Nigerian Code of Corporate Governance 2018 (Principle 16): Remuneration governance

Principle 16 of the Nigerian Code of Corporate Governance 2018 (NCCG) deals with Remuneration Governance and provides, “The Board ensures that the Company remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.”

Remuneration Governance is one of the most sensitive and sometimes controversial topics in corporate governance. Today, non-executive directors are clearly spending more time on their Board roles with Board and Committee meetings, video conferences, shareholder meetings and director development programmes, among other commitments.

They also need to make out time to attend to Board and individual director performance evaluation. With more stringent corporate governance expectations, reputational risk is now included in the basket of an already time-consuming job. Given the vital importance of the responsibilities assigned to non-executive directors, it is expected that they will devote significant time and effort to their boardroom and non-boardroom duties.

Section 267 of the Companies and Allied Matters provides that a company is not bound to pay remuneration to Directors but where the company agrees to pay, Directors shall be paid such remuneration out of the funds of the company and such remuneration shall from time to time be determined by the company in general meeting.

The NCCG recommends that the remuneration policy should be designed to attract, motivate, reward and retain high-performing human capital, to pursue the long-term growth and success of the organisation. The policy is also expected to demonstrate a clear relationship between Key Performance Indicators and remuneration. However, where remuneration is linked to performance, it should be designed in a way as to prevent excessive risk taking.

The Code provides that the Company’s Remuneration Policy as well as remuneration of all Directors should be disclosed in the annual reports.

The decision on non-executive director compensation should not be that of management. This is to ensure that the Board is able to maintain its independence of management and not feel beholden to the CEO for his/her “benevolence.”

The Board Governance/Remuneration/Nomination Committee, armed with appropriate data, should make recommendations to the Board, mindful of the company’s ability to pay and sustain the compensation package as well.

As much as possible, most members of the Committee should be independent non-executive directors. Executive directors should not be involved in the determination of their own remuneration. Committee members should have access to up-to-date- industry pay levels, structuring methods and components of remuneration of peer companies. However, while remuneration levels may take into account relevant benchmarks and market conditions, these criteria should not be used exclusively to justify levels of remuneration.

Too much reliance on relative peer analysis leads to unjustified escalation in executive pay. Each plan should be tailored to the unique circumstances of the company as well as the responsibilities of the position(s) in question and the experience and expertise of the individual. (ICGN Guidance on Executive Remuneration, 2012).

There should be a balance between recommending over-generous remuneration which is not in the interest of the shareholders, and a level of remuneration which fails to attract the desired quality of human capital to the organisation.

It is expected that the remuneration of executive-directors will be structured in a manner that will motivate them to achieve the long-term objectives of the company. Therefore, the remuneration committee should offer competitive base pay combined with performance-based rewards such as bonuses linked to medium and long-term targets, shares and share options.

The Code provides that managing director/CEO and other executive directors should not receive sitting allowances for attending meetings of the Board or its committees and Director’s fees from the Company, its holding company or subsidiaries. Their remuneration should however cover reward for time spent on the Board, its committees, and related work.

A novel provision of the NCCG is the requirement for companies to implement a Clawback policy to recover excess or undeserved rewards, such as bonuses, incentives, share of profits, stock options, or any performance-based reward, from directors and senior employees.

The clawback should be triggered if the account or financial performance on which the reward was based is later found to be materially false, misstated, misleading, erroneous, etc. or in instances of misdemeanour, fraud, material violation of company policy or material regulatory infractions.

The concern had always been expressed that when companies are penalised for “wrong-doing,” no actual persons are punished. Shareholders ultimately bear the brunt of “bad-behaviour.” It is expected that Clawback policies will include staggered incentive payment to ensure that the company actually has something to claw back.

The Code further recommends that non-executive Directors should not receive performance-based compensation as it may lead to bias in their decision-making and compromise their objectivity.

Another novel provision of the Code is the payment of compensation for loss of office or retirement to directors – including non-executive directors. In the case of the MD/CEO, EDs and senior management, the compensation payable for any loss of office or termination of appointment should be consistent with their contractual terms, fair and not excessive.

Increased demands coupled with the unique requirements of each Board means that non-executive director pay should be fair, but not enough to tilt the balance of independence required of an effective Board.

It is also not good practice for the Board to use executive compensation as a benchmark for determining non-executive director remuneration. In addition to their statutory responsibilities, executive directors have day-to-day responsibilities to which they are expected to devote all their time and attention.

Just as executive compensation is heavily scrutinised today, so is non-executive director compensation. Opaque and “off radar” remuneration that cannot stand the test of scrutiny should not be paid to Directors to avoid compromising their independence. The Board should continue to strive to strike the right balance and ensure that appropriate disclosures are made in the interest of transparency and accountability.