Board Members and Directors’ Remuneration

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As a concept, best practice in corporate governance essentially focuses on the issues which arise from separating ownership and control, in particular the principal-agent relationship between shareholders and executive directors.

Board Members and Directors’ remuneration has widely been used as a tool to align the interests of shareholders and executive directors and so reduce agency costs.

In recent years, variable remuneration, normally linked to performance and responsibilities, has become much more prevalent.

However, a mismatch between performance and board members & executive directors’ remuneration has also come to light.

Poor remuneration governance &  policies and/or incentive structures may lead to unjustified transfers of value from companies and their shareholders and other stakeholders to executives.

Moreover, a focus on short-term performance criteria may have a negative influence on long-term sustainability of the company.

Best practices in Board Members & Director’s remuneration:

A significant number of Countries and States throughout the world have not adequately implemented these Directors’ remuneration best practices, and in some case are far from doing so.

However there is a growing tendency to legislate on disclosure and the shareholders´ vote. More and more governments have decided to implement regulations on the matter.

A cornerstone of Director’s remuneration best practices is that disclosure of remuneration policy and individual remuneration be made mandatory for all listed companies.

Also highly critical are a binding or advisory shareholder vote on remuneration policy and greater independence for non-executive directors involved in determining remuneration policy.

Further reading: Corporate Governance | Audit | Performance Improvement

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