Ideally directors’ remuneration should achieve two aims, it should motivate superior performance and should lead a director to behave in a way that is beneficial to the long-term interest of shareholders. How to achieve this is a delicate balancing act and the need to balance incentives through appropriate remuneration becomes more acute as there is a rising whiplash against corporate failures especially when directors are seen to be receiving remuneration not linked to performance.
A Remuneration committee made of non- executive board members is usually tasked with creating an appropriate remuneration policy for executive directors. Their challenge is to develop a strategy that links rewards to performance. Components of such a strategy may include encouraging long-term loyalty through share purchase schemes and offering non-cash benefits to compensate for lower basic salary. The European Corporate Governance Forum sets out the following best practice guidelines for remuneration policies:
- The level of variable pay should be reasonable in relation to total pay level;
- Variable pay should be linked to factors that represent real growth of the company and real creation of wealth for the company and its shareholders;
- Shares granted to executive directors under long-term incentive plans should vest only after a period during which performance conditions are met;
- Severance pay for executive directors should be restricted to two years of annual remuneration and should not be paid if the termination is for poor performance.
Asides from performance, there are dimensions relating to director remuneration that a company must also consider including legal, competitive, ethical and regulatory. For example, legal requirements on transparency and disclosure of remuneration policies vary from country to country.
According to Right2Info, the law and practice website, the following are some regulations surrounding director remuneration from some countries:
In the United States, the disclosure regime places emphasis on both (i) detailed disclosure of “straightforward” remuneration information in a format that readily allows comparison across companies and (ii) disclosure regarding the general remuneration processes and decisions of public companies and corporate governance matters related to remuneration practice. Similarly, Canada requires that publicly listed companies must include in annual filings summaries of remuneration for the CEO, Chief Financial Officer and the three next most highly compensated officers and for all directors as well as a “Compensation Discussion & Analysis”.
In Europe, the UK requires that requires publicly traded companies listed on a national stock exchange disclose executive compensation in their annual reports. The disclosure regime requires the disclosure of salary, fees, bonus benefits, pension and long term incentives in a tabular format. In addition, companies are required to provide a detailed description of several compensation elements including: executive compensation philosophy, overview of bonuses, overview of long term incentive plans, description of pensions, payouts to departing executives, and the peer groups used to help determine remuneration. Most notably, the United Kingdom requires a vote of the shareholders to approve the remuneration report
In Nigeria, the Securities and Exchange’s commission section 4.10 states, “the company’s remuneration policy and all material benefits and compensation paid to directors should be published in the company’s annual report.” However, It doesn’t specify the level of detail required.
Whilst, the Nigerian code isn’t as strident as some others, companies who seek to lead in corporate governance should adopt best practice in setting director remuneration including guaranteeing independence of the remuneration committee, adopting a mix of short and long term performance rewards, and adequate disclosure to shareholders on the policy and procedures used to arrive at the remuneration policy.