Introduction to the remuneration committee
Of all committees of the board, the remuneration committee has three elements that are imperative in its successful functioning:
- transparency of outcomes
- clarity of deliverables
- independence of action from the board or influencers.
In some cases, this committee is combined with the nominations committee, given their shared roles on building effective leadership, whether through appointments to the board or remunerating leaders and executives. Here, we look at the remuneration committee in isolation.
Duties of this committee include the actual setting of remuneration for senior management by the remuneration committee, in addition to executive and (where relevant) non-executive directors. The remuneration committee should also review workforce remuneration and related policies and the alignment of incentives and rewards with culture, which should be taken into account when setting the policy for executive directors.
Many sports organisations do not remunerate their non-executive directors or board members. However, given the high profile of remuneration for directors where it does take place, the output and effectiveness of this committee are highly important for the public profile of the organisation and the knock-on effect this can have across the external environment. This is equally applicable if your organisation is a charity or with a visible presence and significant member associations. Public scrutiny of senior remuneration is high across all sectors, particularly where public money or charitable donations are involved, and this focus on pay can place the work of the remuneration committee under the spotlight.
Duties, responsibilities and tasks
There are three key roles that the remuneration committee fulfils:
- to set the policy for board and senior management remuneration,
- to set or approve individual remuneration awards and
- to oversee company-wide remuneration policies.
Let’s have a look at each of these.
The Code for Sports Governance requires that:
‘remuneration of directors and employees, if any, shall be determined in accordance with a formal, approved procedure’ (Req. 2.13)
The main responsibility of the remuneration committee is to set the policy for board and senior management remuneration, aligning it to the strategy of the organisation as set by the board as well as to organisational values. A robust policy can help to ensure that remuneration is aligned to the purpose of the organisation so driving engagement and helping to deliver long-term sustainable success for the organisation, keeping the two closely intertwined.
To be able to deliver in its role, the remuneration committee should have a clear understanding of the strategy of the organisation and its drivers as well as of the wider sports sector. By understanding the strategy, suggested metrics and deliverables can be proposed, discussed, and agreed upon. As strategy is primarily a long-term view of the future of the business, it can underpin long-term incentives within a remuneration policy.
Generally, remuneration committees are not creating a remuneration policy from scratch and are instead reviewing and revising existing policies for current suitability and application. A complete review of the policy, as if it was being implemented for the first time, should be undertaken at defined intervals and on significant change to the organisation or the composition of the executive team. The committee will also review the policy on a regular basis, ensuring it continues to adapt to changes in strategy, direction, and external conditions in the sector.
When setting the policy, the committee should reflect on the balance between setting the policy for individuals versus the roles they perform. The key is to ensure that the policy is aligned to strategy and organisational objectives, is effective in its aims, and management, at all levels, buys into it rather than seeking ways to work around it or manipulate it. It should be remembered that the purpose of a remuneration policy is to encourage and motivate appointees to deliver the best they can in their role and to continue to be the best candidate for the role.
When setting performance measures and targets, the committee should ensure that they are robust, meaningful, and aligned to the strategy. The policy should be transparent to all stakeholders. When documenting the policy, the committee should ensure that it is clear, concise and understandable. Complexity in policy will have a knock-on effect in terms of complexity in its application, with a potential challenge in its application that would be difficult to explain.
This function of the remuneration committee helps in creating independence of application and removes the ability of senior management to influence metrics supporting remuneration setting.
Whether its responsibility is to set or approve remuneration, the committee is the independent arbitrator of the application of the policy. During the review, consideration should be given to the application of the set policy in respect of each individual award, as well as the impact of stakeholders and other third parties. While the committee could simply apply the policy and approve the award, circumstances may have changed between setting the policy and its application that should be taken into consideration.
A by-product of the review of executive remuneration may also include an annual appraisal of the chief executive. Consistency in approach should be aimed for, and the appraisal of the CEO may also form the framework for their appraisal of other members of the executive or management.
Increasingly, the remuneration committee also oversees the approach to remuneration for the whole organisation and its effectiveness in delivering the required results. Oversight here is not just against the organisation’s strategy but, more particularly, in respect of diversity, inclusion, and gender pay. Metrics on these latter points may be required to be included in annual reports and made publicly available, adding to the transparency required from the organisation and the remuneration committee on their behalf.
The remuneration policy of the whole organisation will be set, applied and reviewed by the HR department with the support of the board. The role of the remuneration committee is to review its application and the effectiveness of its desired results. For example, if a company-wide policy has an aim to retain staff, does the policy deliver this? Other aim