The board of directors has a number of important responsibilities with respect to executive compensation. These responsibilities include:
- Setting the overall compensation philosophy and framework: The board is responsible for setting the overall compensation philosophy and framework for the company. This includes deciding what factors the board will consider when setting executive compensation, such as performance, risk, and alignment with shareholder interests.
- Determining executive compensation levels: The board is responsible for determining executive compensation levels. This includes setting salaries, bonuses, and other forms of compensation.
- Approving executive compensation plans: The board is responsible for approving executive compensation plans, such as stock option plans and bonus plans.
- Reviewing and approving executive compensation on an annual basis: The board is responsible for reviewing and approving executive compensation on an annual basis. This review should assess the performance of executives and ensure that compensation is aligned with shareholder interests.
The board’s responsibilities for executive compensation are set out in several corporate governance codes and standards in Canada. For example, the Canadian Code of Corporate Governance (CCCG) recommends that the board establish a compensation committee to oversee the company’s executive compensation practices.
The board can also delegate some of its executive compensation responsibilities to management. However, the board retains ultimate responsibility for executive compensation. This means that the board must be satisfied that executive compensation is aligned with shareholder interests and that it is reasonable considering the company’s performance.
Benefits of effective executive compensation practices
Effective executive compensation practices can provide several benefits to companies, including:
- Attracting and retaining top talent: By offering competitive compensation packages, companies can attract and retain top talent.
- Aligning executive incentives with shareholder interests: By linking executive compensation to performance, companies can align executive incentives with shareholder interests.
- Motivating executives to achieve company goals: Effective executive compensation practices can motivate executives to achieve company goals.
- Reducing risk: By paying executives a fair and reasonable level of compensation, companies can reduce the risk of executives taking excessive risks in order to boost their own compensation.
By understanding its responsibilities for executive compensation and taking steps to implement effective executive compensation practices, the board can help to attract and retain top talent, align executive incentives with shareholder interests, motivate executives to achieve company goals, and reduce risk. This can lead to a number of benefits for the company, including improved financial performance, enhanced reputation, and increased shareholder value.
This article is for informational purposes only and is not legal advice. Contact us today to discuss your specific situation.