Corporate Governance - Board Remuneration Flashcards
1
Q
Why is Remuneration a Corporate Governance Issue?
A
- Need to attact and retain executives.
- Remuneration incentives may be used to motivate better performance from executives.
- Remuneration incenives must be aligned with shareholder interests and promote the company’s success.
- Failure should not be rewarded.
- Directors must not determine their own remuneration.
- High-levels of remuneration undermine trust in large businesses.
2
Q
What are the two Principal Components of Remuneration?
A
- Fixed (non-performance-based):
- Basic salary.
- Pension. - Variable (performance-based):
- Bonus (short-term).
- Shares, options other other incentives (long-term).
3
Q
What are the key Performance Measures?
A
- EPS - earnings per share.
- TSR - total share return (dividend-linked).
- EBITDA - earnings before interest, tax, depreciation and amortisation.
- ROCE - return on capital employed.
4
Q
What are the key Difficulties with linking Rewards to Performance?
A
- Selecting appropriate performance measures.
- Determining threshold for payment of rewards.
- Determining whether a cap on incentive rewards should exist.
- Ensuring short-term incentives promote the company’s long-term success.
- Ensuring incentives do not promote bad behaviour.
- Preventing peer performance ‘piggy-backing’.
- Preventing predecessor performance ‘piggy-backing’ (legacy effect).
- Not fostering an expectation that incentive rewards will be disbursed regardless of performance.
- Developing a scheme palatable to shareholders.
5
Q
What are the Disadvantages of Share Option Schemes?
A
- Share options may reward directors with valuation increases, which are linked to market conditions, rather than performance.
- Conversely, share options may decrease in value and even become worthless due to exigent market conditions.
- Options do not confer an entitlement to dividends.
- The share market price may diminish beneath the option strike price.
- Vesting of shares, in favour of share options, may be preferred given they will also have some value.
6
Q
What are the Key Remuneration Principles established by the UK Corporate Governance Code?
A
- Remuneration policies and practices should support the strategy and long-term success, with alignment to company purpose, values and its successful long-term strategy (Principle P).
- Remuneration policies should be developed through formal and transparent procedures; no director should be involved in determining their own remuneration (Principle Q).
- Directors should exercise independent judgement and discretion when authorising remuneration outcomes, considering the company, individual performance and wider circumstances (Principle R).
7
Q
What is the Requirement for and the Role of the Remuneration Committee?
A
- Board should establish a Remuneration Committee of independent NEDs - >=3 NEDs, or >=2 NEDs for smaller companies (Provision 32, Code).
- Board chair may only service on Committee if independent on initial appointment and cannot chair Committee (Provision 32, Code).
- Committee chair must have served on the Committee for >=12 months (Provision 32, Code).
- Committee has delegated responsibility for determining remuneration for Chair, EDs and senior management, and also reviews and aligns incentives and rewards with culture (Provision 33, Code).
8
Q
What Issues may arise through the use of Remuneration Consultants?
A
- Conflicts of interest may arise if the consultants advise the company on other deliverables, or have an external relationship with the appointing directors (e.g. via another company).
- Risk of recommendations favouring the executives who appoint them.
- May table complex remuneration structures to increase consultancy fees and render their continuing services near indispensable.
- May pressure Remuneration Committees to accept their recommendations.
- Appointing directors may also pressurise the Remuneration Committee.
9
Q
What are the key Requirements concerning use of Remuneraton Consultants?
A
- Remuneration consultants should be identified in the annual report together with any other connections they have to the company or its board (Provision 35, Code).
- Remuneration committee members should exercise independent judgement when evaluating third paty advice or receiving ED / senior management views (Provision 35, Code).
10
Q
What are the three Types of Remuneration Reports and Policies required by a Quoted Company?
A
- Remuneration Committee Report.
- Directors’ Remuneration Report.
- Directors’ Remuneration Policy.
11
Q
What are the key Content requirements of the Remuneration Committee Report?
A
- Under statutory disclosure regime, must confirm (i) Committee membership, (ii) details of any advisers and (iii) chair statemente re. significant directors’ remuneration change during past year.
- Provision 41, Code requires the report to:
- Explain strategic rationale for ED remuneration policies, structures and performance metrics.
- Explain why remuneration is appropriate re. pay ratios, gaps and other metrics.
- Description of how Provision 40 factors have been addressed.
- Clarify if the policy has operated as intended.
- Shareholder engagement and impacts this has had on remuneration outcomes.
- Any discretion applied to such outcomes and why.
12
Q
What are the key Requirements of the Directors’ Remuneration Report?
A
- Under s.420 CA ‘06, companies must make disclosures concerning directors’ remuneration in the AR&A via a ‘directors’ remuneration report’.
- This report should include the remuneration policy, if that is to be put to shareholders for approval at AGM as well as details of remuneration paid to directors in the relevant FY.
- The annual remuneration policy for a quoted company must be put to shareholder vote alongside the AR&A, usually via the AGM (s.439, CA ‘06).
- If the vote is defeated, the existing policy or a revised policy must be put to vote at the next GM, where the accounts are laid (s.439A, CA ‘06).
13
Q
What are the Requirements concerning a Directors’ Remuneration Policy?
A
- Quoted companies cannot make payments to a director unless made pursuant to a policy approved by shareholders or specifically approved by shareholders (ss.226A-B, CA ‘06).
- Shareholders must be invited to approve the policy, regardless of any changes, every three years and must also be asked approve any policy revisions (s.439, CA ‘06).
- The policy tabled for approval must have either have been approved by directors within the directors’ remuneration report or as a separate revised policy (s.422A, CA ‘06).
14
Q
What are the threshold Considerations relevant to Compensation for Loss of Office?
A
- Directors’ service contracts must not exceed two years without shareholder approval (s.188, CA ‘06).
- Provision 39, Code:
- Notice/contract periods should be one year or less.
- If longer periods are initially necessary, for recruitment purposes, these should ultimately reduce to one year or less.
- Remuneration Committee must ensure committed compensation does not reward poor performance.
- Compensation should reduce any losses of departing directors.
15
Q
What are the concepts of Clawback and Malus in terms of Compensation?
A
- Remuneration policies should not be formulaic and allow, in certain circumstances, use of overriding discretion (Provision 37, Code).
- Malus/performance adjustment - Performance awards may be forfeited before vesting and disbursement, in certain circumstances.
- Clawback - Recovery of amounts already paid.
- Clawback and malus typically used for gross misconduct or mistatement of results.
