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Elements of remuneration for executive directors and senior executives -…
Elements of remuneration for executive directors and senior executives
In addition to being appointed as a director, executive directors are appointed under a service contract to perform executive management functions
Under their contract, the executives typically forego the payment of directors fees and are paid a salary instead
NEDs do not have a service contract, they are appointed using a relatviely simple letter of appointment, their fees are determined by the board
Components of executive remuneration
Basic salary
Payments into a pension scheme
An annual bonus, usually linked to the annual financial performance of the company
Long-term incentives, usually in the form of share options or share awards (sometimes called restricted stock awards)
Other benefits and perks, such as free medical insurance, a company car or accomodation
Remuneration can be divided into two elements
Fixed pay
The elements in a remuneration package are a fixed amount each year, such as a basic salary
Received by a director regardless of performance, such as their salary, benefits and any salary related pension contributions
Variable element
Consists of performance related incentives such as cash bonuses, share options and other long term incentive schemes
Pay received under these elements is usually dependent on the performance of the company or the individuals (or a combination of both)
It is not necessarily easy to decide the right balance between fixed and variable elements or on the measures of performance for the variable elements
Some internet start up companies give their directors and senior staff large share option awards and relatively low salaries, they are able to get away with this because the executives believe that by foregoing part of their salary, they will be able to reap even greater awards in the future
The variable elements of pay can be divided into
Short term incentives, often in the form of cash bonuses but maybe in the form of a grant of company shares
Long term incentives in the form of share options or share grants
Short-term incentives are based on annual performance targets
Long term incentives may be awarded each year but are linked to performance over a longer period, typically 3 years or more
Long