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ACCA Strategic Professional · Strategic Business Leader · The board of directors

Zephyra plc, a listed manufacturer, is setting up a remuneration committee. The chair of the board proposes that the chief executive, Mr Lang, should sit on the committee and vote on his own pay package so that the committee can 'reflect operational realities'. Under good governance practice, what is the most appropriate response?

The proposal should be rejected. A remuneration committee should comprise independent non-executive directors, and no director should be involved in deciding their own pay. Allowing the chief executive to vote creates a conflict of interest, and abstaining on only one element would not remove it.

  1. AAccept, because the chief executive understands performance better than anyone
  2. BAccept, provided Mr Lang abstains only on the final bonus figure
  3. CReject, because the committee should consist of independent non-executive directors and no director should decide their own payCorrect
  4. DReject, because remuneration decisions should be made by the external auditors

Explanation

Governance codes recommend that a remuneration committee be made up of independent non-executive directors so that no executive determines his own pay. Allowing the CEO to vote creates a self-interest threat. Partial abstention on the bonus alone still leaves him influencing the rest of the package, so it does not solve the problem.

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