As a general principal, companies should establish a formal, transparent and arms length procedure for developing a policy on the remuneration of executives and for fixing the remuneration packages of individual directors. The remuneration committee should consist exclusively of non executive directors who are independent of management and free from any business or other relationship with the company that could materially interfere with the exercise of their independent judgement. Although the chairman of the board may be a member of the remuneration committee, he may not be its chairman. The rationale behind this prohibition is to ensure that there is a balance of power on the board. The chairman of the remuneration committee is in a powerful position apropos the determination of executive remuneration. The combination of this role with that of chairmanship of the board will arguably lead too much authority being concentrated in a single individual. This would be contrary to one of the most fundamental principles of corporate governance, namely to ensure an appropriate separation of powers within the company.
The remuneration committee plays an important role in balancing the interests of the company against those of its individual employees. The remuneration committee should review and make recommendations to the board on remuneration issues, the terms of the service contracts of executive management, share option schemes and other incentivisation mechanisms. In determining the company’s remuneration policy, the committee may be guided by other companies of similar size, market capitalisation or in the industry.