Director Compensation: Practice and Disclosure

The approval of director compensation is one of the agendas at annual general shareholders’ meeting every year. Lately, shareholders and investors have been paying more attention to this particular topic. Questions about policy, type, and size of director compensation were raised at AGMs. The Board of Directors, particularly Remuneration Committee, should be able to present compensation policy and rationale as well as clear any queries from shareholders regarding the matter. The IOD would like to encourage our readers to study best practices, compensation types, and disclosure of director compensation.

Director Compensation Best Practices

The Corporate Governance Code for Listed Companies 2017 (CG Code) indicated guidelines in proposing director compensation to shareholders that can be summarized as follow:

1. The remuneration of the board should be consistent with the company’s strategies and long-term objectives, and reflect the experience, obligations, scope of work, accountability and responsibilities, and contribution of each director.

2. Shareholders must approve the board remuneration structure, including level and pay components (both cash-based and non-cash compensation). The board should consider the appropriateness of each pay component, both in terms of fixed rates (such as retainer fee and attendance fee) and remuneration paid according to the company’s performance (such as bonus and rewards). The remuneration should reflect the values that the company creates for shareholders taking a long-term perspective on company performance, and the pay level should not be too high so as to avoid the board excessively focusing on the company’s short-term results.

3. The board should disclose the directors’ remuneration policy that reflects the duties and responsibilities of each individual, including the pay components and level received by each director.
According to a survey of 677 Thai listed companies in the 2019 Corporate Governance Report of Thai Listed Companies, 90% of Thai listed companies thoroughly presented director compensation policy and payment method to directors and committee members while 58% of Thai listed companies proposed all types of director compensation and other fringe benefits. Thai listed companies tend to make constant positive compliance progress with the criteria every year.

 
Types of Director Compensation

Director compensation comprises of 1) Cash-based compensation such as retainer fee, attendance fee, and bonus/reward. 2) Non-cash compensation such as stocks, warrants, and other benefits. Types of director compensation depend on director compensation policy stipulated by each company.

According to data compiled from 264 listed firms in the IOD’s Director Compensation Survey 2018 shown in Figure, Thai listed companies mostly paid cash compensation to directors in the form of attendance fee (83%) and retainer fee (72%). Only 2% offered non-cash compensation such as warrants. Based on data from 1,400 S&P-listed companies in the National Association of Corporate Directors’s (NACD) Director Compensation Report 2018-2019, payment of cash compensation accounted for 44% while non-cash compensation (Equity) accounted for 56%.

International Corporate Governance Network (ICGN) suggested that companies pay director compensation in the form of retainer fee rather than attendance fee. This is because retainer fee will better reflect qualifications, skills, experiences, competencies, as well as roles and responsibilities of each director beyond board attendance fee. All major listed companies, both in Thailand and abroad, are on the similar trend of paying less attendance fee and more retainer fee while smaller firms are still mostly pay attendance fee.

Director Compensation Disclosure in Other Countries

According to global director compensation policy disclosure practices shown in Figure, most countries have laws requiring disclosure of director compensation policy, total amount of director compensation, and amount of compensation paid to each director. In Thailand, listed companies are required to disclose director compensation policy and amount of compensation paid to each director annually in Form 56-1.

Since director compensation is a crucial subject that directors should emphasize, the IOD has continuously conducted reports on Director Compensation Survey of Thai Listed Companies every two years. The report is well recognized by most Thai listed firms and is used as a benchmark by the board in determination of director compensation. To seek shareholders’ approval, the board usually presents director compensation, both types and amount, in comparison with industry peers and companies with top line in the same proximity.

The IOD is currently compiling data from participating listed companies to prepare the report on Director Compensation Survey of Thai Listed Companies 2020. In this regard, the IOD would like to invite directors to take part in the development of Thai director compensation database by responding to the survey. You can find more information about the project and contribute to the survey at http://www.thai-iod.com/en/publications-detail.asp?id=589&type=2

Reference
1. Corporate Governance Report 2019, Thai Institute of Directors Association (IOD).
2. Directors Compensation Survey Report 2018, Thai Institute of Directors Association (IOD).
3. Corporate Governance Code for listed companies 2017, Securities & Exchange Commission.
4. International Corporate Governance Network, 2016. ICGN Guidance on Non-executive Director Remuneration.
5. National Association of Corporate Directors, 2019. Director Compensation Report 2018-2019.
6. Organisation for Economic Co-operation and Development, 2019. OECD Corporate Governance Factbook 2019.

Siriporn Wongkeaw
Senior CG Analyst
Thai Institute of Directors (IOD)