Frederic Barge (Reward Value) Wants to Change the Remuneration Culture
It is spring, and so the annual reports are being published thick and fast. Investors, voting consultants and journalists often skip straight to the section on remuneration, which can run to many pages. In Air France-KLM’s annual report, for instance, it took 24 pages to explain the remuneration package of CEO Ben Smith (total value €4.3 million). The top bonuses awarded are causing an increasingly animated social debate, which is only aggravated by rising inflation. Last year, the remuneration of directors of large listed companies rose by 35% on average (according to the annual remuneration survey conducted by Het Financieele Dagblad), spurred on by a combination of economic recovery and higher share prices. In contrast, the average employee has had to make do without a salary increase for quite a few years now. Trade unions and politicians are up in arms, and in The Hague there are calls for top bonuses to be taxed. The remuneration debate is also taking place outside of the Netherlands. In France, introducing a cap on bonuses formed part of the newly re-elected President Macron’s campaign.
Frederic Barge wants to take the sting out of the debate on top bonuses. He was previously responsible for the remuneration policies of executives, senior management members and Supervisory Board members at companies including ABN AMRO, ING and Ahold Delhaize. In 2018, he founded Reward Value, a non-profit organization that aims to transform remuneration into a catalyst for social change, rather than a divisive societal issue. Barge wants to innovate the current remuneration model by linking remuneration with multiple long-term value creation. Bonuses should no longer be awarded exclusively on the basis of financial performance: The social impact (both positive and negative) should be given equal weighting. That calls for a new remuneration system.
At the heart of Remuneration 4.0 are the Principles for Responsible Remuneration (PRR), which are being developed by Reward Value. According to these principles, responsible remuneration is based on five pillars: How the remuneration policy influences directors’ behavior; aligning purpose, performance and pay; focus on long-term value creation; linking remuneration and financial, natural and social capital; and measuring relative performance through comparison with peers based on stock market value, market value and broader prosperity.
Barge explains that the scientific justification of the principles and their translation into new remuneration models is the subject of six active research projects that Reward Value is conducting in collaboration with domestic and foreign universities. For that purpose, the organization is working with companies, knowledge institutes, research institutes (such as SEO, FCLTGlobal and Diligent Institute), major investors (such as umbrella organization Eumedion and the American sustainability investor Federated Hermes) and social parties (such as NGOs and government agencies). Within the foundation’s Advisory Board, the academic justification is further anchored by representatives from the University of Amsterdam, Nyenrode Business University and IMD Lausanne. Reward Value wants to be the driver of a multi-stakeholder community on this topic: Commitment from a wide circle of stakeholders should help the evolutionary development progress towards a different remuneration policy. Reward Value’s partners have access to the results of remuneration and performance research, provide thoughts and ideas concerning new remuneration models, and contribute to realizing the necessary research. The founding partner is the Goldschmeding Foundation, which is a nonprofit foundation.
Why did you choose a nonprofit, rather than a commercial remuneration consultancy?
‘That stems from our mission. We want to make an impact and initiate the debate about remunerating people differently. We also want to develop concrete tools for that in the form of new principles. This mission can only succeed if we occupy an independent position, right in the middle of all the stakeholders. We must be able to consult with companies, institutional investors, NGOs, regulators and academics in a way that is free and unbiased. Within a commercial model, there is a client relationship that can create tension between what the client asks for and what the Principles for Responsible Remuneration entail. That is why we leave the remuneration advice to the consultants, who, incidentally, we also consider important stakeholders. The consultant is mainly asked for advice on today’s remuneration system. We want to explain, with academic justification, what the remuneration could look like the day after tomorrow. What is the future?’
What motivates you?
‘Remuneration is a topic close to my heart – I have worked on it for years for large listed companies. At one point, I thought: What am I going to do before I get my fishing license? I could have gone back to work for another corporate, but I saw a different challenge ahead of me: Changing the current remuneration culture. In recent years, companies have, by choice or otherwise, become aware of their social responsibility. They have formulated a purpose: Why are they on this earth? The corporate purpose has expanded to include long-term value creation for society. However, remuneration policies have not changed much in the last 50 years. Reward is still done according to financial standards and largely with a short-term focus. So while companies are now doing things differently when it comes to their strategy, their remuneration system is left unchanged. Our survey of 30 multinationals showed that only 1% of directors’ remuneration is linked to material KPIs for sustainable operations. If you look at AEX and midcap companies, that increases to approximately 3.5%, but that is still marginal. This means there is a gap between the social purpose of companies and our archaic remuneration model. Director remunerations have risen sharply in recent decades, but the big issues surrounding the climate and inequality have hardly been addressed in the process.’
How can that gap be bridged?
‘Companies can align remuneration with purpose by following five steps. The first step is to ensure that the strategy is reflected in the remuneration policy. The second step is to link remuneration to material criteria for ESG (environment, social & governance, ed.). The selected criteria must be relevant to both the sector and the company. The third step is to give those criteria sufficient weight within the total remuneration. If ESG criteria only count for a very small proportion of the bonus, it will not influence directors’ behavior. The fourth step is to adopt a long-term perspective. In most remuneration schemes, share award packages are paid out after just three years, which encourages a short-term focus. The fifth and final step is to ensure that directors have really challenging targets that make an impact, and to monitor progress.’
How do you measure that progress?
‘We look at both the financial results and the value added or removed from the environment or the social sphere. By monetizing the positive or negative impact on society, we assign a financial value to it: Which amount is required in order to repair the damage caused?
There have been more developments in measuring environmental impact than in measuring social impact. However, for social impact you can factor in aspects such as living wages, development opportunities, sustainable employability, a safe work environment, inclusiveness, job satisfaction and human rights. You can also look at the company's products and services: Do they contribute to a better world? Impact rating accounting allows us to measure, monitor and report on the company’s sustainability. It also helps to balance and trade off the interests of the company and the various stakeholders.’
How does the outside world know whether companies are actually doing what they say they are doing when it comes to sustainability?
‘We are developing the conviction barometer, which is an artificial intelligence-based tool that helps identify greenwashing. The tool facilitates analysis of whether the social position of the company corresponds with stakeholders’ expectations and experiences. It can also be used to assess whether the company is showing conviction and commitment to achieving social targets. Are the objectives reflected in concrete terms in capex, investments, and the remuneration policy? For example, an American oil and gas company says it has been working on its transition to sustainable energy for years. Yet only 0.2% of capex goes to renewables, and sustainability targets are not reflected in the bonus criteria. The company's negative impact on the environment therefore appears to have remained the same over a period of 13 years. Put your money where your mouth is: Companies may say all sorts of things, but are they really investing in that ambition and holding their directors to account for it?’
What is the role of Supervisory Board members, considering their responsibility for the three As: Appoint, assess and award?
‘Supervisory Board members pay a relatively large amount of attention to the appointment process, whereas the award process is often the last item on the agenda. They mainly look at the frame of reference: What does the market pay and should their own directors’ remuneration be adjusted accordingly? Supervisory Board members should take a broader, more strategic approach to remuneration policy. Are the remuneration scores still aligned with the social environment? Does the policy align with the purpose and are relevant sustainability criteria given sufficient weighting in the targets? The remuneration issue should also play a role during the selection process for new directors, and not just afterwards. Does the candidate have an intrinsic motivation for sustainable value creation and how does the candidate respond to remuneration incentives in order to realize ESG targets?’
How can Supervisory Board members assess this?
‘It requires knowledge of behavioral science, which we are developing. A lab experiment is currently being conducted concerning the impact of aspects such as personality, risk acceptance and short-term and long-term orientation on how people react to incentives. We also want to conduct this experiment in-company and observe behavior and decision-making in the boardrooms. Does redesigning the remuneration model result in different decisions, and to what extent do personality traits, leadership style, team dynamics and organizational culture play a role in that?
This provides information for the purposes of appointment policy and assessing the current leadership team. Are the purpose, motivation and remuneration aligned? This calls for better coordination between appointing, assessing and awarding. For example, the remuneration committee should include the Chair of the nomination committee, the Chair of the audit committee, and potentially the Chair of the sustainability committee. The various committees should also make decisions in a more integrated way. Next, you need to know how those decisions resonate with the various stakeholders and be able to explain them properly, especially when it comes to remuneration. Make sure you have a communication plan: Why did you or did you not decide to apply that clawback scheme? The qualitative transparency about remuneration is often still a cause for concern. Enforcing this by law may result in steps being taken.’
Should directors be rewarded with bonuses for sustainable value creation? Is that not simply part of their social duty of care, according to our stakeholder model?
‘Most directors are intrinsically motivated to take their social responsibility – they do not just spring into action when you dangle a carrot in front of them. However, only rewarding directors based on financial KPIs and short-term incentives partly destroys their personal motivation. The current remuneration system is therefore flawed and is more of an inhibitor than an incentive for accelerating sustainability. Developing new remuneration models could in fact boost directors’ intrinsic motivation.
In time, you might also be able to scrap share-based remuneration, in order to expand the singular focus on shareholder interests to stakeholder interests and stretch the short term into the long term. Furthermore, at some point you need to consider the amount of remuneration, as some companies have really gone too far in that respect. In future, you could even explore how to reward directors in non-financial ways. As a society, we currently only express success in terms of money. Prestige due to a high salary may soon be replaced by prestige due to level of social contribution, and that in itself is the bonus. But that requires a societal redefinition of recognition, which takes time.’
Are directors and Supervisory Board members open to different forms of reward? Is there support for it?
‘The directors and Supervisory Board members we have spoken to are interested and intrigued, but have a wait-and-see approach as well. They do think that now is the right time to change the remuneration culture and they would like to follow the development of new models, but they will not implement them straight away. Companies struggle to be the first to take action and wrestle with the issue of how far to go linking ESG targets to remuneration policy. At the same time, companies realize that doing nothing will result in overregulation and therefore a huge compliance burden. That would negatively affect the innovative capacity that we so desperately need in order to make the economy more sustainable. In addition, sticking with the current remuneration system entails a reputational risk for companies, which may affect their competitive position and position on the labor market, ultimately undermining their raison d'être.’
What do you hope to achieve? What do you dream about?
‘My ultimate dream is to see the Principles for Responsible Remuneration become a recognized global standard that is supported by the United Nations, just like the Principles for Responsible Investment. We are already engaging with the UN Global Compact on this. Around that, you can build an international network of accredited companies that are committed to implementing the principles. We also want to create a responsible remuneration index, which ranks companies annually based on the sustainability of their remuneration policy, as a driver of social change. Finally, I hope that companies’ remuneration policies will no longer provoke public indignation in the future. If you can demonstrate that a different remuneration method results in companies operating in a more sustainable and inclusive way, you break the current deadlock in the remuneration debate and remove it from the emotional sphere. People will no longer skip to the section on remuneration. They will read the annual reports to find out the information they are intended to provide: What added value does the company have for society and all stakeholders?’
This interview was published in Management Scope 05 2022.
This article was last changed on 25-05-2022