Deciding remuneration packages
This guide is based on UK law.
Best practice; the remuneration committee
Principle B.2 of the Combined Code states that:
“There should be a formal and transparent
procedure for developing policy on executive remuneration and for
fixing the remuneration packages of individual directors. No
director should be involved in deciding his or her own
remuneration.”
Quoted companies fulfil this obligation by having a remuneration
committee.
Committee membership
According to provision B.2.1 of the Code, remuneration
committees should have “at least three, or in the case of smaller
companies two, members who should all be independent non-executive
directors”.
A smaller company is a company outside the FTSE 350. (The
Combined Code’s tests of “independence” are discussed in the
Corporate governance section of Legal
info about Companies).
Since June 2006, the Combined Code has accepted that a company
chairman may sit on, but not chair, the remuneration committee if
he or she was considered independent on appointment as
chairman.
The committee’s terms of reference
Remuneration committees must, says the Combined Code, make their
terms of reference publicly available – an obligation usually
fulfilled via the company’s website. The Institute of Chartered Secretaries
(ICSA), which helped compile a list of the principal duties of the
remuneration committee for the Higgs review, has published guidance
notes giving model terms of reference. These can be downloaded from
its website.
Central to the role of the “remco” is the concept of delegated
responsibility. The terms of reference must make clear that
committee members actually set the remuneration for all executive
directors and the chairman; their role is not merely to make
suggestions.
Furthermore, the influence of the committee extends beyond the
pay of the boardroom. Code provision B.2.2. says:
“The committee should also recommend and
monitor the level and structure of remuneration for senior
management.”
The Code’s expectation is that senior management for this
purpose should normally include the first layer of management below
board level.
The ABI’s guidelines say that remuneration committees should pay
particular attention to arrangements for those senior executives
who are not board members but who have a significant influence over
the company’s ability to meet its strategic targets.
However, the most recent version of the ABI guidelines (December
2006) has dropped a previous request for disclosure of the
remuneration for these executives in companies’ remuneration
reports. Nonetheless, International Accounting Standard 24
(“Related Party Transactions”) requires the disclosure of some
details of their remuneration in companies’ reports and accounts,
but on an aggregated basis with remuneration paid to directors.
Appointment of remuneration consultants
The Combined Code (supporting principle B.2) says that
remuneration committees should be responsible for any appointment
of consultants “in respect of executive director remuneration”. It
also says (B.2.1) that the company must state publicly (again via
its website) whether the appointed consultants have any other
connections with the company.
These points are echoed in – and given more force by – the
Regulations, which require the committee to disclose in the
remuneration report:
- the name of any person who assisted it in the consideration of
any matter (this applies not only to external advisers but also to
internal company officers such as senior HR executives);
- whether that person provided any other services to the company
during the relevant financial year;
- whether that person was appointed by the committee.
