Companies "should justify directors' remuneration packages"

The Institute of Directors (IOD) has recently said that companies have a responsibility to explain and justify the remuneration packages of their top directors. It urges shareholders to play more of a role, even if this means opposing the re-election of some directors.

In recent years there has been increasing public concern over what is widely viewed as the spiralling remuneration of company directors. At a time when companies are keen to promote pay schemes based on performance, too often the links between directors' pay and performance are viewed as non-existent. In a report on director's remuneration publicised in March 1997, the IOD is keen to set the record straight. It argues that, although it recognises that directors' pay in the largest companies has been on average high, it has been relatively modest for those directors who work for small to medium-sized enterprises. In fact, the median pay increase for this group of directors in 1996 was 4%, the equivalent of the increase in average earnings for all employees in that year.

The IOD urges that shareholders should play a large role in deciding the remuneration packages of their directors, even to the point where "shareholders should oppose the re-election of directors who do not, in their view, merit their remuneration." Remuneration committees, which set the pay of top directors, should play a key role in designing remuneration packages which recruit, retain, and motivate high-quality directors. In particular they should be looking to dispel the image of the "old boys' network".

The public has been concerned with two particular aspects of directors' pay: the high increases, especially in the privatised public utilities; and the large compensation packages awarded when a director leaves a company before the expiry of his or her contract.

IOD says that it is simply not good enough to compare directors' pay in one industry with directors' pay in another industry. The choice of comparator group must be treated with sensitivity and requires knowledge and diligence. It is also made all the more complex by the growing international character of markets for top directors.

While wanting to disassociate itself from the worst cases, the IOD says that " the job of a top director is much tougher, more risky and more demanding than it was, say, 20 years ago and this justifies the higher reward". The IOD recognises that the debate is taking place against the backdrop of increasing inequalities, but critics are likely to whether the IOD is keen for its members to reduce the inequality or to justify it.