Chapter 6 - Remuneration Of Directors And Senior Executives

Question 1

For what reasons is the remuneration of senior executives considered a corporate governance issue in some countries?

Answer 1

Various reasons:

• excessive payments reduce investor confidence and anger employees
• remuneration incentives should be aimed at rewarding performance
• shareholders object to having no influence over remuneration

Question 2

What are the main component elements of the remuneration package of a senior executive director?

Answer 2

• basic salary
• payment into a pension scheme
• annual bonus linked to performance
• long-term incentives (usually share options)

Question 3

What company performance targets might be used as a basis for fixing annual bonus payments to a CEO?

Answer 3

Financial targets such as EBITDA

Longer term strategic targets

Question 4

What are the problems in linking rewards to performance of senior executives?

Answer 4

An executive might leave before his impact is fully realised, meaning he may be paid more than he deserves.

Question 5

What are the advantages and disadvantages with the remuneration committee using the services of consultants?

Answer 5

Reliance on what other organisations are paying their executives can create an upward spiral of remuneration.

Question 6

What company performance targets might be used as a basis for deciding how many shares should be granted to a senior executive as a long-term incentive arrangement?

Answer 6

Total Shareholder Return (TSR) is most common.

Question 7

What are the drawbacks to using share options as long term incentive schemes?

Answer 7

• they reward the executive for increases in share price, which encourages “short termism”
• executives may be reluctant to award dividends to seek takeovers
• share price is not always linked to performance

Question 8

What are the two elements of remuneration?

Answer 8

1 Fixed element (paid regardless of performance)

2 Variable element (performance-related incentives)

Question 9

What are the general provisions of the UK Code on the design of remuneration packages?

Answer 9

Schedule A of the Code:

• remuneration committee should decide an appropriate balance between fixed and performance related pay
• performance conditions should be relevant, stretching and designed to promote long-term success
• there should be upper limits on incentives

Question 10

What are the provisions in the UK Code on short-term and long-term incentive schemes?

Answer 10

Schedule A:

• share options should not be offered at a discount to the current market price
• any new long-term incentive should be shareholder-approved
• total rewards should not be excessive

Question 11

What does the UK Code state about remuneration policy?

Answer 11

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages for individual directors. No director should be involved in deciding his or her remuneration.

Question 12

What are the principal responsibilities of the remuneration committee?

Answer 12

• developing remuneration policy
• negotiating the remuneration of individual directors
• setting the remuneration for all senior executives and directors
• set the remuneration of the CoSec

Question 13

According to the UK Code, what should the composition of a remuneration committee for a FTSE350 be, and who may be its chairman?

Answer 13

• entirely independent NEDs
• at least 3 members
• the company chairman may not be the chairman of the committee, but can be a member

Question 14

Is it appropriate for a remuneration committee to consult the company chairman of CEO on remuneration packages for individual executives?

Answer 14

Yes, but the committee should take care to recognise and avoid conflicts of interest.

Question 15

What does the UK Code state about remuneration policy?

Answer 15

There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages for individual directors. No director should be involved in deciding his or her remuneration.

Question 16

What are the principles or provisions of the UK Code regarding severance payments to senior executives?

Answer 16

2 provisions:

• when negotiating terms of appointment, the remuneration committee should consider what compensation commitments the company will have in the event of early termination of office.
• notice periods for executive directors should be one year or less.

Question 17

What principles on severance pay were recommended in the joint ABI/PLSA statement on severance pay?

Answer 17

• severance payments arising from poor performance should not extend beyond basic salary
• companies should provide full disclosure in their remuneration report of the constituent elements of any severance payments.

Question 18

Why should NED remuneration be a fixed fee, not a incentive based package?

Answer 18

To protect NED independence.

Question 19

What are the rules in the UK for the disclosure of details of director’s remuneration by listed companies?

Answer 19

CA 2006 requires a remuneration report in the annual report and accounts, containing:

• a statement by the committee chairman
• company policy on directors’ remuneration
• an implementation report, explaining how policy has been implemented.

Question 20

Why might it be appropriate for shareholders to be allowed to vote on remuneration policy for directors, but not on the remuneration package of individual directors?

Answer 20

It would be problematic to have to hold a vote on the individual remuneration of every director.

Question 21

Since when have shareholders had a binding vote on remuneration policy?

Answer 21

Since 2013

Question 22

What are the consequences if a director receives a payment not in line with the remuneration policy approved by shareholders?

Answer 22

The director holds the money in trust, and it may be reclaimed by the company.