The board of directors has both executive and non executive directors. Executive directors have both executive and board duties to perform while non executive directors have only board responsibilities. Therefore both types of directors vary in the responsibilities and authority they have in the company affairs. Thus the non executive directors devote very little time to company affairs ( only attend board meetings, committee meetings of which they are members or sometimes pay a visit to the company premises for getting knowledge of how things are done).
The board membership, irrespective of executive or non executive membership, is very crucial in the governance and management of the company. However, as the duties and responsibilities of directors vary according to their type of directorship; the rewards should also match the responsibilities carried out and be in line with the performance shown over period of time.
Board membership carries responsibilities that involve a lot of risks, and no body will be motivated to set on the board unless there are some justifiable lucrative rewards for being on the board. So directors, whether executive or non executive must be remunerated however the vital question will be how?
As is clear from the roles played by executive and non executive directors, the difference in duties, responsibilities and accountability require different remuneration practices for both types of directors.
SETTING DIRECTORS’ REMUNERATION
For setting directors’ remuneration, the board must form a Remuneration Committee. A prior approval from the shareholders of the members on the committee is recommended. However, when it is not possible for solid reasons, the members must be presented in the AGM to the shareholders for approval if they are already appointed. The following guidelines must be followed:
a)The non executive members must be greater in numbers than the executive members. b)The committee must have at least two meetings in each calendar year to monitor the targets and performance. c)The committee must be given authority to receive advice for setting remuneration from outside. d)The committee must be given authority to establish remuneration packages for directors within the upper and lower limits. These ceilings and floors must be duly approved by the shareholders in AGM in advance.
The company must have a clear statement of its policy for remunerating directors whether executive or non executive directors. This will make the work of remuneration committee very easy. The remuneration policy should be properly disclosed before the shareholders in the AGM for their approval. The policy statement should have guidelines like:
a)A detailed summary of the fixed remuneration and other benefits to be received by the directors during their stay as board members.
b)A detail summary of any performance conditions to which any entitlement of the Director is subject.
c)A detailed summary of any performance conditions to which any entitlement of the Director to share options or under a long-term incentive scheme is subject. d)An explanation as to why any such performance conditions were chosen. This will provide for the rationale of linking the remuneration with performance measures chosen and their appropriateness e)A summary of the methods used in assessing whether any such performance conditions are met. This will provide for transparency and credibility of the remuneration system. f)If such performance conditions involve comparisons with external factors, a summary of the factors to be used. It will provide for measuring and assessing the effects of factors from outside the company on the remuneration practices of the company for directors. g)The procedure and a description of and an explanation for any significant amendment proposed to be made to the terms and conditions of any entitlement of...