Chapter 9

What factors have influenced the executive directors

remuneration debate?
The overall level of directors remuneration and the role of
share options
Suitability of performance measures linking directors
remuneration with performance
Role of remuneration committee in setting director
remuneration
The influence that shareholders are able to exercise on
directors remuneration
Why is the area of executive directors rumination of such
interest to investors and particularly to institutional
investors?
- To address ongoing issues relating to directors
remunerations
- Huge remuneration packages with less performance.
- Equity reward may lead to lack of public hands
- For Sustainable future
- the gap in income inequality is also widening
What are the main components of executive directors
remuneration packages?

Base Salary
Bonus
Stock options
Restricted share plans (Stock grants)
Pension
Benefits (car, health care etc.)

Critically discuss the role of remuneration committee in

setting executive directors remunerations?
There should be a formal and transparent procedure for
developing policy on executive remuneration and for fixing the
remuneration packages of individual directors. In practice, this
normally results in the appointment of a remuneration committee.
The remuneration committee should make recommendations to
the board, within agreed terms of reference, on the companys
framework of executive remuneration and its cost; it should
determine on their behalf specific remuneration packages for
each of the executive directors, including pension rights and any
compensation payments. The remuneration committee
mechanism should also provide a formal, transparent procedure
for the setting of executive remuneration levels, including the
determination of appropriate targets for any performance-related
pay schemes. Although non-executive directors may not be willing
to stipulate demanding performance criteria because they may
have a self-interest in ensuring that they themselves can go on
earning a high salary without unduly demanding performance
criteria being set by their own companies remuneration
committees. There is also another aspect, which is that
remuneration committees will generally not wish the executive
directors to be earning less than their counterparts in other
companies, so they will be more inclined to make
recommendations that will put the directors into the top or second
quartile of executive remuneration levels. It is certainly the case
that executive remuneration levels have increased fairly
substantially since remuneration committees were introduced
which, of course, was not the intended effect.
Critically discuss the performance criteria that may be
used in determining executive directors remunerations?
Performance criteria may differentiate between 3 broadly
conceived types of measures: market based, accounts based,
individual based. Some potential criteria are:

* Shareholder return
* Share price (and other market based measure)
* Profit base measure
* Return on capital employed
* earning per share
* Individual director performance (in contrast to corporate
performance measures)
Critically discuss the importance of executive director
remuneration disclosure?
Experience has shown that variable pay schemes have become
increasingly complex
And that in certain instances this has led to excessive
remuneration and manipulation. As part of the
accountability/transparency process, the remuneration committee
membership should be disclosed in the companys annual report,
and the chairman of the remuneration committee should attend
the companys annual general meeting to answer any questions
that shareholders may have about the directors remuneration.
The disclosure should contain sufficient detail to enable
shareholders fully to understand the components of directors
remuneration as well as progress towards the achievement of
previously granted awards and should include details on pension
entitlements and increases thereof and perquisites and other
benefits in kind. Without such disclosure shareholder control over
director remuneration is illusory. In some countries, executives
seem to consider the disclosure of the precise amount of
remuneration to be a risk to their personal safety.
*** Notes:
II: Institutional Investors

CG: Corporate Governance