Linking strategy, risk and remuneration

Linking strategy, risk and remuneration: a key corporate governance responsibility that demands utmost transparency in the modern boardroom. 

A long-standing boardroom problem is that even the best plans can fall victim to fragmentation quite quickly. Directors can often struggle to zoom out on important decisions, especially when it comes to longer-term oversight. 

The key example here is the crossover between strategy, risk and remuneration. Each one can be carefully thought out, plans put into action, but directors could fail to realise that they are part of a whole – a collective system that forces each one to depend on the others. 

Strategy needs to be mapped out, contextualised by the risk around it. Meanwhile, executing that strategy needs the right people in charge: people who know the risk, whose roles are structured by key deliverables that will ultimately influence their remuneration. It’s all interlinked, and in today’s governance world, so focused on transparency, it’s an essential narrative device.

Good governance professionals can take a wide view that incorporates all of these components. Moreover, they can consistently explain how each affects the other in their reporting. In today’s business climate, where transparency is valued more than ever before, this is exactly the kind of reasoning stakeholders want to see.

Realistically, it’s a common pitfall to keep strategy, risk and remuneration separate. Even firms that avoid it during strategic planning might fall victim to it in practice. It’s very easy to avoid these tough questions once plans are set in motion. 

That said, keeping these elements siloed will create a trust deficit with stakeholders. They’re smart people, experienced enough to know that policies alone are not enough. If they look at your governance and realise that core policies aren’t measured against each other, they will see a serious lack of transparency from the outset.

Regulators know this better than anyone. We don’t need to look further than the  UK Corporate Governance Code to see explicit mandates for this shift. It’s contained in the (as of 2024) dramatically revamped Principle C, which requires governance reporting to take this kind of top-down view. Boards need to focus on:

• Their own decisions
• The outcomes of those decisions
• An assessment of those outcomes in the context of the company’s objectives.  

In the end, this can, and should, be a reflection of risk and remuneration as well, since all are linked together.

Creating a system where strategy, risk and remuneration respect each other requires behind-the-scenes mechanics, backed up by thorough reporting. 

• On strategy: You need to define key performance indicators (KPIs) for every strategic pillar.
• On risk: You need to spend time working out your principal risks and then directly link these with the KPIs mentioned above. That second part is often where firms fall down. 
• On remuneration: You need to ensure that provisions for variable pay are built into all relevant contracts. Most executive and c-suite professionals will expect this to some extent, so it’s certainly not an alien concept. Practically, the variable pay structure should introduce long-term incentive plans (LTIPs), tie them to KPIs and include risk-based malus and clawback provisions.

Leading reporters like UK-based water company Severn Trent have done this by tying executive pay to what they term “Outcome Delivery Incentives” (ODIs). Here, remuneration is linked to specific regulatory targets such as leakage and pollution; if the company fails in those areas, executives are financially penalised. This has a profound ability to showcase follow-through and create trust in the organisation.

Reporting is your key opportunity to demonstrate the link to stakeholders. It’s also a great opportunity for you and your colleagues, because it provides unique visibility over how the three components operate alongside and complement each other.

Here are some practical tips for leadership teams:

• Make every section mean something: Critically analyse every section of your reporting. If you’re mentioning it, there must be a tangible reason (beyond it being a legal requirement). For example, if a report talks about the board evaluating the risk register, it should show why that evaluation matters. Perhaps a certain risk, like cybersecurity, was re-assessed, even bumped up to being a principal risk. From there, you fan out, tracking its impact on both strategy and remuneration.
• Validate the linkage: When you carry out the above task, ensure you correctly assess the link across the three components. This will often involve input from your colleagues and board committees, who have more visibility over the inner workings. Externally, a useful document is the annual report, which can act as a kind of barometer for whether stakeholders understand how you’ve linked strategy, risk and remuneration.
• Empower CoSec-IR unity: Create a joint annual engagement plan between the company secretary and investor relations functions. This is a crucial link between two areas jointly responsible for overseeing strategy, risk and remuneration. When they talk, visibility gets far easier.

As detailed and drawn-out as strategy can get, the best boards are always able to look above it all and tie different essential components together. This is exactly what needs to happen when it comes to strategy, risk and remuneration. Individually, they’re huge responsibilities, but they’ll only be executed correctly when they’re considered together.

• UK Corporate Governance Code 2024
• ANNUAL PERFORMANCE REPORT – Severn Trent Water
• Corporate governance reporting under spotlight in FRC review
• The FRC’s Annual Review of UK Corporate Governance Reporting and the ‘Comply or Explain’ Principle in Retrospect
• Preparing for 2026: Ten tips for compensation committees and HR teams
• Compensation Strategy Best Practices: 2026 Edition
• Severn Trent Water Limited Report and financial statements For the year ended 31 March 2025