GUIDING PRINCIPLES FOR BOARDROOM REMUNERATION

The following guiding principles on boardroom remuneration have been developed by Hay Group:

1.  Pay policies and practices for executive directors can and should be used to attract and retain top executives of outstanding ability and to help focus and reward performance which results in increased shareholder value.

2.  The pay of executive directors should be determined on the basis of an explicit pay philosophy and strategy which has been consciously developed to support the organization's business strategy, structure and approach to human resource management.

3.  The pay of executive directors should be tailored to the organization's particular culture, management style and competitive environment. Pay can help to reinforce a distinctive culture and management style. The degree to which there is a clearly agreed set of values at board level can help to foster a desired culture throughout the organization.

4.  The pay of executive directors should foster a pay-for-performance orientation and top-management focus on sustained performance and the creation of shareholder value.

5.  Executive directors' pay processes should become part of the overall management process. Performance objectives and measures should be consistent with the organization's decision-making processes and management information systems. If it is not the right measure for the incentive scheme, it is probably not the right measure for making decisions.

6.  The design of executive director pay packages should consider the needs of individual directors but not at the expense of underlying goals and objectives. Too many pay schemes in the UK have been developed on the basis of tax efficiency alone with little or no regard for fundamental business objectives.

7.  The pay of executive directors should be determined and monitored in a manner which safeguards against self-interest and avoids impropriety. Pay philosophy, scheme design and pay levels should be approved and monitored by independent non-executive directors.

8.  While the design of top pay systems can be complex, schemes should be easily understood and clearly communicated. The objective is to influence behaviour and focus efforts, not to strain for over-precise measurements. If directors do not understand the scheme, it will not work.