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  Remunerating Directors

Introduction to Remunerating Directors

Setting remuneration of directors at a suitable level is not an easy task. However, it is frequently vitally significant to the success of the company. In this part we refer some of the main issues and problems that must be considered.

Remuneration policy

The UK (United Kingdom) Corporate Governance Code says that the level of directors' remuneration should be enough to attract, retain and motivate individuals of the right quality.

The UK (United Kingdom) Code also says that remuneration should be related to long-term performance and to the risk policy of the company. An important proportion of the total remuneration awarded to executive directors should be relies on company and individual performance.

Through linking pay to performance, a number of the risks and rewards of being a shareholder are passed to the directors. If a specific course of action yields good returns, the directors will advantage; if it fails to create a return the directors will not. This might support them to think more such as shareholders and to take tough decisions that are possible to benefit shareholders.

The executive director's remuneration package of a large listed company is generally made up of two elements:

  • A fixed element

 Which is mainly in the form of a base salary but will also involve benefits like pension contributions, medical insurance and so on; and

  • A variable element

That rewards directors on the basis of both short-term and long-term performance.

The variable element is generally relies on the executive directors achieving clear targets which reflect the goals of the company. The rewards for attaining these targets are generally taken in the form of cash and/or shares.

The major elements of the remuneration package for an executive director of a listed public company are displayed in Figure.

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Figure: the main elements for an executive director of a listed public company

Tenure and service contracts

The UK (United Kingdom) Corporate Governance Code suggests that all directors submit themselves for re-election, through shareholders, at regular intervals. For larger companies, it is suggested that all directors be matter to annual re-election. For smaller companies, re-elections should happen at least each three years. Non-executive directors which have served more than nine years though should be subject to annual re-election.

The yearly re-election of directors of larger companies is intended to make sure greater accountability. Though, there are concerns that it is potentially disruptive and may support short-term thinking between board members.

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