Director Remuneration:

In some countries,for example the US,it is common for most senior executives to be excluded from the board of directors.Directors remuneration mean the remuneration of executive-directors and other senior managers.The term directors pay will be used as a convenient general term.Non-executive directors are paid an annual fee for their services.This is usually a fixed based on the estimated number of days that the director will spend with the company during the year for example attending board meetings and meetings of board committees.

 

A general principle of corporate governance is that the Non executives probably cannot be considered properly independent if they receive any additional remuneration from the comapany other then a basic fee.Additional remuneration could take the form of:

• fees for additional consultancy services.

• membership of the company's share incentive scheme.

• membership of the company's pension scheme.

 

Components of a remuneration package:

The remuneration package for an executive director is a part of the directors contract of service.Remuneration is reviewed regularly,typically each year.The board framework of a remuneration package is agreed through negotiation between the individual director and the remuneration committee.The package is negotiated when the director first joins the company and might be re-structured at any subsequent time.

 

The components of a remuneration package are commonly:

• a basic salary

• one or more annual cash bonuses,linked to the achievement of specific performance targets.

• free shares in the company or share options.

• pension rights or a contribution to a pension fund for the director.

 

A director  will often receive additional benefits such as free medical insurance,a company car,use of a company aeroplane or helicopter and so on.Occasionally a director might be  paid a joining fee to persuade him to join the company.

 

Purpose of a remuneration Package:

A remuneration package should attract individuals to a company,and persuade them to work for the company.The size of the remuneration package that is needed to attract 'Top quality' individuals depends largely on conditions in the labour market.In other word,the amouunt that a company must offer its directors depends on:

• what other companies are paying,and

• how many suitable candidates are available.

 

The UK corporate governance code(combined code) states that levels of remuneration should be suffiecient to retain and motivate directors of the quality required to run the company successfully,but the company should avoid paying more than is necessary for this purpose.

A second purpose of a remuneration package is to provide incentives for the director.Directors should be rewarded with incentives so that they are motivated to achieve performance targets.

 

• A generally-accepted view is that unless a director is rewarded for achieving targets,he or she has no incentive to improve the company's performance.(This view is based on the conflict of interest between management and shareholders.)

• It can also be argued that companies have to offer incentives to thier directors because other companies do so.Directors usually expect cash bonuses and equity awards.