Director's Remuneration Package

Explain how the different components of the director’s remuneration package might be more aligned to shareholders’ interests

Balanced package is needed for the following reasons:

The overall purpose of a well-designed rewards package is to achieve a reduction (minimisation) of agency costs. These are the costs the principals incur in monitoring the actions of agents acting on their behalf. The main way of doing this is to ensure that executive reward packages are aligned with the interests of principals (shareholders) so that directors are rewarded for meeting targets that further the interests of shareholders. A reward package that only rewards accomplishments in line with shareholder value substantially decreases agency costs and when a shareholder might own shares in many companies, such a ‘self-policing’ agency mechanism is clearly of benefit. Typically, such reward packages involve a bonus element based on specific financial targets in line with enhanced company (and hence shareholder) value.


(1) Basic salary

 It is the salary laid down in the contract of employment.
 Generally is not related to performance (although increase in it may be).
 Length of contract may not be of excessive length, to protect shareholders’ interests, however, it may not provide enough incentive for directors to perform well.


(2) Performance related bonus

 Cash bonus paid for good performance.
 Performance measures need be determined carefully so that they are not subject to manipulation of profits, do not focus excessively on short-term results and reward individual contribution.
 Example the bonus payable to a sales director - reward based on revenue or profits would play an important part in rewarding performance, on an annual or more frequent basis.



(3) Share and share options

 Rights to purchase shares of a specified exercise price over a specified time period in the future.
 If share price goes up (due to good company performance) and it exceeds the exercise price, director would be able to purchase shares at lower than their market value.
 Share option can be used to align director’s interests with shareholder wishes to maximise company value.
 Share options can be used to reward long-term performance whereas bonuses can be used to reward short-term performance, by specifying that the options may not be exercised for some years.


(4) Benefits in kind

 Car, health care provisions and life insurance.
 It may be difficult to relate these elements to directors’ performance.
 one symptom of the breakdown of the agency relationship is the directors are being rewarded with excessive perks.
 Remuneration committee should ensure that the benefits are not excessive.


(5) Pension

 Pension contribution tends to be linked to basic salary.
 Usually not connected to performance.
 UK combined code stresses that the remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and changes in pensionable remuneration.



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