Future Leaders Blog

The ICGN Future Leaders Committee aims to integrate the perspectives of early career professionals into ICGN’s policy work. Following its appointment in January 2025, the Committee decided to focus on three key themes: Capital markets competitiveness, Executive remuneration and Board effectiveness. Its members have produced videos and articles to share their insights and stimulate debate on important corporate governance issues. The views expressed are those of the individual members of the Future Leaders Committee and do not necessarily reflect the positions of the ICGN Secretariat or its members. 

What does executive compensation tell us about Board effectiveness?

Heloise Courault, Senior Corporate Governance & Stewardship Analyst, AXA Investment Managers, part of BNP Paribas Group

Executive compensation plays a central role in corporate governance, the agency theory, and the relationships between investors, Boards, and management:  

  • Boards, by designing and approving the CEO’s pay, are able to ensure the CEO acts in line with the strategic orientations set by Boards. Effective Board oversight of executive remuneration should therefore contribute to address the information asymmetry between Boards and management.  

  • Similarly, investors outside the Boardroom lack access to inside information, but have a financial interest to ensure that Boards and management teams act in the company’s long-term interest. Therefore, they can leverage on executive remuneration disclosure to anticipate potential future management behaviours (e.g. by looking at which performance metrics the Board is focusing on in the design of a variable plan), but also gauge the dynamics between Boards and management.  

Because of the role played by executive compensation, the way it is set and structured may signal a potential imbalance of powers between the Board and the CEO, which could be the early sign of a governance issue. For instance: 

  • Excessive remuneration: cases when remuneration is repeatedly and significantly increased year after year, one-off cash awards and other retention plans, or golden parachute and large severance agreements (making the CEO’s revocation costly), while sometimes justified and well explained, could also in some cases reflect the CEO’s high bargaining power and level of influence over the Board.  

  • Insufficiently stringent performance targets: for instance, bonuses showing little variability over the years regardless of the company’s performance, minimum performance thresholds or targets set well below market guidance, can lead investors to question why Boards are accepting payouts to the CEO even when the targets they set are not achieved. 

  • Poor Board accountability: repeated and significant shareholder dissent on remuneration proposals without any visible reaction from Boards, high turnover within the Remuneration Committee, or low tenure of non-executive directors compared to the CEO could affect the level of Board accountability on remuneration issues, and may be signs that Boards are not acting as stewards of shareholders’ interests, but rather are under the sway of the CEO.  

These examples demonstrate how it can be beneficial for investors to closely examine how executive remuneration is set and structured, as it may reveal broader issues related to Board functioning and the Board’s ability to independently and effectively oversee management. 

An in-depth analysis of the structure, process, and governance around executive compensation may actually help investors undercover the potential signs of a weak Board.

Will Farrell

Federated Hermes
Assistant Manager, EOS
London

Will co-leads the climate change theme at EOS, the stewardship arm of Federated Hermes Limited, where his coverage includes companies in Europe and Australia, primarily financial services, energy, chemicals, and materials. Prior to joining EOS, Will worked in the energy and infrastructure investment banking team at Macquarie Capital, where he specialised in renewable energy. Before that, Will held a number of roles across the UK climate policy space, including as a parliamentary researcher for Rt. Hon. Chris Skidmore MP on climate and energy issues, and as a climate and economic policy analyst at a diplomatic institute. He was appointed as a voluntary adviser to Rt. Hon. Alok Sharma MP, President of COP26, on preparations for COP26 after co-founding a Westminster climate policy group in 2019, which engaged MPs and Members of the House of Lords to advocate for more ambition on climate action in public policy. Will has a Bachelor’s degree (1st Class Honours) in Economics from the London School of Economics and Political Science.