The effect of remuneration committee on directors' remuneration in Hong Kong

Abstract

According to the Code on Corporate Governance Practices (CG Code), listed firms should be overseen by a board of directors that promotes the success of the firm through effective direction and supervision of the listed firm’s affairs. Remuneration paid to directors should be sufficient to attract and retain directors of a caliber required to run the company successfully, but companies should avoid paying more than is necessary. The board should appoint a remuneration committee consisting wholly or mainly of non-executive directors and chaired by a non-executive director. The role of the committee is to make recommendations to the board on executive director remuneration in all of its forms, drawing on outside advice as necessary. According to the CG Code, the committee should consult with the chairman of the board and/or chief executive officer regarding its proposals relating to the remuneration of other executive directors. However, as many listed firms in Hong Kong are majority-owned by individuals and their families, the positions of the chairman and/or chief executive officer are usually held by family members who can influence the level of remuneration paid to directors. In an effort to assess how well the CG Code works, this study examines whether directors’ remuneration is influenced by independent non-executive directors where the chairman of the board is a family member. Findings show that since the introduction the CG Code, where the number of independent non-executive directors on the remuneration committee is high, the committee acts as means of control, which leads to lower directors’ remuneration than in situations where family members have more influence on remuneration committee decisions.