ACCA SBL Syllabus B. Governance - Director's Remuneration - Notes ^{11 / 12}

The purpose of directors' remuneration is:

• to attract and retain individuals

• motivate them to achieve performance goals

Components of a rewards package

These include:

1. Basic salary , which is paid regardless of performance; 

   It recognises the basic market value of a director.  (Not linked to performance in the short run but year-to-year changes in it may be linked to some performance measures)

2. Short and long-term bonuses and incentive plans which are payable based on pre-agreed performance targets being met;

3. Share schemes 
   which may be linked to other bonus schemes and provide options to the executive to purchase predetermined numbers of shares at a given favourable price;

4. Pension and termination benefits including a pre-agreed pension value after an agreed number of years’ service and any ‘golden parachute’ benefits when leaving;

5. Pension contributions
   are paid by most responsible employers, but separate directors’ schemes may be made available at higher contribution rates than other employees.

6. Other benefits in kind such as cars, health insurance, use of company property, etc.

Balanced package

This is needed for the following reasons:

• A reduction 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.