Remuneration committee
The board committee that decides the pay of directors and senior management, which SEBI requires to be made up entirely of non-executive directors with an independent director as chairman.
In plain language
Someone has to decide what a company pays its own directors and top managers. Leaving that decision entirely to executives who benefit from it is an obvious conflict.
The remuneration committee exists to break that conflict. It is a board sub-committee, and the workbook's governance checklist sets a specific membership rule for it.
How it works
The workbook: "SEBI regulation currently stipulates that all members should be non-executive directors and the chairman of the committee should be independent director."
This sits alongside two other, differently-worded committee thresholds in the same governance checklist: the audit committee needs at least two-thirds independent directors, and the board itself needs 50% or one-third independent depending on whether the chairman is executive. The remuneration committee's rule is the strictest on membership type (all non-executive) but does not require every member to be independent — only the chairman.
A worked example
A company forms a 5-member remuneration committee. All 5 are non-executive directors — 3 of them also happen to be independent, 2 are non-executive but not independent. If the chairman is one of the 3 independent directors, the committee is compliant.
If instead the company appoints one of its executive directors to the committee, or makes a merely non-executive (not independent) director its chairman, the committee fails the SEBI rule on both counts respectively.
Why NISM asks about it
Chapter 7.6.2(viii) sets out the remuneration committee composition rule, immediately after the audit committee rule in the same governance checklist. Expect a question giving a committee's composition and asking whether it meets the SEBI rule, or one distinguishing this rule from the audit committee's two-thirds threshold.
Common exam traps
- Do not swap this rule with the audit committee's. Audit committee: at least two-thirds independent. Remuneration committee: all non-executive, chairman independent. Two different tests in the same section.
- "All non-executive" does not mean "all independent." A remuneration committee can lawfully include non-independent, non-executive directors — only the chairman must be independent.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Agency riskThe risk that a company's management, who control day-to-day decisions, pursue their own interests rather than those of the shareholders who actually own the business.
- Audit committeeThe board sub-committee responsible for reviewing a company's financial statements and nominating its auditors, which SEBI requires to be at least two-thirds independent directors.
- Corporate governanceThe rules, processes and procedures followed in running a company, judged by an analyst against a checklist of board, audit and related-party tests rather than by reputation.
- Non-executive directorA board director who is not part of day-to-day management, but who is also not classed as independent — a third category sitting between executive and independent directors.
- Independent directorA director who is neither part of management nor otherwise connected to the company — at least half the board where the chairman is executive, and one-third otherwise.
- Nomination committeeThe board committee that appoints independent directors, which the workbook says should ideally consist exclusively of independent directors so that company executives have no role in the appointment.