Around the world, governments, regulators and stock exchanges are requiring companies to disclose precise details of how their most senior executives have been paid. With these numbers now in the public domain, independent directors—especially remuneration committee chairmen—may be questioned by shareholders at any moment. To ensure that remuneration is defensible, directors need to address two key questions: “How much?” and “How?”
Responding to the first is more straightforward: by ensuring that total pay (including salary, short-term bonuses, long-term incentive grants and significant benefits) falls within market norms. This assessment should take into account the scale of the executive’s role, the company’s size and industry, and the executive’s contribution to the company’s success.
The primary executive compensation question is where to set the balance between guaranteed and variable pay. While every company is different—different markets, different strategies, different people, different investor expectations—market benchmarking information from other comparable companies provides some guidance. With public disclosure of remuneration, boards will have to defend remuneration payments to their shareholder. If anyone on the remuneration committee is uncomfortable with these potential payments, the structure should be adjusted.