Executive compensation has long been used for rewarding performance and retaining talent. When boards only evaluate pay through a reward-and-retention lens, however, they invite scrutiny from investors, proxy advisors and regulators, particularly around alignment with strategy and long-term value creation.
As attention to pay vs. performance intensifies, executive compensation programs and CD&A disclosures send a message far beyond the boardroom, signaling governance quality, strategic clarity and credibility. Effective committees don’t just approve pay programs, they challenge them. They listen to dissent and apply disciplined oversight, judgment and consistency, continually testing alignment with strategy. To guide this process, here are five questions boards should ask their compensation committees:
1. What are we actually rewarding?
Executive incentive plans do more than reward results—they shape behavior. Incentive design influences how leaders prioritize decisions, allocate capital and manage trade-offs. When incentives are misaligned with strategy, they can encourage behaviors that undermine long-term objectives, even if short-term results appear acceptable.
Boards should look beyond stated plan objectives and examine the motivations created by incentive metrics and goals. What actions are executives most strongly driven to take? What risks might they accept, or avoid, based on how performance is measured and rewarded?
Persistent divergence between incentive outcomes and strategic intent raises questions about board oversight.
2. Are incentives aligned with where the business is going?
Static compensation programs in a dynamic business environment can signal a disconnect from the realities of the business. While executive pay may lag strategy during accelerated transformations, continued reliance on legacy metrics may unintentionally anchor leadership to past models instead of future growth.
Compensation committees should regularly test whether incentive design is evolving alongside changes in the business model, industry dynamics, strategic objectives, risk profile and capital allocation. Alignment with yesterday’s strategy may feel safe but sends the wrong signal about the board’s readiness for what’s next.
3. Would an informed shareholder understand and support our pay outcomes?
Even technically sound compensation decisions can weaken credibility if they are difficult to explain, appear defensive, over-reward for performance or provide large, one-time awards. Compensation outcomes are judged externally, without full context, and must withstand investor scrutiny on performance alignment. Boards should pressure-test pay decisions through an investor lens: Can the rationale be defended relative to financial performance, explained simply and reasonably viewed as disciplined oversight?
When explanations become overly complex or rely on exceptions, such as special recognition awards without a compelling narrative, credibility erodes, even when intentions are valid.
4. How does our use of discretion strengthen, or weaken, trust?
Discretion is a powerful governance tool, but it cuts both ways. When used thoughtfully and sparingly, boards are viewed as exercising judgment in exceptional circumstances. When used repeatedly, it creates entitlement expectations and signals weakened incentive rigor.
Investors and proxy advisors pay close attention to discretion. Committees should clearly explain why and how it aligns with performance realities when applied. Used well, discretion builds trust and reinforces governance judgment; used poorly, it invites skepticism.
5. Do our compensation decisions form a clear and credible pattern of pay for performance over time?
Governance credibility is built through consistency and transparency. While incentive programs must evolve with strategy, investors assess compensation longitudinally, looking for principled judgment, performance rigor and alignment with shareholder experience.
Compensation committees should ensure design changes strengthen, not disrupt, the governance narrative. Evolution should be intentional and reinforce a coherent and credible narrative about payout levels, performance achievement and shareholder alignment.
The role of the future-ready compensation committee.
Future-ready boards recognize that executive pay serves two critical purposes:
- As a leadership tool to reward, retain and properly motivate executives, and
- As a governance signal to stakeholders evaluating board effectiveness
Strong oversight begins with disciplined questions and thoughtful consideration of diverse perspectives in the boardroom. Committee members bring varied experience and risk lenses; surfacing those differences strengthens decision-making.
Compensation committee chairs play a pivotal role in ensuring all views are explored and weighed, enabling durable, defensible pay decisions. Committees that consistently apply this mindset are better positioned to support sustainable value creation and withstand scrutiny.
