Corporate governance and Executive Director pay

Ally Douglas By Ali Douglas, ICAS Lecturer

13 January 2016

In this article, ICAS tutor Ali Douglas takes a closer look at corporate governance and the methods that organisations can use to ensure that executive director pay remains both fair and consistent.

Corporate governance, including considerations in relation to the setting of Directors’ remuneration is considered as part of the Assurance and Business Systems (ABS) course at TPS. The appropriateness of executive director pay is undoubtedly of critical importance for all UK Companies, in particular those listed on the London Stock Exchange.

The UK Corporate Governance Code

In the UK, the UK Corporate Governance Code highlights the importance of executive directors receiving remuneration that includes a performance-based element and that it should be designed to promote the long-term success of the company.  Formerly known as the Combined Code, it sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

Performance-based pay

It is important that when setting remuneration there are rigorous processes to ensure that the level of remuneration set is fair, but also appropriate to attract and maintain the calibre of people that the company needs. The establishment of performance-based pay is a key way that organisations can reduce agency risk and ensure that their directors are acting in the best interests of the shareholders.

The role of Remuneration Committees

The Code recommends establishing a Remuneration Committee comprising of non-executive directors who will be responsible for setting formal and transparent policies for executive remuneration.  This independent committee should ensure that pay levels are appropriate and prevent executives making decisions over their own pay levels.  It also make provision for disclosure of any remuneration consultants appointed to aid in the setting of remuneration and any potential connections to the company.

Appointment of new executive board members

It is also important that companies have rigorous processes for appointing new executive board members that have the correct skills, experience and knowledge to aid in promoting the success of the company.  While companies may look to use external agencies for this purpose it is recommended that internal procedures such as establishment of a Nominations Committee are considered in order to assess and recommend prospective appointments that will provide the most benefit to the long-term success of the organisation.

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