Let's train our Remcos well, like this ...

23.07.2016

The Problem

The job of remunerating executives fairly and responsibly has become complex and the Remuneration Committee (Remco) has to deal with this complexity and still deliver appropriate solutions. This means that the adopted best practice guidelines for the remuneration of executives has to be integrated fully into the organisation. It appears, however, that ineffective integration of best practices in this area is now increasingly exposing organisations to reputational and sustainability risks.

The Solution

The delivery of outputs by committee members is a function of their skill levels, which should be augmented and updated through customised training continuously. The scope and content of meaningful training is usually based on a formal training needs analysis. For Remco, this can best be achieved through an assessment of the committee's actual performance against the mandate given to it by the board. This is reflected in its Terms of Reference and Annual Work Plan. A mandate based on the best practices proposed in King III would, for example, cover the integration of 3 principles and approximately 53 best practices. A training need would emerge when the execution of a particular best practice was found to be inadequate or ineffective.

As regards their impact on the organisation, the ineffective integration of approximately 15 of King III's best practices has the potential to lead to a sustainability risk. For example, best practice 147 in Chapter 2, requires that the company 'adopt remuneration policies and practices that create value for the company over the long term'. This is a particularly complex undertaking. If Remco should achieve an overall assessment of inadequate or ineffective here, then further training would be indicated for this area.

In view of the underlying reputational and sustainability risks, organisations are encouraged to develop the necessary tools to undertake a training needs analysis for their Remcos, and implement the requisite training programmes. Those companies looking for a ready-made tool can find one at https://iiasa.site-m.com/store/ViewProduct.aspx?ID=5857602 the website of The Institute of Internal Auditors SA. They have a Remuneration Committee Assessment Program tool that will serve to identify Remco training needs and facilitate the development of customised training. Application of the tool will also enable the board to fulfil its requirement to review the effectiveness of Remco each year, as required by King III and King IV.

Article produced by John Mansfield of Remuneration Management Services.

contact John at john@rms.co.za