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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

A multinational's board wishes to strengthen oversight of executive remuneration and reduce the risk of managers setting their own pay. According to widely accepted corporate governance codes, which action is most appropriate?

The board should set up a remuneration committee of independent non-executive directors. Independence prevents executives from setting their own pay, reducing the conflict of interest between managers and shareholders, which is the approach recommended in widely accepted corporate governance codes.

  1. AEstablish a remuneration committee composed of independent non-executive directorsCorrect
  2. BAllow the CEO to chair the remuneration committee to ensure speedy decisions
  3. CRequire the finance director to approve all directors' pay packages
  4. DSet executive pay only by reference to the previous year's profit

Explanation

Governance codes recommend a remuneration committee made up of independent non-executive directors so that executives do not determine their own pay. Having the CEO or finance director decide pay creates a conflict of interest, and linking pay solely to last year's profit is a flawed design rather than an oversight mechanism.

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