The role of the remuneration committee is to have an appropriate reward policy that attracts and motivates executives to achieve the long-term interests of shareholders. In order to be effective, the committee needs both to determine the organisation’s general policy on the remuneration of key management personnel (executives and directors) and specific remuneration packages for each executive director.
In this article we provide some pointers for the remuneration committee.
The ASX Corporate Governance Council’s Principles require that the remuneration committee be comprised of a majority of independent non-executive directors, which allows an executive director to also be a committee member. However, because there are perceived conflicts of interest, membership of the remuneration committee by an executive director is minority practice (see our article on CEO membership of the remuneration committee HERE).
A suggested checklist of the responsibilities of the remuneration committee is provided below.
• Review the framework for the remuneration and terms and conditions of employment of the chairman of the board and of executive directors.
• Monitor the level and structure of the remuneration of senior managers.
• Set detailed remuneration of the executive directors and chairman including termination payments
• Ensure that executive directors are fairly rewarded for their contribution to the performance of the company
• Ensure transparency to shareholders that remuneration of the executive directors is set by individuals with no personal interest in the outcome of the committee decisions
Remuneration will need to attract, retain and motivate executives and directors of sufficient quality and at the same time take into account shareholders’ interests.
Typical components in an executive directors’ remuneration package are listed below.
• Fixed remuneration. This comprises basic salary and usually superannuation and fringe benefits, in accordance with the terms of the executive director’s contract of employment, and is not related to the performance of the company. Generally, fixed remuneration is related to market practices for similar peer companies. However, the committee may need to take into account the market levels of pay for the executive director’s home domicile if they are recruiting from offshore
• Bonus – executive directors may be paid by cash bonus for excellent performance (a portion of this may be provided in the from of deferred shares)
• Share options – an option is a right to purchase shares at a specific exercise price at a specified date in the future. Share options give directors the incentive to manage the company to realise a share price increase. Share options are believed to align the executive director’s goals with shareholders, thus overcoming agency problems since the directors become owners. However, executive director share options, according to the ASX Corporate Governance Council guidelines, should be approved by shareholders (whether the underlying shares are purchased on market or are newly issued). In addition, the guidelines require that the company ensure that the shares are not offered at a discount and options should not be exercisable in less than three years
• Superannuation – Generally superannuation is part of the fixed remuneration, although it is sometimes treated separately if it is of the defined benefit variety. The committee should consider the superannuation consequences and associated costs to the company not only of basic salary increases, but also any bonus payments, which in many companies also receive superannuation benefits (from 1 July 2008 for all employers the earnings base for Superannuation Guarantee purposes will be “Ordinary Time Earnings”, which includes bonus payments).
The Corporations Act requires:
• Directors to include a “Remuneration report” as a separate and clearly identified section within their annual directors’ report
• The remuneration report to be submitted to a non-binding vote of members at the AGM each year,
• The remuneration report to provide full details of –
o The remuneration of key management personnel (including executive and non-executive directors),
o Details of employment agreements with key management personnel (including the duration of the contract, notice periods and termination payments of the key management personnel).
While only practiced by a minority of companies in Australia, remuneration committees probably should consider disclosing the names of external remuneration consultants employed by the remuneration committee© Guerdon Associates 2023 Back to all articles