Reward Governance in Private Companies: When Flexibility Becomes A Risk

Poor reward governance in privately owned companies can undermine business performance and long-term potential. As these companies grow, their approach to remuneration governance often determines whether executive remuneration functions as a strategic asset or as a source of inconsistency and conflict.

In private companies, there is often no uniform approach to remuneration governance. Some founder-led businesses continue to determine executive remuneration through owner discussions, while others rely on the board as a whole or seek advice from external remuneration specialists. More mature organisations may establish formal remuneration committees with independent members and documented terms of reference. This diversity reflects the absence of a single prescriptive governance model within the private sector.

By contrast, public companies and many charities and not-for-profit organisations have adopted governance arrangements that reflect the principles of the UK Corporate Governance Code. It sets clear expectations for listed companies, including that remuneration committees (RemCos) should operate with appropriate independence, follow a formal and transparent process, and ensure that no director is involved in decisions relating to their own remuneration outcome. The charities and not-for-profits that voluntarily adopt structures in line with the Corporate Code recognise that greater transparency, accountability, and independent oversight help maintain public trust.

In practice, remuneration governance in private companies takes a variety of forms, often uniquely reflecting the company's size, ownership model, and strategic ambitions. The Financial Reporting Council's (FRC’s) Wates Corporate Governance Principles offer guidance for large private companies, encouraging them to adopt governance models and reporting methods which facilitate effective leadership and organisational success. Whilst they recommend policy transparency, RemCo independence, and business strategy alignment, they are not prescriptive of how remuneration should be governed. The diversity of governance arrangements is reflected in the FRC's 2025 Review, which found that even among companies reporting against the Wates Principles, only 65% disclosed whether they utilise a remuneration committee in their governance structure.

Smaller private companies are even less likely to have dedicated, independent remuneration governance. With fewer senior executives and simpler organisational structures, remuneration decisions are often made by the owner, CEO, or the board; executive pay may be determined reactively in these companies, with little consideration of long-term organisational ambitions.

When remuneration governance does not structurally evolve alongside the organisation, it can have far-reaching consequences. For example, when executive directors on the main board are involved in remuneration discussions, potential conflicts of interest arise. Without clear and independent governance, disagreements around executive remuneration become harder to resolve because there is no agreed framework against which decisions can be evaluated. Salary reviews, bonus outcomes, and long-term incentive plans risk becoming matters of negotiation and dispute rather than objective assessment. This unclear remuneration governance can encourage game-playing around budgeting and performance target setting, with overemphasis on such metrics undermining long-term planning and performance potential. Over time, remuneration can become influenced as much by an executive's ability to advocate for themselves as by the strategic value they create for the organisation.

Without a clear pay philosophy or reward policy, organisations can struggle to establish consistent principles across the workforce. When employees are unclear about how pay decisions are made, whether progression is based on objective criteria, or whether reward outcomes accurately reflect contribution and performance, trust and organisational culture both suffer. Difficulties in explaining and justifying pay decisions can undermine relationships between executives and employees, as well as between owners and stakeholders. Employees may lose confidence in the wider reward framework, affecting talent recruitment, engagement, and retention.

Ensuring that remuneration governance evolves in line with the company reduces the risks associated with informal pay decisions and allows remuneration to be leveraged as a tool for growth and alignment. This begins with establishing a clear reward philosophy that aligns remuneration with organisational goals. Introducing proportionate governance structures that reflect the size and ownership model of the organisation, then defining the decision-making responsibilities of the governing members, ensures clarity and accountability regarding remuneration discussions. Decisions can then be independently challenged where necessary, which is essential in transparent and effective remuneration.

Independent reward specialists can help reduce governance risk by introducing objective challenge and ensuring remuneration decisions remain aligned with long-term organisational goals. From pay benchmarking to effective LTIP design, we work with businesses to develop remuneration governance that is transparent, proportionate, and strategically aligned. To discuss how your remuneration governance can evolve alongside your organisation, contact our Principal Consultant, Paul Hunter, at paul@people-performance-reward.co.uk.