A5 - Directors remuneration

Director's Remuneration
General principles of remuneration

Director's Remuneration
The purpose of directors' remuneration is:

to attract and retain individuals

motivate them to achieve performance goals

Components of a rewards package

These include:
1. Basic salary , which is paid regardless of performance;
It recognises the basic market value of a director. (Not linked to
performance in the short run but year-to-year changes in it may be linked to
some performance measures)
2. Short and long-term bonuses and incentive plans which are payable
based on pre-agreed performance targets being met;
3. Share schemes
which may be linked to other bonus schemes and provide options to the
executive to purchase predetermined numbers of shares at a given
favourable price;
4. Pension and termination benets including a pre-agreed pension value
after an agreed number of years service and any golden parachute
benets when leaving;
5. Pension contributions
are paid by most responsible employers, but separate directors schemes
may be made available at higher contribution rates than other employees.
Other benets in kind such as cars, health insurance, use of company
property, etc.
Balanced package
This is needed for the following reasons:

A reduction of agency costs

These are the costs the principals incur in monitoring the actions of agents
acting on their behalf.

The main way of doing this is to ensure that executive reward packages are
aligned with the interests of principals (shareholders) so that directors are
rewarded for meeting targets that further the interests of shareholders.

A reward package that only rewards accomplishments in line with

shareholder value substantially decreases agency costs and when a
shareholder might own shares in many companies, such a self-policing
agency mechanism is clearly of benet.
Typically, such reward packages involve a bonus element based on specic
nancial targets in line with enhanced company (and hence shareholder)
value.

Syllabus A5ac)
A5a) Describe and assess the general principles of remuneration.
iii) links to strategy
iv) links to labour market conditions.
A5c) Explain and analyse the legal, ethical, competitive and regulatory issues
associated with directors remuneration.

General principles of remuneration

Links to strategy
Suitable and appropriate remuneration packages have to be paid to directors in
order to attract and retain the most suitable candidates.
These packages should be structured to:

ensure that they are paid well

ensure that they achieve shareholders' best interests as well as their own
personal interests
ensure that there are links to the company's strategy
ensure that they remain motivated
ensure that there are links to strategic goals and targets such as:
1.cost of capital,
2.return on equity,
3.economic value added,
4.market share,
5.revenue and
6.prot growth

Links to labour market conditions.

A basic salary is paid to directors in line with their terms and conditions, and
is not related to any other conditions.
This salary is calculated by taking into consideration the experience of the
director, and what other companies are willing to pay which ultimately
dictates the current market conditions.
Remuneration packages should be set by a remuneration committee
consisting of independent non-executive directors to ensure that packages
are equitable, and appropriate according to performance and in line with the
organisations remuneration policy.