What is a remuneration committee?
A remuneration committee consists of board members responsible for setting an appropriate reward policy that motivates executives to achieve the long-term interests of the investors/shareholders. Responsibilities include setting the remuneration policy for executive management, determining individual compensation for executive directors, and providing direction on equity plans, salaries, bonuses, and pensions.
What is the role of the remuneration committee?
The remuneration committee:
- Reviews the compensation of executive directors and senior managers.
- Sets detailed compensation for executive directors and the chairperson, including any payments required in the case of termination.
- Assures shareholders the remuneration of executive directors is free of bias and personal interest.
- Establishes the targets for performance-related pay.
- Determines the company’s remuneration policy and philosophy.
Who are the members of the remuneration committee?
The remuneration committee should consist of:
- Independent non-executive directors: This is to avoid conflicts of interest. Members should have a high-level understanding of internal and external factors affecting the organization.
- At least three members: Depending on the organization's size, at least three members are needed on a remuneration committee. The odd number of members allows for ties to be broken in the case of disagreement.
- A chairperson: The remuneration committee needs to appoint a committee chair.
- A secretary: The secretary is responsible for accurately taking the minutes of all remuneration committee meetings.
Remuneration committee best practices
1. Considering a number of factors
A remuneration committee needs to take into consideration various factors when guiding executive directors' and senior managers’ packages:
- Company size: Company size affects how much executive directors and senior managers can be paid, including salary amounts, bonuses, and long-term incentive plans. Company size can be measured by revenue, margins, financial structures, and even headcount. It’s up to the remuneration committee to determine which factors are most appropriate.
- Performance: The remuneration committee needs to clearly understand a company’s performance and where they are in the cycle of profitability. Some companies might be new or well-established. Some companies might experience phenomenal growth in one year but very little in the next. Certain circumstances may call for stronger remuneration benefits (such as when the company performs well). In contrast, a conservative remuneration policy might be more appropriate during years in which the company is struggling.
- External factors: Remuneration committees must factor global considerations into their compensation policies. This allows them to factor in any change in the external environment that could affect the overall company performance. Companies with a wide geographical spread should ensure that a consistent approach is followed that is also in line with the regulations of the respective countries in which they operate.
2. Knowledge sharing
Committee members do not have a lifetime appointment. The discussions between old and new remuneration committee members are essential. This is important for transferring knowledge related to long and short-term incentives, the marketplace, and other important considerations around bonuses and salaries. There might be special arrangements for individual directors that old and new committee members should discuss.
3. Taking company values into account
Every member of the remuneration committee needs to be aligned with the company’s organizational culture and values. These elements are reflected in the remuneration philosophy and, therefore, the policies and practices implemented.
4. Understanding the business context
Remuneration committee members need to embed themselves in the business of the company. This is to understand the financial and market data in which the company operates. Having this understanding is important, as they provide direction on the remuneration policy of executive directors and also need to consider shareholder interests. Often, committee members sit on the board of directors and should have some understanding prior to their appointment to the board. However, further understanding may be required.
A remuneration committee needs to uphold the highest standards and maintain quality through the process based on the following criteria: