish whether the executive is responsible only for Finance or also has responsibility for functions such as Strategy, Technology, Procurement or Investor Relations.

For a Chief People Officer, understand workforce size, geographic coverage and whether the role includes functions outside traditional HR.

This information becomes the basis for selecting comparable roles.

Build the peer group carefully

The peer group is one of the most important parts of executive benchmarking.

For an ASX-listed company, it can be tempting to benchmark against companies immediately above and below it by market capitalisation.

That is a useful starting point, but it should not be the only consideration.

Look at factors such as:

Market capitalisation

Revenue

Industry

Number of employees

Geographic complexity

Business model

Growth stage

Executive role scope

Suppose your company has a market capitalisation of $800 million.

A practical peer group might include companies between approximately $400 million and $1.6 billion, with further consideration given to revenue, industry and operating complexity.

The range does not need to be mathematically perfect. The purpose is to avoid comparing the executive with businesses that are obviously much smaller or larger.

Do not make the peer group too narrow

There is another problem at the opposite extreme.

If you require every comparator to have exactly the same industry, market capitalisation, revenue, location and business model, you may end up with five companies.

That is not necessarily enough information to establish a reliable market.

A better approach is often to use a core peer group of closely comparable organisations and then test the result against a broader market.

For example:

Primary peer group: comparable ASX-listed companies.

Secondary market: broader companies of similar size.

Survey data: Mercer, Aon, Korn Ferry or another relevant executive remuneration source.

If all three sources point to a similar remuneration range, you have much greater confidence in the result.

Benchmark the job, not the person

This distinction is important.

Executive benchmarking should determine the market value of the role before considering the individual currently occupying it.

Do not start with:

"Our CFO earns $500,000. Is that competitive?"

Start with:

"What does the market pay for a CFO of a business of our size and complexity?"

Once you establish the market reference, you can consider where the individual should sit relative to it.

A newly appointed executive may reasonably sit below the market median.

A highly experienced executive with a sustained record of strong performance may sit above it.

The market benchmark provides the reference point rather than automatically determining the salary.

Benchmark each component of remuneration

Executive remuneration should not be benchmarked using base salary alone.

At minimum, consider:

This is particularly important for listed-company executives.

Company A might pay its CEO $900,000 fixed remuneration with a large STI and LTI opportunity.

Company B might pay $1.1 million fixed remuneration but provide considerably less variable remuneration.

Looking only at fixed remuneration would suggest Company B pays more, even though Company A may provide substantially higher total remuneration at target performance.

Compare STI opportunity properly

Do not simply compare whether companies have an annual bonus.

Look at the opportunity as a percentage of fixed remuneration.

For example:

Then examine the design.

What measures are used?

How much is financial?

How much is non-financial?

Is part of the STI deferred?

Is the award delivered entirely in cash?

What discretion does the Board retain?

Two companies with a 100% STI opportunity may have quite different remuneration arrangements.

Do the same with LTI

Long-term incentives need similar treatment.

Compare the annual LTI opportunity as a percentage of fixed remuneration and understand how the award is delivered.

Look at:

• performance rights or options;
• performance period;
• performance measures;
• vesting conditions;
• holding periods; and
• annual grant value.

For example, one CEO may receive an annual LTI grant equal to 100% of fixed remuneration while another receives 200%.

That difference can materially change the overall market positioning even where fixed remuneration is almost identical.

Use ASX remuneration reports as a practical source

For Australian listed companies, remuneration reports can provide very useful executive benchmarking information.

You can collect information on:

CEO fixed remuneration

STI opportunity

STI outcomes

LTI grants

LTI structure

other executive remuneration

and changes to remuneration arrangements.

The important part is being consistent.

Do not compare one company's statutory accounting remuneration with another company's target remuneration.

Accounting values for share-based payments can make this particularly misleading.

Where possible, compare remuneration on the same basis across every company.

Build a simple peer table

A working table for CEO benchmarking might look like this:

These figures are illustrative, but the table demonstrates the analysis.

You can immediately see whether the executive is positioned differently because of fixed remuneration, STI, LTI or the overall package.

Calculate market percentiles

Once you have enough reliable observations, calculate the market distribution.

For example:

You can then compare the executive's package with the market.

However, do not treat P50 as an automatic recommendation.

The median is simply the middle of the selected market.

The Board still needs to determine where it wants to position remuneration.

Decide your intended market position

An organisation might decide to position fixed remuneration around the market median while providing greater upside through variable remuneration.

Another might deliberately position fixed remuneration below median with competitive total remuneration available for strong performance.

For example:

Fixed remuneration: around P50

Target total remuneration: around P50

Maximum remuneration for exceptional performance: potentially P75 or above

That creates a clear remuneration philosophy.

The executive receives competitive remuneration for performing the role, with higher outcomes dependent on delivering stronger results.

Check internal executive relativities

External benchmarking should not be the only consideration.

Look at the relationship between the CEO and other executives.

Suppose:

CEO fixed remuneration = $900,000

CFO = $650,000

COO = $625,000

Chief People Officer = $450,000

Those differences may be perfectly reasonable.

However, if one executive is positioned materially differently from the rest of the leadership team, understand why.

Internal relativities become particularly useful when external market data for a specialist executive role is limited.

Avoid chasing the highest-paying peers

Peer selection can easily become biased.

An executive may reasonably suggest that several larger companies compete for their talent.

If every benchmarking exercise gradually adds larger and higher-paying organisations, the benchmark will continually move upwards.

The peer group should therefore be agreed before looking at individual remuneration outcomes.

For an ASX-listed company, the Remuneration Committee should be comfortable that the peer group represents the company's genuine executive talent market rather than simply a collection of organisations that support a desired remuneration result.

Use more than one source where the decision is significant

For senior executives, particularly the CEO, relying on one source can be risky.

A robust exercise might use:

Published ASX remuneration data

plus

a reputable executive remuneration survey

plus

relevant recruitment or market evidence where appropriate.

If Mercer indicates the CEO's target total remuneration is around P50, published peer-company data suggests approximately P45 and another credible dataset suggests P55, the overall conclusion is reasonably clear.

If one source says P25 and another says P75, investigate why before making a recommendation.

The difference may be caused by peer selection, company size, job matching or remuneration definitions.

Present the conclusion simply

The final Board or Remuneration Committee paper does not need to contain every piece of data collected.

A useful conclusion might say:

The CEO's fixed remuneration is positioned approximately 8% below the median of the selected peer group and broadly around the market median based on survey data. Target STI opportunity is consistent with market practice, while the annual LTI opportunity is below the peer-group median. Overall target remuneration is estimated to be between P40 and P50 of the relevant market.

Then explain what you recommend.

Perhaps no adjustment is required.

Perhaps fixed remuneration needs a modest increase.

Perhaps the issue is actually the LTI opportunity rather than salary.

The purpose of benchmarking is to inform the decision, not automatically produce a pay increase.

The biggest mistake is benchmarking the title

Executive benchmarking becomes unreliable very quickly when the process starts with a title and ends with a market median.

A CEO is not simply a CEO, and a CFO is not simply a CFO.

Company size matters. Role scope matters. Industry matters. Business complexity matters. The structure of remuneration matters.

A practical executive benchmarking exercise should therefore move through a clear sequence:

Understand the role and company size, select a defensible peer group, benchmark fixed and variable remuneration separately, review total remuneration, test the result against another credible source, consider internal executive relativities and then decide where the organisation actually wants to position the role.

The market data provides the evidence.

The final remuneration decision still requires judgement.