Corporate governance remains a key focus area for different organisations, from state-owned entities to private institutions and non-governmental organisations.
It assists firms in ensuring transparency and accountability. It further contributes to the safeguarding of the interests of the organisation’s universe of stakeholders. We appreciate that corporate governance frameworks vary in different jurisdictions and that corporate governance credos differ across establishments. We, however, respect that there are two fundamental themes that require careful consideration across the plethora of organisations in the global economy, being board remuneration and executive remuneration.
In this regard, we will briefly explore these foundational concepts and consider best practices that may drive a well thought out, rational and comprehensive compromise between compensation for performance and the maintenance of ethical standards. It can certainly be argued that board remuneration has a direct impact on the effectiveness of board members as well as the fulfilment of their fiduciary duties.
When making decisions about board remuneration, several aspects can be considered: firstly, board member independence and objectivity. It is generally agreed that remuneration committees should ideally comprise independent directors who are void of personal or financial interests in the decisions being made. This fosters unbiased decision-making and minimises conflicts of interest.
Performance is another critical factor to be considered in this regard. Remuneration packages should do their best to incentivise directors such that they are better positioned to enhance long-term shareholder value. This may be achieved through a combination of fixed as well as variable factors, such as base allowances and bonuses that would be linked to key performance indicators (KPIs). Equity-based incentives such as stock options can be incorporated to align directors’ interests with long-term organisational performance.
Transparency is a consideration of import when it comes to the overall concept of board remuneration. It is overly vital for information regarding director remuneration policies, and information on how these policies are determined, to be disclosed. This disclosure should also delve into the particular performance metrics incorporated. Transparent reporting builds trust, enhances accountability, and gives evidence of the extent to which fair and justified remuneration practices are being implemented. Benchmarking board remuneration with peer industry organisations can go a long way in maintaining competitiveness and avoiding excessive figures that would potentially lead to public scrutiny as well as reputational risk.
Having briefly considered board remuneration, we now explore executive remuneration. Executive remuneration has significant implications for organisational performance, shareholder value, as well as equitable income distribution. Performance-based incentives play a crucial role in inducing effectiveness, with executives compensated based on measurable targets that have been set during the organisational strategy formulation process. Financial performance indicators, including earnings per share (EPS), return on investment (ROI), and operational goals can be considered in the process of assessing individual performance as well as collective performance.
Incorporating elements that relate to deferred compensation in executive remuneration packages can assist in promoting long-term sustainable growth. The incorporation of such elements also simultaneously discourages excessive risk-taking for short-term gains. Transparency, which was highlighted with regard to board remuneration, is equally important as regards executive remuneration. Clear disclosure of elements such as base salary, bonuses, stock options, perks, and retirement benefits should be made. Transparency builds trust with the organisation’s stakeholders, and enables constructive engagement on the issue of executive remuneration.
The balance between executive remuneration and staff remuneration within the organisational hierarchy should be carefully considered. This balance or compromise warrants ample consideration because excessive discrepancies in this regard may lead to internal dissatisfaction, dwindling employee morale, as well as negative stakeholder perception. Striking a fair and reasonable balance that reflects the value created by executives whilst also respecting staff contributions, is overly essential.
Responsible remuneration policies, income equity analyses, and consideration of the broader societal impact of income inequality can assist the organisation to achieve this balance. Overall, board and executive remuneration are critical aspects of corporate governance. By considering factors such as independence, performance, transparency, peer analysis, and remuneration ratios (executive-staff remuneration balances), organisations can more intelligently find the right compromise between rewarding performance and maintaining ethical standards.
Incorporating best practices in remuneration strategies and ensuring rightful disclosure can foster accountability, align executive interests with long-term shareholder value, and help organisations to maintain a positive reputation in their complex and ever-evolving operational landscapes.
The views and opinions expressed in this article are those of the author, Dumisani F. Ntini – Governance and Strategy Practitioner. Purchase ‘The Corporate Governance Companion’ today and unlock the secrets of effective corporate governance. Contact info@governancegroup.org.
