Managing Executive Remuneration

Written by Lawrence Zammit, 29 October 2013

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One the scandals that the international financial and economic crisis brought out in the open was the remuneration packages of a number of senior bankers. Many felt that the remuneration packages earned by persons in senior management positions in a number of international banks were not deserved and were detrimental to the interest of the shareholders.

This shed new light on the way executive remuneration should be managed. In private companies, this is very often a function of the CEO, while the board determines the remuneration of the CEO. In public companies there is the requirement for a remuneration committee, which advises the board on executive remuneration.

Irrespective of how executive remuneration is managed, it needs to be appreciated that this task requires informed judgement to be able to make sound decisions on levels of remuneration, on the link between remuneration and performance, and on the structure and cost of all elements of the executive package.

I strongly believe that it is the function of the board to set the remuneration strategy of the company. The role of the CEO is to implement that strategy within the parameters set. Setting the remuneration strategy involves understanding the position of the business within the sector it is operating, the past performance of the business and future prospects, what drives that performance and the impact of executive remuneration on business costs.

When setting the remuneration strategy, the Board of Directors is also sending a message on what it believes the company culture and values should be, whether in the design of incentives or the type of benefits available, or, indeed, the level of remuneration itself. Directors need to be able to recognise deeply held values that are associated with success and to avoid cutting across these values when it comes to remuneration arrangements.

The Board of Directors should also be looking at the market and making use of information that is available on management remuneration. Such surveys are not there to take the decision for the Directors. However they are a tool that will enable the Directors to set the strategy.

Ultimately a remuneration package is tied to the responsibilities of the post and the performance of the individual. This does imply an element of subjectivity in the decision. On the other hand it is critical that the management of executive remuneration is based not on perceptions but on facts.

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