Recently, the issues of remuneration of company executives, including from the point of view of its fairness, are among the most controversial. In this article, we will consider the basic aspects of the remuneration policy of the board of directors.
The concept of the board pay equity in a nonprofit company
Because nonprofit organizations, the purpose of their creation, the procedure for registration and activities are fundamentally different from commercial organizations, management in nonprofit organizations contains several subtleties and individual points.
When determining the remuneration of members of the board of directors, the same methods for evaluating their performance and forms of remuneration are most often used for top managers. The amount of remuneration for the members of the nonprofit board of directors depends on the company’s financial results and is approved annually by the shareholders. This possibility of discretionary intervention by shareholders eliminates the risks of potential abuse of the compensation program.
The fairness of remuneration is assessed using two main criteria:
- Firstly, to recognize the remuneration as fair, its amount must be no less than that established by the Law on the Minimum Wage.
- Secondly, the fairness of remuneration implies the absence of any discrimination in its determination.
The remuneration of members of the board of directors
Speaking about the remuneration of the board of directors of a nonprofit company, it should be noted that, as a general rule, it includes five main elements:
- salary or, more precisely, official salary;
- share options;
- fringe benefits;
The guaranteed element of the manager’s remuneration is salary. As a rule, its size is determined based on the average level in the sector of the economy in which the company operates. In most cases, following the explicit terms of the employment contract, the salary of the head of the company also includes remuneration for performing the functions of a member of the board of directors (director’s fee). The presence of such a condition allows the company to protect itself from the presentation by the head of the requirements for additional payment for the performance of the relevant functions.
Bonuses are one of the most effective ways to stimulate the achievement of high performance of the company and its head personally. There are two types of bonuses:
- discretionary bonus
- contractual bonus.
Discretionary bonuses mean the company’s discretion in deciding whether to pay them. In other words, under a discretionary scheme, the manager does not have the right to demand payment of bonuses even if all established performance indicators are achieved. The only limit to a company’s discretion is that it must comply with its implied duty of trust and confidence in the labor law between itself and the manager. This obligation, in particular, implies that when deciding on the payment of bonuses and determining their amount, the company must not exercise the discretion granted to it in bad faith or unpredictably (capriciously).
In the case of a contractual scheme, the manager has the right to demand the payment of bonuses calculated under a predetermined formula. The company has no right to refuse him this in whole or in part.
The importance of options as an element of executive remuneration has recently increased significantly. So, if in the early 90s of the last century their share in the structure of executive remuneration was on average 22%, today it is about 33%. Moreover, options are often viewed as a decisive factor in the process of selecting and retaining a leader with the experience and knowledge necessary for the success of the company.