Lesson 4: Remuneration Flashcards
Explain remuneration as a Corporate governance issue
Companies need to attract and retain talented executives
Remuneration can be used to motivate executives to achieve better results
Incentives need to be aligned with shareholders interests
Directors should not be rewarded for failure
Directors should not be able to decide or influence their own remuneration
High levels of executive pay undermine public trust
How can performance be measured
Earnings per share
Share price / dividend
Profit before income tax
Return on capital employed
Other non financial measure
Explain problems linking reward to performance
You must select the right performance measures
Must set a threshold beyond which rewards are paid
Ensure targets used for short term incentives promote long term success
Prevent the legacy effect (the impacts that previous conditions have on current)
Design schemes which are satisfactory to shareholders
Explain drawbacks of share option schemes
Share options reward holders for increase in share price and penalise holders for decrease in share price but these changes could be due to Bull / bear market and not reflect company performance
UK Corp Governance code and Remuneration
Remuneration polices should be designed to support strategy and promote long term sustainable success
There should be formal and transparent procedures for developing executive remuneration
No director should be involved in determining their own remuneration
Directors should exercise independent judgement and discretion when authorizing remuneration outcomes
The RemCom determines remuneration for executive directors and senior managers and it is comprised of INEDs (minimum 3). The board chair cannot chair the RemCom.
Annual Remuneration committee report
Per corporate governance code, the work of RemCom should be described in the annual report
Annual report should state whether the remuneration policy operated as intended
It should also specify engagement with shareholders and engagement with workforce
Also per the CA 2006 section 420 quoted companies are required to make detailed disclosures regarding directors remuneration
The Annual Directors Remuneration Report must include
- the directors remuneration policy
- an annual implementation report detailing payments made to directors
Remuneration policy
Contains table with remuneration components
Statement on the remuneration principles
Description of provisions in director contracts related to remuneration/ loss of office
Information on notice periods, exit payments
Statement on how shareholders views are taken into account
Directors remuneration implementation report
Summary of any performance metrics / conditions
Explanation of why performance metrics / conditions were chosen
Summary of assessment methods
Any significant amendments proposed
Companies Miscellaneous Reporting Regulations 2018
Quoted company
With > 250 UK staff
Required to publish the ratio of their CEOs total remuneration to the median remuneration of their UK employees
Publish supporting info including
Reasons for changes to ratio year to year
The effect of future share price increases on executive pay outcomes
Summary on any discretion exercised on executive remuneration outcomes with respect to share price appreciation/ depreciation
CA 2006 Annual Vote
The Annual Remuneration Report of a quoted company must be put to an annual vote by shareholders
Directors must invite shareholders to approve the Remuneration Policy at least once every three years
Compensation for loss of office
CA 2006: directors services contracts must not exceed 2 years in duration without shareholder approval
The UK Corporate Governance Code requires
Notice period should be one year or less
RemCom to ensure compensation commitments do not reward poor performance
Compensation should be reduced to reflect departing directors obligations to mitigate loss
Malus and Clawback
Per UK corporate governance Code remuneration schemes should include malus and clawback provisions to enable the company to recover sums or share awards in certain circumstances
Malus - individual would forfeit all or part of their bonus or long term incentive award before it is vested / paid
Clawback- company can recover sums already paid
The triggers are gross misconduct or misstatement of results
NED Remuneration
Per the Corporate Governance Code, NED remuneration should be determined by the Articles of Association or the Board
Levels of remuneration should reflect time commitment and responsibilities of the role.
Remuneration should not include share options or other performance related elements
