Rewards Solutions Perspectives

The Future of Executive Compensation

Join us as we explore the biggest market forces impacting executive compensation and corporate governance today and tomorrow.

Recruiting for the C-suite has always been a tough task, but current trends make it even more so.

By some measures, CEO turnover is the highest it’s been since the 2008-09 recession. Creating motivating, well-designed pay packages is critical to landing — and keeping — top executives. At the same time, making sure executive compensation packages are in line with shareholder, proxy advisory firm, regulatory and legislative standards is complicated. That’s partly because shareholder activism is more widespread as investors unite across markets around common themes such as defining what pay for performance means and ensuring companies address social and environmental issues (e.g., diversity, pay equity and climate change).

In the following sections of this report, we highlight some of the biggest issues facing corporate boards and executives today — from the impact private equity is having on recruiting and compensating executives to the spread of say-on-pay voting worldwide to getting more impact out of your equity plans.





Key things to keep in mind for executives and boards  


Firms are competing on an unlevel playing field for top talent.
In the current business environment, different types of organizations are bumping up against one another in their hunt for top talent. Compensation packages need to be easily understood and motivating; simply continuing to pay more each year is insufficient and unsustainable. Learn more ›

Don’t be complacent on governance issues.
As shareholder issues spread across borders, what is a hot issue in one market one year could quickly spread to another country the following proxy season. Companies of all sizes and industries should consider their shareholder risk profile. Learn more ›

Your approach to accounting and valuing equity compensation can be a strategic advantage.
It is vital to evaluate your compensation plans strategically from all angles, stretch your plans further for the same or less cost, and ensure participants understand and appreciate the value of their rewards. Learn more ›


Our executive compensation services take a holistic, multi-services approach while leveraging our best-in-class compensation data.

We help clients address the following:

  • Peer group and pay philosophy development
  • Board and executive market analysis
  • Annual and long-term plan design, including goal setting and metrics
  • Say-on-pay guidance and support
  • Deep technical expertise including valuation, financial reporting, taxation and regulatory assistance
  • Equity plan share authorization
  • Legal plan / employment agreement documentation and proxy disclosure assistance
  • Institutional shareholder engagement strategy and proxy advisor analysis and outreach
  • Pre-IPO to going public conversion assistance
  • Employee education and communication about equity plan design and benefits

How Competition is Influencing Executive Compensation Plans

There’s no way around it: business is more competitive, complex and interconnected these days. The barriers of entry to create a business and then compete in virtually any market are low (sometimes all that’s needed is an internet connection). The implications of this new reality for executive compensation may not seem immediately evident but they run deep.

For one, executives have a wider choice in the types of companies for which they can work. Startups are constantly being formed and disrupting traditional markets. The flood of late-stage capital, along with a variety of exit options available to private firms, means there is no longer the rush to go public. As such, private companies need seasoned leaders as their organization grows and matures. Executives that may not want to deal with the constantly evolving governance regulations and disclosure that come with the territory of being a public company can be particularly attracted to private company life. These dynamics mean executive compensation plans need to be designed in a way that are compelling to prospective executives and have retention value to prevent executives from leaving for the many choices of employers they have. Figure 1 shows that public company CEOs are earning more, on average, year-over-year. However, with greater shareholder scrutiny of pay, boards need to really think about designing pay packages with retentive value and long-term metrics that will please shareholders.

Figure 1
Target Total CEO Compensation in Thousands

Source: Aon's Total Compensation Measurement Survey, 2019

Secondly, this new business environment means that executive teams are no longer comprised of individuals from the company’s home country. Oftentimes, executives work remotely from locations across the globe. Companies need to consider how to pay these individuals. It boils down to having both a local and global mindset. Boards need to evaluate the pay practices and benchmarks of where the CEO is located against the global market for talent.


Companies have long used a location-specific strategy when it comes to cash compensation — not just in the United States (U.S.) but globally. However, we don’t see this practice as widespread for equity awards. Taking a local approach to granting equity for executives is more important as companies increasingly look outside headquarters to hire the C-suite. This will help companies conserve shares while remaining competitive in the local market. Our research among European life sciences companies finds that once these companies begin listing in the U.S. they burn through equity at a faster pace — an indication that these firms are granting employees more equity to compete in the U.S. market where equity grants tend to be higher and more broad-based in the organization.

Read our articles on geographic pay differentials in the U.K. and China

Figure 2
Three-Year Average Gross Equity Burn Rate

Source: Radford Burn Rate and Overhang Database, 2018.

Finally, changing dynamics in business mean compensation plans need to account for the fact that certain roles that were traditionally only found in the technology sector can now be found in any type of industry. Consider a retail company that’s moving to a multichannel business model and needs to hire a chief technology officer (CTO) to execute these plans. In order to attract the best talent, business leaders need to understand the average total compensation and pay mix that this position customarily receives across industries and then weigh that data against their own internal benchmarks and selected peer group. In the example of a CTO, technology companies tend to pay more and in a different pay mix compared to companies in other industries, which can leave non-technology companies at a disadvantage. Figure 3 shows the premium that CTOs earn at technology companies.

To bridge this gap, we are advising some of our clients outside of the technology sector to evaluate the market for key roles outside of their industry. In some cases, these companies will create special compensation arrangements for key roles, such as retention grants, or raise equity targets. They also need to evaluate their overall employee value proposition, establish a pay philosophy that accommodates different labor markets and is consistent and fair in application across the business, and think about rewards beyond compensation.


Figure 3
Pay Premium for CTOs at Technology Companies vs. General Industry Companies

Bonus target premium

LTI grant date value premium

Target total compensation premium

Source: Radford Global Technology Survey, Aon Total Compensation Measurement Survey


Case Study: Reimagining Rewards for a New Spinoff Entity

The Challenge

Our client was selling its majority stake in a business unit to a private equity firm in a multi-billion-dollar deal to form a new business. The executive team of the newly formed business needed to develop a rewards philosophy from the ground up. With the opportunity to look at rewards from a blank sheet of paper, leadership wanted to ensure alignment of their compensation programs with the desired culture of the newly formed company. To do so required a pivot away from old practices. The prior company that sold the majority stake had a conservative compensation philosophy. With new private equity ownership, the business needed to become more agile and innovative to deliver a return on investment as well as compete for digital talent as their market became increasingly disrupted by technology firms.

The Work

The team formed for this project included Rewards Solutions consultants in the U.K., the U.S. and Asia who had the industry expertise that was needed for the business our client was involved in. Our team was able to leverage financial services, technology and general industry compensation data and benchmarking tools to assess the competitive market for key in-demand global roles. We were retained to help with executive compensation, rewards philosophy and trends, and sales compensation. Specifically, the work entailed:

  • Benchmarking executive pay levels for the company’s top global executives against multiple global peer groups with similar ownership structures utilizing our suite of compensation surveys covering multiple industries,
  • Equity incentive benchmarking and design,
  • Advice on trends and practices in the technology sector — including fintech,
  • Running a series of workshops with senior leaders to articulate a rewards philosophy and strategy for the new business, and
  • Complete sales compensation plan redesign.

Client Results

Our client put in place a new compensation structure that was aligned with its strategy and quickly embarked on a process of restructuring and shedding non-core assets. Less than 12 months after the private equity firm purchased the majority stake in the spin off, the newly formed venture went public and reportedly doubled the private equity firm’s investment.

Our formula for success is to first understand our client’s business issues, then identify how these can and should impact on the compensation philosophy, and finally ensure that the new compensation plan design is in line with the rewards philosophy.


Governance Issues Spread Across Borders

We’re seeing shareholders across borders unite around common themes in corporate governance, including say-on-pay voting, alignment of pay with performance in long-term incentives, gender pay equity, diversity and inclusion throughout an organization, and linking environmental and social issues to executive pay.

The nuances of each of these issues can vary within different markets — for example, pay equity laws both within and outside of the U.S. differ in what they require both in methodology and disclosure. However, boards and executives need to stay on top of these issues and develop a strategy to proactively address them. In addition to regulatory scrutiny, your shareholders are likely to ask questions about what your business is doing to address and mitigate risk as it pertains to these topics if they haven’t already.

Let’s explore these topics and how we’re working with our clients to address them.

Issue #1

Say-on-Pay Voting

Say-on-pay voting, in both binding and advisory form, is still being adopted by new markets and modified in others. There are four main markets where say-on-pay voting is taking place due to regulatory reforms, including:

European Union

The EU Shareholder Rights Directive II requires an annual advisory vote on the remuneration report and a triennial vote on remuneration policy, which may be advisory or binding depending on each member-state for future proxy seasons.

United States

Say-on-pay voting began in 2011 following the passage of the Dodd-Frank Act. Rules call for a non-binding vote at least every three years (though most companies hold one every year) and a vote on the frequency every six years.

United Kingdom

Companies must hold an annual advisory vote on the remuneration report (similar to the U.S.) in addition to a binding triennial vote on remuneration policy. Votes must also occur when the policy changes or the advisory vote fails.


Annual advisory votes are required on the remuneration report. If there is 25% opposition at two consecutive annual meetings, there'll be a separate vote to determine whether the directors need to stand for re-election at an extraordinary general meeting (EGM). If that vote passes, the EGM must occur within 90 days.


The global spread of advisory and binding say-on-pay voting shows how the once niche issue eventually spread like a wildfire across numerous countries and continues to evolve as market conditions, the global competition for talent and investor expectations also change.


The Evolution of Say-on-Pay Voting: A Timeline



The United Kingdom becomes the first country to adopt mandatory non-binding shareholder votes on director compensation through the Directors' Remuneration Report


In the first year of mandatory, non-binding say-on-pay votes in the U.K., shareholders at GlaxoSmithKline became the first to vote down the company's remuneration


Only nine companies in the U.K. lose their say-on-pay vote — all but two are fairly small firms


Germany's governance code allows for voluntary, non-binding say-on-pay voting; most German companies comply


Mandatory, non-binding say-on-pay voting begins in the U.S.

Australia's two-strikes rule goes into effect, which says if 25% of shareholders vote against a company's remuneration report at two consecutive annual meetings, the entire board may have to stand for re-election within three months; 22 companies reportedly received a "second strike" in 2012

Italy requires financial services companies to hold a binding say-on-pay vote; in 2012 all companies required to hold votes but they only remain binding for financial services


Mandatory, binding votes on approval of the remuneration policy for Board Directors begin in the U.K.

France revises its governance code to recommend companies hold an annual, non-binding say-on-pay vote; if they choose not to they must explain any non-compliance with the code and publish the explanation in their annual report

*Note: this timeline is not an exhaustive list of countries where there is say-on-pay voting but is meant to provide a snapshot of how the issue of say on pay has spread across countries and continents.

Companies need to proactively monitor exposure on proxy advisory firm and investor guidelines related to say-on-pay, and then depending on actual voting outcomes, take an adequate response to a low or failed vote. Given that pay-for-performance concerns and high executive pay are often the key drivers in declining vote results, a major byproduct of the spread of say-on-pay globally is higher at-risk compensation levels, including the wider adoption of performance-based equity compensation at the executive ranks. For multinational companies, a truly global strategy containing performance-based equity compensation must also factor and balance compensation needs with local tax and regulatory considerations. Countries have different expectations for pay design due to local practices, culture and regulatory considerations, but the overall theme of pay for performance and increased transparency around incentive compensation has become the new norm.

Case Study: How Aon Helped a Bank Transform its Long-Term Incentive Design to Win Shareholder Support

The Challenge

Our client is a high-performing bank that was under shareholder scrutiny over executive pay programs due to quantitative pay-for-performance concerns. Given the profile of the business, it was important to take a very rigorous approach to managing the say-on-pay vote.

Our quantitative say-on-pay modeling and qualitative review showed the company was at risk of a potential negative proxy advisory firm voting recommendation and lower than desired say-on-pay support at its upcoming annual shareholder meeting. In addition to likely negative scrutiny from proxy advisory firms, institutional investors had raised concerns about the lack of performance-based equity, short performance periods and an overlap in performance metrics between the short-term and long-term incentive plans.

The Work

We were able to conduct our say-on-pay voting analysis six months before the annual meeting, allowing time for us to work with the client to recalibrate and gather important feedback from institutional shareholders and the research teams at the major proxy advisory firms. We provided likely voting outcomes for three different plan designs before landing on the right plan for the business. Our solution involved redesigning the company’s long-term incentive plan and educating the company on the accounting, governance and regulatory issues of each long-term incentive vehicle, including the cost-saving advantage and positive shareholder optics associated with post-vest holding periods for executive officers.

Client Results

Our work was supported by our team of equity and governance experts, allowing for a holistic approach to educating the company on all aspects of its long-term incentive vehicles. The solution ultimately struck a balance between addressing external investor and proxy advisory firm concerns and management considerations while designing programs that make sense for the business and are appropriate for the industry. The new LTI plan is 100% performance based, evaluated against three performance metrics.

Our client received more than 97% shareholder approval for its say-on-pay vote at the annual meeting following the implementation of the new LTI plan — a 35% increase in support from the prior year.


Issue #2

Pay Equity and Diversity

Ensuring pay is set fairly and that employees from all backgrounds have equal opportunities to advance in an organization are some of the most important business issues of our time. Regulations addressing pay equity are sweeping the globe, and some companies must comply with multiple laws depending on where employees are located, where the company is headquartered and what stock exchange(s) it’s listed on. Many organizations are also proactively addressing pay fairness and the transparency of their pay systems proactively as they see it as the right thing to do, while attempting to strike a balance between adequate disclosure and over-disclosure.


At Aon, our research finds that pay equity is often exacerbated by an unequal representation of women and minorities within high-paying job functions and higher job levels. For companies to effectively address pay gaps they need to assess the composition of their workforce and enable greater job mobility for underrepresented employee populations.

In the U.S. market, developing a pay equity story has become a necessary practice for corporate issuers to appeal to institutional investors and regulators, avert unnecessary shareholder proposals (e.g., Arjuna Capital’s gender pay cap proposals) and to ensure that sufficiently diverse populations are maintained within the workforce in a competitive labor market. Similar actions are being taken throughout global markets, especially as institutional investors use their voting power globally.


Beyond pay equity, there has been an even bigger spotlight on diversity within corporate boards in recent years. Several investors adopted or strengthened their board diversity policies in 2019. For example, numerous institutional investors, along with proxy advisory firm Glass Lewis, voted or recommended against nominating and governance committee members at companies in 2019 where there was no gender diversity on the board. ISS says it will apply a similar standard in the 2020 proxy season. Meanwhile, California also took the step of requiring public companies headquartered in the state to have at least one female on the board by the end of 2019. While there is some leniency of investors for corporate issuers to phase in more diversity in the board room over a stated period of time, there is an increased expectation of communication from companies regarding board refreshment and recruitment policies through direct shareholder outreach and enhanced proxy disclosure, as well as through increased transparency regarding the capabilities and skills represented by existing board members.


Our advice for corporate boards across the globe is to analyze your composition and skillsets through ongoing board evaluation and skills matrices and be prepared to justify existing policies. Also, be willing to move toward a more diverse board if your current composition lags your shareholders’ guidelines and proxy advisory firm standards — in addition to industry and peer benchmarks.



Issue #3

Environmental and Social Issues

The emerging field of environmental and social (E&S) governance has become complex terrain for companies to negotiate. While issuers have gotten comfortable in navigating general governance topics, the E&S angles are numerous and encompass a broad range of factors that can sometimes be unrelated to the company’s core business. This makes it difficult to determine which items truly warrant the most attention from boards and executives.

As these topics have become a higher priority for shareholders across many different markets, a growing number of companies are also now linking elements of executive pay to specific goals or at least considering whether such a linkage is desirable. Take the example of Royal Dutch Shell, which announced recently that it would tie certain incentive pay targets to cutting carbon emissions targets over three and five-year periods, beginning in 2020. The announcement followed pressure from some Royal Dutch Shell shareholders to take more action on addressing greenhouse gas emissions. Oil, gas and mining companies have been incorporating such factors in incentive plans for years (at least as part of their non-financial, subjective goals used in individual performance factors for annual bonuses or as modifiers in short-or long-term incentive programs). These plan designs may provide a framework for other industries to consider. Figure 4 shows that institutional investors across the globe are increasingly supportive of responsible investing practices, with the biggest year-over-year jump seen in the U.K.


Factors driving the focus on E&S

  • The submission of shareholder proposals
  • Investors voting against certain board members and board committees up for election at companies that they perceive aren’t doing enough to address certain these topics
  • New E&S rating frameworks coming out each year by different groups
  • The integration of E&S information as formal buy-side factors in the investment decision process at many institutional investors globally
  • The development of market infrastructure such as the Sustainability Accounting Standards Board (SASB) Framework, which encourages companies to report their sustainability activities in ways that are material to investors
  • Formal regulatory action, particularly in Europe, mandating that investors consider environment, social and governance information in their investment processes

Figure 4
Change in Responsible Investing Attitudes from Corporate Pension Funds by Geographic Region

Source: Aon 2019 Global Perspectives on Responsible Investing Survey

Today’s Environment Calls for Greater Focus on Efficiency in Compensation Plans  

Many businesses today constantly face pressure to lower expenses, but in order to lower the cost of compensation plans, companies must typically make the awards less valuable. However, there’s a better way. Companies can learn methods to reduce cost without a measurable impact on the perceived value of the award, making the awards more efficient.

We are helping companies navigate this situation by reducing the cost of their equity plans without a commensurate change in the award’s perceived value, enabling businesses to get more out of their awards by making them more efficient and effective. Our services below help bridge the communication gap that we see in some organizations.

The following design features within equity plans can support this balance of attracting and retaining talent while minimizing cost to the organization:

Post-vest holding periods
Learn More ›

A mandatory post-vest holding period on an equity award is a mandatory period after vesting over which the underlying share cannot be sold. If the employee were to terminate during this period, the shares would not be forfeited; however, the shares still could not be liquidated until the holding period lapses. This holding period, typically between one and three years after vesting, includes numerous governance benefits while not drastically impacting the perceived value as most executives must hold the awards after vesting anyway, such as:

  • Contribute to and accelerate the achievement of required ownership levels
  • Make clawback mechanisms feasible because they allow for easier recovery of awards
  • after they are vested as employees are forced to hold onto shares for an extended period of time
  • Promote greater alignment with shareholder and proxy advisory firm policies
  • Sizable reduction in fair value for the mandatory period of illiquidity, often ranging in fair value discounts between 6% and 15% depending on the length of the holding period and the company’s expected volatility


Negative TSR Payout Limits
Learn More ›

An increasing number of companies have design features that limit payouts in the event that shareholder return for the performance period is negative. More companies use relative rather than absolute TSR. This accounts for a company that can have exceptional performance relative to its peers but still be in negative territory — for example, navigating business performance during a recession or a geopolitical event that negatively impacts your industry. Placing some limits on a plan to prevent windfall payments when stock is down is prudent.


Shortening contractual term of stock options
Learn More ›

Many companies grant options with 10-year terms, but most employees exercise their options shortly after vesting. By moving to a seven-year term, a company could take 10% off the fair value of the stock options without really impacting the perceived value if most employees exercise early anyway. In fact, that lower fair value could be used to grant more options which might be even more attractive to all employees.

Using a different valuation technique
Learn More ›

This approach is most easily used in the valuation of stock options. For instance, most companies will use the Single-Point Black-Scholes model to value their option grants; however, a move towards the Multiple-Point Black-Scholes model maintains the same disclosure (you are still using the Black-Scholes model) but with potentially sizable discounts in fair value — sometimes as much as 7%. This approach does not require any change in the option’s design, which means there is no impact to award holders’ perceived value.


Adding maximum caps to awards
Learn More ›

Award holders have the potential to earn large windfall payments at the end of the performance period because of the leveraging of relative TSR awards. For example, if a company grants an award with a 200% maximum payout and the company’s stock price triples over a three-year performance period, the award holder will receive 600% of the target value of the award. In some respects, this is to be expected. After all, the intention of the plan was to incentivize and reward increases in stock price. However, some companies wish to limit the overall value that can be recognized by award holders for governance and optics reasons. Limiting the value recognized by award holders is as simple as defining that maximum value. Maximum caps also serve as a governance control to limit windfall payouts due to extreme stock price performance. However, it can also provide moderate reductions in fair value without significantly impacting the perceived value of awards on the part of employees as the cap may be deemed unlikely to come into play. While only around 10% of plans in the U.S. contain maximum caps, this is a growing number in the past three years.


Making Equity Awards More Relatable to Executives

Beyond maximizing the value of equity compensation through accounting and valuation techniques, there is also the importance of making sure employees understand the full value of their awards. While this employee communication piece might seem geared more toward the broader employee population, we find that there is plenty of room for companies to educate their executives around their equity compensation plans as well. Studies have shown that there is a better return on your investment in equity compensation when your employees better understand the value of the rewards they are receiving.


A web-based platform that provides employees both the communication and financial reporting aspects that come with equity awards that vest based on total shareholder return or other internal metrics. The platform tracks the performance of long-term incentive grants on a daily basis and allows participants to dig into the details as to how the award works with downloadable files detailing the exact calculation. Learn More


This service delivers educational videos customized to each client, helping employees better understand the value they are receiving from their compensation plans in an easily digestible format. The interactive video technology prompts the user to click through new videos that are relevant to keep them engaged. The video below explains the performance goals and metrics of a performance-based LTI plan that is geared toward executives. Learn More

EquiTV Video on Performance Share Plans

Bringing Our Capabilities Together

Finding the right executives to lead complex, global organizations into the digital age has never been more important and more difficult. With businesses more globally connected, companies are recruiting talent against a wider range of competitors. Yet, boards can’t afford to simply ratchet up pay each year to attract the right leaders. What they must do is develop compelling and motivating pay packages that balance stakeholder interests and optimize their executive compensation spend.

In order to successfully navigate this complex environment, boards and executives must take a comprehensive approach to executive compensation that incorporates the right compensation benchmarks (looking at data from a local, global and industry-expansive viewpoint), shareholder expertise and equity techniques.

The Rewards Solutions practice at Aon brings together a global team of executive compensation experts that leverage the power of our deep knowledge of industries, corporate governance and equity compensation issues, combined with our extensive global compensation data to provide a holistic offering that is unmatched.


Meet Our Authors

Amy E. Jennings
Partner, Rewards Solutions

Dan Kapinos, CEP
Partner, Rewards Solutions

Laura Wanlass
Partner, Rewards Solutions

Nic Stratford
Partner, Rewards Solutions

Robert Surdel
Partner, Rewards Solutions

Ted Buyniski
Partner, Rewards Solutions

Todd Leone
Partner, Rewards Solutions

Virginia Fischetti
Partner, Rewards Solutions

General Disclaimer
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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