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Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Drafting a Remuneration Committee Terms of Reference document is essential for companies that have a remuneration committee to ensure their decisions are legally valid and effective. This document should be tailored to each company’s specific needs and regularly reviewed and updated so it stays relevant. The scope of the committee’s authority should be detailed, including the kinds of decisions it can make, who it should consult with, its responsibilities and procedures for selection or replacement of members. Principles for making decisions must also be set out such as considering the company’s strategy, market competition and employee attraction/retention. Accountability is necessary too, requiring board approval for remuneration decisions plus reviews from external advisors. Finally provisions must exist for regular review and updating - this could include an annual review with changes as required.

The ��������Ƶ team know how important a well-drafted terms of reference document is when forming a remuneration committee, which is why we provide free templates within our open source legal template library. Our library contains millions of datapoints which teach our AI what a market standard terms of reference document looks like so you can draft quality documents without having to pay legal costs. That said we also have an in-depth guide below on step-by-step guidance to drafting these documents if you prefer that method - either way we’re here to help! So if you want more information on how you can access these templates today then please read on below!

Definitions

Remuneration: Payment or compensation given to an employee in return for their work.
Committee: A group of people appointed to carry out a specific task.
Purview: The range of authority, responsibility, or influence.
Quorum: The minimum number of members present required for a meeting to make decisions.
Voting Requirements: The minimum number of votes needed for a decision to be made.
Nomination: The process of suggesting a person for a role or job.
Selection: The process of choosing someone for a role or job.
Chair: The person in charge of a meeting or group.
Reporting Lines: The chain of people who have a responsibility to report to each other.
Delegation: The process of giving someone else authority to make decisions or take action.
Local Laws and Regulations: The laws and regulations that are specific to a particular region or country.
Generally Accepted Accounting Principles (GAAP): A set of rules and standards used to maintain and report financial records.
International Financial Reporting Standards (IFRS): A set of international accounting standards used to prepare financial statements.

Contents

1. Understanding the role of the remuneration committee and its purpose
2. Defining the scope of the remuneration committee’s responsibilities
3. Outlining the composition of the remuneration committee
4. Deciding the number of members
5. Establishing the qualifications of members
6. Determining how members are appointed
7. Establishing the rules and procedures to be followed by the remuneration committee
8. Deciding on the frequency of meetings
9. Establishing quorum
10. Deciding voting requirements
11. Setting out the process for the nomination and selection of the chair
12. Clarifying the reporting and decision-making processes
13. Establishing the reporting lines and procedures
14. Deciding what types of decisions require the approval of the board
15. Establishing the remuneration committee’s authority
16. Identifying the areas of responsibility and authority
17. Setting out the decision-making and delegation processes
18. Identifying the required legal and regulatory framework
19. Ensuring compliance with local regulations
20. Identifying any applicable laws or standards
21. Setting out the applicable financial and accounting policies
22. Defining the financial and accounting principles
23. Establishing the applicable accounting guidelines
24. Defining the remuneration committee’s responsibilities for the approval and communication of executive remuneration
25. Establishing the criteria for evaluating executive remuneration
26. Defining the process for the approval of executive remuneration
27. Establishing the process for communicating executive remuneration decisions
28. Determining the remuneration committee’s review and approval authority for other compensation and benefit issues
29. Establishing the criteria for evaluating other employee compensation and benefit issues
30. Defining the decision-making and approval process
31. Setting out the process for communicating other compensation and benefit decisions to employees

Get started

Understanding the role of the remuneration committee and its purpose

• Research best practices and relevant legal requirements for remuneration committees
• Understand the purpose of the remuneration committee and how it affects the overall corporate governance
• Analyze the existing roles and responsibilities of the board of directors and how the remuneration committee will supplement it
• Consider the company’s size, structure and culture when defining the role of the remuneration committee
• Define the roles and responsibilities that the remuneration committee should have

Once you have researched and identified the purpose of the remuneration committee, you can move on to the next step of defining the scope of the committee’s responsibilities.

Defining the scope of the remuneration committee’s responsibilities

• Identify and define the roles and responsibilities of the Remuneration Committee, including the scope of their duties and the matters on which their advice can be sought.
• Define the authority and powers of the Remuneration Committee in line with the legal requirements of the company.
• Determine the extent to which the Remuneration Committee’s decisions must be reported to the board of directors.
• Outline the Remuneration Committee’s roles in setting executive salaries, bonuses and other forms of remuneration.
• Establish clear criteria for the assessment of executive performance and the determination of remuneration.

You will know you have completed this step when you have clearly defined the scope of the Remuneration Committee’s responsibilities and set out the authority and powers of the Remuneration Committee in line with the legal requirements of the company.

Outlining the composition of the remuneration committee

• Identify the appropriate skills and experience needed for each member of the remuneration committee.
• Consider and decide on the maximum number of members of the remuneration committee.
• Draft qualifications for each member of the remuneration committee.
• Identify the appropriate individuals for each role in the remuneration committee.
• Once the composition of the remuneration committee is set, you can move on to the next step.

Deciding the number of members

• Determine the number of members of the remuneration committee. This is generally between three and five members.
• Consider potential conflicts of interests and the need for a quorum.
• Communicate the number of members to the relevant stakeholders.
• You can check this off your list and move on to the next step once the number of members has been determined and communicated to the relevant stakeholders.

Establishing the qualifications of members

• Decide on the qualifications required for members of the Remuneration Committee, such as relevant qualifications or experience in the area of remuneration or financial management
• Consider any legal requirements, such as any relevant qualifications or experience required for a particular role
• Define the criteria and set out the criteria in the Terms of Reference
• Check that the criteria are appropriate and fit with the purpose of the Remuneration Committee
• When the criteria has been established and defined, you can move on to the next step of determining how members are appointed.

Determining how members are appointed

• Identify the body responsible for appointing members of the remuneration committee
• Set out the procedure for how members will be appointed, such as the duration of their appointment, any restrictions on tenure, and how they can be removed
• Outline any specific criteria for appointing members, such as minimum qualifications or experience
• Determine how often members should be appointed or reappointed
• Establish any measures that should be taken to ensure members are independent and free from conflicts of interest

Once you have determined the process for appointing members of the remuneration committee, you can check off this step and move on to the next step of establishing the rules and procedures to be followed by the remuneration committee.

Establishing the rules and procedures to be followed by the remuneration committee

• Review existing policies, procedures and legal requirements to determine the rules and procedures to be followed by the remuneration committee
• Establish clear rules and procedures to be followed by the committee, such as meeting frequency, quorum requirements, voting procedures, and conflict of interest rules
• Ensure these rules and procedures are in line with the company’s corporate governance policies
• Document the rules and procedures and make sure they are accessible to all committee members
• Once the rules and procedures have been established and documented, the step is complete and you can move on to the next step.

Deciding on the frequency of meetings

• Decide on the frequency of meetings for the remuneration committee. Consider the amount of work to be done, the number of members, and the amount of time available when deciding on the frequency.
• Consider holding meetings at least once a year to review and discuss the remuneration committee’s terms of reference and ensure that the committee is functioning effectively.
• Set out the frequency of meetings in the committee’s terms of reference.
• Record the frequency of meetings in the committee’s minutes.
• You can check this step off the list when you have decided on and recorded the frequency of meetings for the remuneration committee in the terms of reference and minutes.

Establishing quorum

• Determine how many members must be present at a meeting for it to be considered a quorum.
• Consider whether attendance via teleconference or video conference will be allowed.
• Set out the timeframe within which members must respond to a meeting invitation for their attendance to be counted in the quorum.
• Document the quorum requirements in the Terms of Reference.

Once you have determined the quorum requirements and documented it in the Terms of Reference, you can check this off your list and move on to the next step of deciding voting requirements.

Deciding voting requirements

• Consider the voting requirements for the Remuneration Committee, such as whether unanimity or majority voting is required
• Set out the voting requirements in the Terms of Reference – make sure to include the number of votes needed to pass a motion
• Consult relevant legislation, standards and guidelines to ensure that the voting requirements abide by applicable laws and regulations
• Once you have determined the voting requirements, you can move on to the next step of setting out the process for the nomination and selection of the chair.

Setting out the process for the nomination and selection of the chair

• Establish a nomination process for the selection of the Remuneration Committee Chair.
• Determine the criteria for selecting the chair (e.g. experience, knowledge of remuneration and pay-setting, etc.).
• Choose an appropriate method to nominate the chair (e.g. open call for applications, closed nomination process, etc.).
• Select appropriate officers or personnel to oversee the process (e.g. the board of directors, etc.).
• Have the board of directors make the final decision on the selection of the chair.

Once these steps are completed, the process of setting out the process for the nomination and selection of the chair can be checked off the list, and the next step in drafting the Remuneration Committee Terms of Reference can be taken.

Clarifying the reporting and decision-making processes

• Outline the reporting process for the Remuneration Committee, including which documents must be submitted and when
• Establish the decision-making process for the Remuneration Committee, including voting procedures
• Describe the process for communicating decisions made by the Remuneration Committee to the Board of Directors
• Define the documentation requirements for decisions made by the Remuneration Committee

You will know that you have completed this step when you have clearly outlined the reporting process, decision-making process, communication process, and documentation requirements for the Remuneration Committee in the Terms of Reference.

Establishing the reporting lines and procedures

• Define the roles and responsibilities of the committee
• Determine who the committee should report to
• Establish the procedures for the committee’s decision-making process
• Establish the frequency of committee meetings
• Establish a process for the committee to review and update the terms of reference
• Create a timeline for the committee’s operational cycle

Once you have established the reporting lines and procedures, you can check this off your list and move on to the next step.

Deciding what types of decisions require the approval of the board

• Determine the decisions the board should approve, such as the overall remuneration policy or changes to a director’s compensation
• Discuss the level of authority to be delegated to the committee, such as the authority to approve individual payments
• Note that the board should approve executive remuneration at least annually
• Decide which decisions should be discussed with the board before being implemented, or decide that the committee should report all decisions to the board for approval
• Document the decisions that the board should approve and the decisions that the committee can make without board approval
• Check off this step when all of the decisions that the board should approve have been documented and agreed upon

Establishing the remuneration committee’s authority

• Draft a document outlining the remuneration committee’s authority
• Ensure that the authority of the remuneration committee is clearly stated in the document
• Ensure that the document is consistent with the organization’s bylaws and regulations
• Include within the document the ability for the remuneration committee to delegate certain powers or assignments to a subcommittee
• Have the document reviewed by legal counsel to ensure that it meets all applicable regulatory and legal requirements
• Make sure that the document is signed by all members of the committee

You can check this off your list and move on to the next step once you have drafted the document outlining the remuneration committee’s authority, have it reviewed by legal counsel, and have it signed by all committee members.

Identifying the areas of responsibility and authority

• Research and review existing documents, such as the company’s articles of association and any existing remuneration policy or terms of reference, to identify the areas of responsibility and authority of the remuneration committee
• Identify the areas that the remuneration committee should be responsible for, taking into account the existing documents, the applicable legal and regulatory framework and the company’s own internal requirements
• Draft the terms of reference to reflect the areas of responsibility and authority of the remuneration committee
• Review and finalize the terms of reference to ensure they accurately reflect the areas of responsibility and authority of the remuneration committee

When you can check this off your list and move on to the next step:

• When the terms of reference have been reviewed and finalized to ensure they accurately reflect the areas of responsibility and authority of the remuneration committee.

Setting out the decision-making and delegation processes

• Outline the decision-making process for the Committee, including the decision-making authority and any delegation powers
• Determine which processes will be delegated to the Committee and which will require Board approval
• Specify the Committee’s authority to review, modify, and approve decisions
• Identify the reporting mechanisms for the Committee’s decisions
• Establish how the Committee’s decisions will be documented and reviewed

When you have outlined the decision-making process, delegated powers, and reporting mechanisms for the Committee, you can move on to the next step of identifying the required legal and regulatory framework.

Identifying the required legal and regulatory framework

• Research relevant local laws and regulations with regards to the formation and purview of a Remuneration Committee
• Research relevant local laws and regulations with regards to compensation and remuneration
• Identify any additional best practices or standards that should be taken into account
• Ensure that the Terms of Reference are in compliance with the relevant laws, regulations and best practices
• Document the laws, regulations and standards that the Terms of Reference must comply with
• Check off this step and move on to the next step once the research is completed and the relevant laws, regulations, and best practices are identified.

Ensuring compliance with local regulations

• Review applicable local regulations to identify any requirements related to the Remuneration Committee, such as restrictions on the type of individuals who can serve on the committee or the frequency of meetings.
• Consult with legal counsel to ensure that the Terms of Reference are in compliance with all applicable local regulations.
• Update the Terms of Reference as necessary to ensure compliance with all applicable local regulations.
• Once the Terms of Reference have been reviewed and updated to ensure compliance with local regulations, check this step off your list and move on to identifying any applicable laws or standards.

Identifying any applicable laws or standards

• Research applicable laws and standards that are relevant to the remuneration committee.
• Check for any specific regulations or guidance that needs to be taken into consideration when drafting the terms of reference.
• Create a list of all relevant laws and standards that the remuneration committee must adhere to.
• Ensure that the terms of reference are drafted in accordance with all applicable laws and standards.
• Once the laws and standards have been identified, and the terms of reference have been drafted accordingly, then this step can be completed.

Setting out the applicable financial and accounting policies

• Research existing financial and accounting policies within the organisation and identify any that are applicable to the Remuneration Committee
• Consider any financial and accounting policies that may need to be changed or added to ensure compliance with the applicable laws and standards
• Draft a set of financial and accounting policies that are tailored to the Remuneration Committee
• Ensure that the financial and accounting policies are reviewed on a regular basis and updated as needed to reflect changes in the applicable laws and standards
• When the financial and accounting policies are complete, you can move on to the next step – defining the financial and accounting principles.

Defining the financial and accounting principles

• Identify the key financial and accounting principles that need to be included in the Terms of Reference
• Outline the roles and responsibilities of the committee members in relation to the financial and accounting principles
• Describe the process for monitoring and reviewing the financial and accounting principles
• Establish the procedures for ensuring compliance with the financial and accounting principles

When you have identified the key financial and accounting principles and outlined the roles and responsibilities of the committee members in relation to them, you can check this off your list and move on to the next step of establishing the applicable accounting guidelines.

Establishing the applicable accounting guidelines

• Determine the accounting standards to be used for reviewing the executive remuneration, such as IFRS or US GAAP
• Identify any external requirements for disclosure of executive remuneration, such as the requirements of the Stock Exchange
• Identify any other relevant accounting guidance that should be taken into account, such as the International Financial Reporting Standards
• Assess the impact of any new accounting standards or external requirements that may affect executive remuneration
• Establish a system to ensure that all relevant accounting guidance is included in the terms of reference

Once you have determined the applicable accounting standards, identified any external requirements and assessed the impact of new accounting standards, you can check this off your list and move on to the next step.

Defining the remuneration committee’s responsibilities for the approval and communication of executive remuneration

• Establish a clear set of responsibilities for the remuneration committee related to the approval and communication of executive remuneration
• Outline what the committee should consider when evaluating executive remuneration
• Ensure that all decisions regarding executive remuneration are documented and communicated to the relevant stakeholders
• Consider establishing a clear timeline for the remuneration committee to review and approve executive remuneration
• Ensure that all executive remuneration decisions are communicated in a timely manner

When you can check this off your list:

• When you have established a clear set of responsibilities for the remuneration committee related to the approval and communication of executive remuneration and established a clear timeline for the committee to review and approve executive remuneration.

Establishing the criteria for evaluating executive remuneration

• Research industry standards for executive remuneration packages
• Draft criteria for evaluating executive remuneration, such as performance metrics, salary comparisons, and market forces
• Establish a timeline for reviewing and approving executive remuneration
• Develop a process for evaluating and approving executive remuneration

When you have completed the above tasks, you will have established the criteria for evaluating executive remuneration, and you can move on to the next step: defining the process for the approval of executive remuneration.

Defining the process for the approval of executive remuneration

• Establish the roles and responsibilities of the Remuneration Committee, including the approval process for executive remuneration
• Develop a checklist of items required for approval, including a review of the executive remuneration policy and financial performance
• Determine the approval thresholds for executive remuneration
• Outline the approval process and timeline
• Agree on the roles of the Remuneration Committee, including who will make the final decision
• Once the process is approved, communicate it to all involved parties
• Check this step off your list when all the necessary steps are completed and the process is agreed upon.

Establishing the process for communicating executive remuneration decisions

• Establish a communication process for remuneration decisions, such as a formal vote and minutes documenting the decision
• Establish a process for communicating the remuneration decisions to the board and other relevant stakeholders
• Ensure that all stakeholders are aware of the remuneration decisions
• Set a timeline for communicating the remuneration decisions
• Identify the person or entity responsible for communicating the remuneration decisions, and ensure they have the necessary training or resources

You will know when you can check this off your list and move on to the next step when you have established a communication process for remuneration decisions, a process for communicating the decisions, a timeline for doing so, and identified the person or entity responsible for communicating the decisions and ensured they have the necessary training or resources.

Determining the remuneration committee’s review and approval authority for other compensation and benefit issues

• Outline the scope of the review and approval authority of the Remuneration Committee for other compensation and benefit issues
• Identify any specific compensation and benefit decisions that would require approval from the Remuneration Committee
• Specify the approval requirements for any decisions that need to be made by the Remuneration Committee, such as the number of members required to approve the decision, any thresholds that must be met, etc.
• Record the remuneration committee’s approval authority for other compensation and benefit issues in the Terms of Reference

You will know you have completed this step when you have recorded the remuneration committee’s approval authority for other compensation and benefit issues in the Terms of Reference.

Establishing the criteria for evaluating other employee compensation and benefit issues

• Define any criteria to be used when evaluating other employee compensation and benefit issues
• Consider the objectives of the organization and how the criteria should help achieve those objectives
• Identify and prioritize any criteria to be used by the remuneration committee in making decisions about employee compensation and benefits
• Ensure that the criteria is measurable, verifiable, and relevant to the situation
• Determine the methodology for measuring and evaluating the criteria
• Document the criteria, objectives, and methodology used to evaluate other employee compensation and benefit issues
• Once the criteria, objectives, and methodology have been established, this step can be checked off your list.

Defining the decision-making and approval process

• Establish the decision-making process for the Remuneration Committee, including the number of members, the required quorum, the voting process, and any other required procedures.
• Ensure the decision-making and approval process is in compliance with applicable legislation and regulations.
• Document the decision-making and approval process in the Remuneration Committee Terms of Reference.
• Review and approve the Terms of Reference with the Remuneration Committee.

Once the decision-making and approval process has been established, documented, and approved, this step can be checked off the list and the next step can be tackled.

Setting out the process for communicating other compensation and benefit decisions to employees

• Develop a template for how employees will be informed about compensation and benefit decisions
• Identify the appropriate parties for communicating the decisions to employees
• Determine who is responsible for preparing and disseminating the information
• Establish a timeline for when communication should be sent out
• Establish standard practices for handling questions from employees
• Establish guidelines for ensuring the accuracy of the information being communicated
• When all the above steps are complete, you can check this off your list and move on to the next step.

FAQ

Q: How do I draft remuneration committee terms of reference?

Asked by Sarah on January 7th 2022.
A: Drafting remuneration committee terms of reference is an important step in ensuring that an organization’s remuneration policy is consistently implemented and upheld. To draft these terms of reference, you will first need to review the applicable legal and regulatory requirements in your jurisdiction. Depending on the country or region, there may be specific laws or regulations governing how remuneration committees are to be structured and how their terms of reference should be drafted. Once you have reviewed the applicable laws and regulations, you should then determine what types of responsibilities and duties should be assigned to the remuneration committee. Generally speaking, these responsibilities may include evaluating compensation packages for senior executives and other key personnel, developing policies and procedures relating to executive compensation, and providing advice on the organization’s overall pay structure. Finally, you should ensure that the terms of reference are clearly articulated and understood by all involved parties.

Q: What are the advantages of having a formal remuneration committee?

Asked by Ethan on March 10th 2022.
A: Having a formal remuneration committee has several advantages for organizations. Firstly, it provides a structured mechanism for setting and reviewing executive compensation that is independent from management and board level decision-making. This helps to ensure that pay decisions are based on objective criteria, which can reduce the potential for conflicts of interest in executive compensation decisions. Secondly, having a formal remuneration committee can help to ensure consistency in pay decisions across different departments, as well as throughout an organization’s life cycle – from startup to established company. Finally, having a formal remuneration committee can help an organization to demonstrate compliance with applicable laws and regulations governing executive pay, which can help to protect against potential legal liability.

Q: How should I go about setting up a remuneration committee?

Asked by Jonathan on May 17th 2022.
A: Setting up a remuneration committee typically involves four main steps. Firstly, you will need to identify individuals who have relevant knowledge or experience in the area of executive compensation and who are willing to serve on the committee. Secondly, you will need to create a written document outlining the roles and responsibilities of each committee member (known as the Terms of Reference). Thirdly, you should ensure that all members have sufficient time available to fulfill their duties properly, which may involve scheduling regular meetings throughout the year. Finally, you should ensure that there is adequate communication between all members of the committee so that decisions can be made in a timely manner.

Q: What type of information should I include in my Terms of Reference?

Asked by Emma on July 23rd 2022.
A: The information included in your Terms of Reference will depend on your particular needs and the type of organization you are operating within. Generally speaking however, you should include information such as the purpose of the remuneration committee (e.g., to review executive compensation packages), its membership (including any required qualifications or expertise), its meeting schedule (if any), its reporting requirements (if any), any specific rules or protocols governing its operations (such as conflict-of-interest protocols), any powers or authority it holds over executive compensation decisions, and any other relevant details necessary for its operations. Additionally, if you are operating within an industry with specific regulations governing executive compensation decisions (such as the financial services sector) then it is important that these regulations are clearly outlined in your Terms of Reference as well.

Q: Is it necessary to have legal advice when drafting terms of reference?

Asked by Owen on September 29th 2022.
A: It is often advisable to seek legal advice when drafting terms of reference for your remuneration committee, as there may be specific laws or regulations that must be adhered to depending on your jurisdiction or industry sector. Additionally, there may be certain liabilities associated with executive compensation decisions that need to be considered when drafting your terms of reference – such as conflicts-of-interest protocols or liability for non-compliance with applicable laws or regulations – so it is important that these matters are addressed properly at this stage. Ultimately however, whether or not you decide to seek legal advice when drafting your terms of reference will depend on your particular needs and circumstances – but if in doubt it is generally recommended that you do seek such advice in order to ensure compliance with applicable laws and regulations.

Example dispute

Suing a Company for Breach of Remuneration Committee Terms of Reference

• Plaintiff must prove that the company breached its remuneration committee terms of reference. This can be done by showing that the company failed to follow the requirements set out in their terms of reference.
• Plaintiff must demonstrate that the company’s actions caused them harm or loss. This may include losses in wages, benefits, or other damages.
• Plaintiff must provide evidence that the company had knowledge of their terms of reference and that they willfully disregarded them.
• Plaintiff must be able to show that they suffered a financial loss or other damages as a result of the company’s breach of their terms of reference.
• Settlement may be reached through negotiation, or a court decision may award damages to the plaintiff. Damages can be calculated based on lost wages and benefits, as well as any other losses suffered due to the company’s breach of the terms of reference.

Templates available (free to use)

Aim Terms Of Reference For Remuneration Committee
Executive Summary For Remuneration Committee Of Premium Listed Companies For Tax Year Before 2019 Terms Of Reference

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