The impact of Artificial Intelligence (AI) on incentive compensation design, implementation

Artificial intelligence (AI) is playing an increasingly significant role in shaping our future, and it is having a direct impact and immediate impact on executive pay, incentive design and pay packages generally.

One of the primary benefits of using AI for executive compensation work is the ability to analyse vast amounts of data quickly and accurately. Traditional methods of benchmarking and determining compensation often rely on manual processes and subjective assessments. AI, on the other hand, can process complex datasets in real-time, providing companies with valuable insights into market trends, industry benchmarks, and competitor practices. That is, so long as there are vital checks and balances in place to ensure the AI data collection is accurate, and peer reviewed.

AI can also help identify patterns (correlations) which might otherwise go unnoticed, enabling all of us to understand the factors that really influence executive performance, recruitment and retention. This data-driven approach allows for more precise and targeted decision-making, ensuring compensation packages align with company objectives and market realities.

Given the sheer speed and depth of AI-driven executive compensation data handling, it becomes possible to design pay packages that are tailored to the unique needs and preferences of individual executives. Potentially, that could mean executives' specific goals and motivations are baked in far earlier, and therefore far more effectively.

Personalisation (tailoring) of pay programmes has been proven to speed up and strengthen the recruiting of talent. It might also allow companies to align compensation packages with their values and priorities. More loyalty? The jury is out.

AI will definitely help HR leaders (as well as Company Secretaries, General Counsel) ensure senior employee pay complies with the constantly evolving regulatory requirements.

If asked, AI itself will claim to be able to track and analyse data to provide evidence-based justification for compensation packages. I find this a stretch. Yes, if achieved, there would be greater transparency - which in turn would help build trust with shareholders, regulators, and the public – but the data AI must rely on is internal to organisations. Would that create more trust?

Which brings us to the key point: technology is not all-embracing, nor is it accurate all of the time. AI itself will tell it has the ‘ability to augment human decision-making, not replace [them]’.

So, to get the best out of AI, integrate this amazing technology into existing decision-making. Use it to process and supplement, not supplant, the expertise of hard-working human resource departments.

As an illustration – we simply asked AI this question:

As a remuneration advisor, what will people in small to medium sized businesses be most interested to read about?

...and in less than a minute, we received this:

  1. Salary Benchmarking:
    Information on how their compensation packages compare to similar businesses in the same sector or region. This can help companies attract and retain talent by ensuring their salaries and benefits are competitive.
  2. Pay Equity Analysis:
    How to ensure fair pay practices within their organisations, including guidance on analysing gender and diversity pay gaps and strategies for addressing them.
  3. Flexible Remuneration Packages:
    As more people are interested in work-life balance and personal development, understanding how to develop flexible remuneration packages could be valuable. This can include options for remote work, flexible hours, training and education opportunities, and other non-monetary benefits.
  4. Performance-based Remuneration:
    This is a complex area that can provide both motivation and retention benefits if done correctly, but it can also be demotivating and costly if done poorly. SMEs would likely be interested in understanding how to structure these types of compensation programs.
  5. Legal and Tax Aspects of Compensation:
    This is especially important for small to medium-sized businesses that might not have dedicated legal or tax departments. They need to understand the tax implications of various compensation strategies, as well as any legal requirements or pitfalls.
  6. Employee Stock Ownership Plans (ESOPs):
    For smaller businesses, offering ESOPs can be a great way to incentivise and retain key employees. Understanding how to set up and manage these plans would be of interest.
  7. Benefits Administration and Management:
    Smaller businesses might be looking for cost-effective ways to manage benefits programs, including health insurance, retirement plans, and other employee benefits.
  8. Creating a Culture of Recognition:
    This includes understanding how to develop a remuneration strategy that values employee contributions, fosters a positive workplace culture, and encourages employee retention and engagement.
  9. Pension and Retirement Plans:
    Understanding different types of retirement plans and how they can be used as part of a comprehensive remuneration package.
  10. Managing Compensation in Times of Change:
    Whether it's scaling up, dealing with economic downturns, or navigating a merger or acquisition, businesses need to know how to adapt their remuneration strategies in response to change.

Amazing, useful, but begs the question: what next?

We shall cover all of the above topics shortly.

As Managing Director, Simon Patterson leads the team at Remuneration Associates (Rem.n), a specialty consulting firm focused on executive pay owned by the professional staff themselves. Formerly Pearl Meyer (London), the team have 35+ years of accumulated experience working together, they are actively engaged as advisors to remuneration committees of some of the largest and some of the fastest growing companies, globally. Mr Patterson and the team consult widely on executive compensation, incentive compensation design, and performance measurement.

Pearl Meyer agreed to divest its London operations on June 17th, 2022. Simon Patterson (Managing Director) and his team now own Remuneration Associates Ltd – an independent consulting firm working with clients around the world, which builds upon the legacy of the London operation.


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