Administrators are in a unique position because they themselves decide their compensation. In the best of worlds, the shareholders or members should be able to assess and set the directors’ compensation. However, it remains beneficial that the financial interests of the management, the members of the Board of Directors and shareholders or members are aligned. It should also include full disclosure, allowing shareholders or members to review its various components.
The directors and executives’ compensation plan usually include other components besides the base salary, such as stock options plans and sometimes even personal loans to executives. The directors and executive compensation plan should be developed with a strong correlation between the compensation and the financial performance of the company. It is important to know the internal fairness ratio between the overall directors and executives’ compensation and the employees’ average salary.
Thus, the compensation plan must ensure that the interests of management and directors promote the company’s long-term profitability as part of overall objectives related to the social responsibility of the company.
The remuneration of a company’s directors and executives should be reasonable and never be higher than the level needed to motivate and retain leaders, for the sake of long-term performance. To attract directors and executives, it must reflect the compensation trends for companies of similar size or companies with which the organization is competing. It must also be disclosed to allows shareholders and members to assess its various components: long-term awards allocated under the form of options or shares and, finally, other bonuses and benefits, such as the supplemental pension plan.
It is better that people working on the directors and executive compensation and officers are accompanied by external and independent consultants. If the directors and the auditor must be independent, it is also true for the external compensation consultants. A firm is independent when it does not have any personal or professional relationship with the company and its management likely to influence his judgment and lead to decisions that would not be in the interest of the company. The fees paid to consultants must be disclosed to shareholder or members.
In a next article, we will discuss further the directors and executives’ compensation.