The remuneration committee is a specialised board committee that establishes the salaries of company executives, including the CEO and senior leadership. It sets up reward policies to encourage executives to achieve company objectives and create maximum value for shareholders.
Purpose and function
The remuneration committee is generally established within the board of directors to supervise and manage executive compensation. Here are its primary duties:
- Executive compensation: The committee reviews and recommends the compensation packages of executive directors and senior management. It sets detailed plans, including base salaries, bonuses, stock options, long-term incentives and payments in case of termination.
- Performance alignment: This task involves setting targets and metrics to determine compensation packages based on performance. Aligning compensation with organisation and director performance incentivises executives to achieve strategic goals.
- Compliance: The committee ensures compliance with applicable laws, corporate governance standards and disclosure requirements associated with executive compensation.
- Transparency: It promotes transparency by disclosing compensation practices, policies and decisions to stakeholders, regulators and the public via annual and regulatory reports.
How remuneration feeds into the board’s work
Executive and director remuneration plays a critical role in an organisation’s overall strategy and growth objectives.
The remuneration committee makes recommendations to the board of directors on executive compensation packages and practices based on comprehensive reviews, evaluations and shareholder consultations. In Europe, investors must approve the policy for remuneration at least every four years and after a material change.
The board of directors then reviews and approves these recommendations, making changes where necessary to ensure alignment with organisational goals and regulatory requirements. Many companies also ask for shareholders to approve the payments in an advisory vote.
Composition and structure
The remuneration committee’s composition and structure are as follows:
The committee largely comprises non-executive, independent directors to avoid any conflicts of interest. Members are chosen for their expertise in finance, human resources, corporate governance and the internal and external factors affecting the company.
The remuneration committee must have at least three members. An odd number is necessary to break tie votes.
The remuneration committee must appoint a chairperson to lead meetings, facilitate communication, set agendas and coordinate with the executive management. The chair also reports the committee’s recommendations, findings and decisions to the board.
Frequency of meetings
The remuneration committee can convene on a quarterly, semi-annual or annual basis depending on the company’s byelaws. In these meetings, the committee reviews and votes on all executive compensation matters, including director performance, regulatory updates and incentive planning.
Additionally, the committee may also set up ad hoc meetings to address potential issues and opportunities associated with changing governance practices, industry trends, shareholder input and business needs.
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