|There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration.|
This Principle describes the role and duties of the Board on remuneration matters.
The governance of remuneration is particularly challenging as it is increasingly a subject of public scrutiny. It is therefore important for directors to develop policies and processes that are transparent and accountable, and that produce defensible outcomes. A common approach is to establish a Remuneration Committee (RC) whereby its key terms of reference is to review and set remuneration packages of individual directors and key executives based on agreed and established criteria.
The Guidelines describe:
- The establishment, composition and disclosures of an RC (Guideline 7.1).
- The requirement to establish a remuneration framework (Guideline 7.2).
- The use of expert advice by the RC and related disclosure requirements (Guideline 7.3).
- Planning for the termination of Executive Directors (EDs) and Key Management Personnel (KMP), and the company’s corresponding obligations (Guideline 7.4).
The Board should establish a Remuneration Committee ("RC") with written terms of reference which clearly set out its authority and duties. The RC should comprise at least three directors, the majority of whom, including the RC Chairman, should be independent. All of the members of the RC should be non-executive directors. This is to minimise the risk of any potential conflict of interest. The Board should disclose in the company's Annual Report the names of the members of the RC and the key terms of reference of the RC, explaining its role and the authority delegated to it by the Board.
The RC should review and recommend to the Board a general framework of remuneration for the Board and key management personnel8. The RC should also review and recommend to the Board the specific remuneration packages for each director as well as for the key management personnel. The RC's recommendations should be submitted for endorsement by the entire Board. The RC should cover all aspects of remuneration, including but not limited to director's fees, salaries, allowances, bonuses, options, share-based incentives and awards, and benefits in kind.
If necessary, the RC should seek expert advice inside and/or outside the company on remuneration of all directors. The RC should ensure that existing relationships, if any, between the company and its appointed remuneration consultants will not affect the independence and objectivity of the remuneration consultants. The company should also disclose the names and firms of the remuneration consultants in the annual remuneration report, and include a statement on whether the remuneration consultants have any such relationships with the company.
The RC should review the company's obligations arising in the event of termination of the executive directors and key management personnel's contracts of service, to ensure that such contracts of service contain fair and reasonable termination clauses which are not overly generous. The RC should aim to be fair and avoid rewarding poor performance.