|The level and structure of remuneration should be aligned with the long-term interest and risk policies of the company, and should be appropriate to attract, retain and motivate (a) the directors to provide good stewardship of the company, and (b) key management personnel to successfully manage the company. However, companies should avoid paying more than is necessary for this purpose.|
This Principle emphasises the importance of an appropriate remuneration structure, policy and practice.
Remuneration levels should be sufficient, but not excessive, to compensate directors for their stewardship, and Key Management Personnel (KMP) for their management of the company. This Principle and its Guidelines take into account contemporary concerns about pay – in particular, the growing perception of excessive levels of senior executive compensation – whilst recognising that remuneration is a key factor in attracting, retaining and motivating the right talent.
The Guidelines describe:
- The linkage that should exist between the performance, risks and the remuneration of Executive Directors (EDs) and KMP. (Guideline 8.1).
- The use of Long-Term Incentive schemes (LTIs) and clawback provisions for EDs and KMP (Guidelines 8.2 and 8.4).
- The considerations for the remuneration of Non-Executive Directors (NEDs). (Guideline 8.3).
A significant and appropriate proportion of executive directors’ and key management personnel's remuneration should be structured so as to link rewards to corporate and individual performance. Such performance-related remuneration should be aligned with the interests of shareholders and promote the long-term success of the company. It should take account of the risk policies of the company, be symmetric with risk outcomes and be sensitive to the time horizon of risks. There should be appropriate and meaningful measures for the purpose of assessing executive directors' and key management personnel's performance.
Long-term incentive schemes are generally encouraged for executive directors and key management personnel. The RC should review whether executive directors and key management personnel should be eligible for benefits under long-term incentive schemes. The costs and benefits of long-term incentive schemes should be carefully evaluated. In normal circumstances, offers of shares or grants of options or other forms of deferred remuneration should vest over a period of time. The use of vesting schedules, whereby only a portion of the benefits can be exercised each year, is also strongly encouraged. Executive directors and key management personnel should be encouraged to hold their shares beyond the vesting period, subject to the need to finance any cost of acquiring the shares and associated tax liability.
The remuneration of non-executive directors should be appropriate to the level of contribution, taking into account factors such as effort and time spent, and responsibilities of the directors. Non-executive directors should not be over-compensated to the extent that their independence may be compromised. The RC should also consider implementing schemes to encourage non-executive directors to hold shares in the company so as to better align the interests of such non-executive directors with the interests of shareholders.
Companies are encouraged to consider the use of contractual provisions to allow the company to reclaim incentive components of remuneration from executive directors and key management personnel in exceptional circumstances of misstatement of financial results, or of misconduct resulting in financial loss to the company.