interest.
(c) Evaluation of remuneration
Spilt of remuneration-basic and performance related
Remuneration for directors is normally based on two elements;
· Firstly a basic annual salary to compensate directors for their normal work in
attending board meeting and running the company, and · Secondly, a performance related component to provide compensation for good
decision making in ensuring that the company is successful and profitable.
This means that whatever remuneration package is determined, it is essential to ensure that the directors have a stake in doing a good job for the shareholder. Each element of a remuneration package should therefore be designed to ensure that the director remains focused on the company and motivated to improve performance.
A balance must be struck between offering a package:
that is too small and hence demotivating and leading to potential underachievement,
and
that is too easily earned.
This implies that there is a mix of salary and performance related pay as noted above. Corporate governance guidelines do not provide a precise "mix" but indicate that the performance related element should be substantial. In terms of TY and JK, there is a performance related element of remuneration. At 40% and 30% it could be argued that the fixed salary percentage is too below-there is
a risk that directors will not be sufficiently well compensated if their company does not perform well. A company needs to attract and retain directors with sufficient knowledge and skill to run the company and 30% specifically may be too low an amount to meet this objective. Marks & Spencer, for example, have 55% of remuneration from fixed salary etc.
Role of remuneration committee
Remuneration will be set by the remuneration committee taking into account the amount of compensation being paid by comparable companies. No information is provided in the scenario regarding other companied; however, it is not clear whether the board of TY are actually meeting governance regulations in this area. The directors appear to be discussing methods of increasing their remuneration following the fall in profits with the fine. This decision should be taken by the remuneration committee, ensuring that no director is also responsible for setting their own remuneration. The committee removes any conflict of interest in this area.
Performance-related elements of remuneration
Performance related remuneration is defined as those elements of remuneration dependent on the achievement of some form of performance-measurement criteria.Care must be taken in determining the elements of performance related remuneration.For example, if the market goes down as a whole, then this could potentially penalise directors for an outcome that has nothing to do with their
performance. In other words, the performance related element should be linked to the performance of the company and not to the stock markets as a whole.
TY and JK have chosen different methods of doing this.
TY Company-proportion of profit
Part of remuneration is based on the profit for the year. At 40%, this is a relatively high amount as it tends to focus the directors on achieving a high profit in absolute terms, and could lead to attempts to amend the financial statements to increase profit. The imposition of the fine on TY has had the immediate effect of making the directors try and amend their remuneration package, again indicating that reliance on profit may be too high.
