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 words, the amount that a company must offer its directors depends on:
a. what other companies are paying, and
b. how many suitable candidates are available.
The UK Corporate Governance Code states that levels of remuneration should be sufficient 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;
i. 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.)
ii. It can also be argued that companies have to offer incentives to their directors because other companies do so. Directors usually expect cash bonuses and equity awards.
iii. If suitable performance targets are selected, and the targets are made sufficiently challenging, the rewards for directors will be made dependent on achieving performance targets for the company that are in the best interests of the shareholders.
Both the UK Corporate Governance Code and the Singapore Code on Corporate Governance contain the identical principle that: ‘A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance’.
The Singapore Code adds: ‘There should be appropriate and meaningful measures for the purpose of assessing individual directors’ performance’, but does not go into further detail.
The specific purpose of cash bonuses, shares and share options is also of significance to director remuneration and incentives, and achievement of the company’s corporate objectives.
However, a major difficulty in practice is finding suitable performance measures and performance targets as a basis for the payment of incentives.
Care must be taken to resolve this difficulties.