Chapter 16- Remuneration of directors and senior executives Flashcards
What is meant by the term “rewards for failure”?
The term refers to remuneration packages for senior directors where the size of the reward (often a bonus) does not seem sufficiently linked to performance and large payments are made to outgoing executives (on dismissal) whose contracts have been terminated following poor company or individual performance.
What are the overall aims of any executive remuneration package?
A remuneration package should attract individuals of a suitable calibre to senior positions, should enable the company to retain them for the mid to long term, and should motivate individuals towards achieving both company and individual performance
Describe the mixture of elements recommended for executive remuneration packages.
Packages should consist of a combination of fixed pay and variable pay/short and long-term incentives, including:
- basic salary;
- payments into a pension scheme (or payments in lieu);
- annual bonus, usually linked to annual financial performance of the company;
- long-term incentives, usually share options/awards; and
- other benefits and perks, such as free medical insurance, company car or accommodation.
What is the recommended composition for a Remuneration Committee? List five duties of the Remuneration Committee
Provision 32 states that the committee should consist of all independent NEDs, with a minimum of 3 (or 2 for smaller companies); the chair of the board can be a member, but not chair the committee; and the committee chair must have served on a remuneration committee for at least 12 months before their appointment.
Duties include:
- Determine and agree (with the board) the remuneration policy, set the remuneration for all executive directors and the chairman
- Recommend and monitor the level and structure of senior management remuneration.
- Decide targets for performance for any performance-related pay schemes
- Responsible for appointing remuneration consultants
- Report to the board and in the annual report on its work
What are the main principles of the UK Corporate Governance Code in respect of remuneration?
Principle P states that remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.
Principle Q states that there should be a formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration. No director should be involved in deciding his or her own remuneration.
Principle R states that directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.
Describe the recommendations that exist in respect of severance payments.
The UK Corporate Governance Code states that the main aim in compensation payments is to avoid rewarding poor performance. The amount of severance pay should reflect a departing director’s obligation to mitigate losses. It is suggested that contracts should provide for a payment of compensation in stages, which would be stopped when the director found employment elsewhere.
The UK Code also states that notice periods in employment contracts of executive directors should be set at 1 year or less.
Provision 37 of the UK Corporate Governance Code provides that remuneration schemes and policies should include provisions that enable a company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so. The provision effectively requires listed companies to adopt malus and clawback provisions. Malus provisions allow the company to forfeit all or part of a payment/award before it has vested and been paid. Clawback provisions allow a company to recover sums already paid.
The joint statement made by the ABI and PLSA in 2008 sets out principles regarding the level of remuneration providing adequate compensation for the risk associated with an executive role; and that where severance payments arise from poor corporate performance they should not extend beyond basic salary.
Explain the voting rights that shareholders have in respect of remuneration
Remuneration policy
Shareholders have a binding vote on an ordinary resolution to approve the remuneration policy. This is a binding vote. If the shareholders reject the policy the board may amend the policy and present the revised policy to the shareholders for approval at another general meeting. Alternatively, they may continue with the most recent policy to have received shareholder approval.
If a company wishes to make changes to the remuneration policy it must put the new policy to the shareholders for approval at a general meeting.
A company must put the remuneration policy to the shareholders for a binding vote at least every three years. However, as small changes require formal shareholder approval some companies decide to hold a binding vote on the policy at every AGM.
Implementation report
Shareholders also vote on the implementation annually, at the AGM. This is an advisory vote. If shareholders vote against an implementation report, the board will be required to put the remuneration policy to the shareholders in a binding vote at the next AGM.
