Components of directors’ remuneration package:

Components of directors’ remuneration package:

• Basic pay – determined through benchmarking against peer group.
• Performance related: bonus payments – usually set on profit targets or total shareholder value. 
• Other PRP – should form a significant part of total package.
• Performance related: share options – options are often recommended to align the interests of the directors with those of shareholders.
• Pension contributions – these are usually connected to the basic salary level.
• Benefits in kind: company car – such benefits are provided in addition to the normal salaries.

Remuneration strategy

The overall aim of a remuneration strategy should be to link reward to performance of the company. The remuneration strategy is therefore about creating a link to corporate strategy since the corporate strategy is the process through which performance is improved.

Components of directors’ remuneration package

Basic salary

As with most jobs all directors are promised a specific annual salary. This is  usually determined through benchmarking peer group salaries. Peer groups should  be industry specific and should reference equivalent sized ventures.

The amount of the basic salary provides an indication of the performance expected from the director, with salaries in the top quartile of payments indicating higher  levels of expected performance.

Bonus payments

The purpose of a bonus is to adjust pay on the basis of performance. To award a bonus regardless of any particular effort is to make the term meaningless as there is no set level of performance necessary to actually obtain that bonus.

A bonus paid to a director at the end of the accounting year may be based on any number of accounting measures including gross profit, net profit, earnings per share and total shareholder value. Most corporate governance systems recommend that the bonus is linked to shareholder value in some way to show that the shareholders' and directors' interests are the same.

Performance related pay (PRP)

Performance related elements of remuneration are defined as those elements of remuneration dependent on the achievement of some form of performance measurement criteria. Good corporate governance principles state that the performance related element should form a significant part of the total remuneration package. 

The PRP elements of remuneration should be attainable in order to provide motivation since unattainable targets are generally demotivating.

Also, linking PRP to share price is generally thought to be inappropriate as you cannot be expected to control market conditions; so a general decline in market conditions is not caused by directors’ actions and so you should not be penalised for this. Similarly, you are not responsible for favourable market conditions and should not be rewarded for these.

Shares and share options

Share options are contracts that allow the executive to buy shares at a fixed price or exercise price. Directors make a profit if the share price of the company increases – the option is exercised to purchase at a lower price and reselling the shares provides the profit.

Share options are good because they attempt to link company performance to director performance in the longer term (although market factors distort this as mentioned above).



Pension contributions
These are a common part of any remuneration package. Their level is usually set in relation to the market conditions (i.e. amounts paid to peer groups) and taking into account the age of the director in question.

It is possible that a proportion of these pensions contributions could be  performance related, providing a further incentive element to the overall package.


Benefits in kind
The provision of ‘perks’ such as a company car and health insurance is a common part of any senior level remuneration package.

These will serve to attract directors into a role, and maybe retain them in it, but rarely have a motivational impact. As long as they are not viewed to be excessive for the position they are widely accepted.