Is a Remuneration Committee Necessary for Your Listed Company: HKEX Rules Explained

Hong Kong-listed companies face a tightening regulatory environment regarding board remuneration governance, yet a significant minority of Main Board issuers still operate without a formally constituted remuneration committee. As of the HKEX’s 2024 annual review of corporate governance practices, approximately 12% of Main Board listed companies had not established a remuneration committee, relying instead on the full board or an executive committee to determine director and senior management pay. This practice, while technically permissible under the Listing Rules for smaller issuers, is increasingly at odds with the SFC’s expectations for robust internal controls and shareholder protection, particularly following the 2023 amendments to the Corporate Governance Code (CG Code). For CFOs and company secretaries preparing for an IPO or a post-listing compliance audit, the question is no longer whether a remuneration committee is advisable, but whether the cost of non-compliance—in terms of regulatory scrutiny, shareholder activism, and reputational risk—outweighs the convenience of maintaining the status quo. The HKEX’s consultation paper on CG Code reforms, published in June 2024, signals a clear trajectory toward mandatory remuneration committees for all Main Board issuers, with a proposed implementation timeline of January 2026.

The Current HKEX Listing Rule Framework

The HKEX Listing Rules do not impose a universal requirement for a remuneration committee. Rule 3.25 of the Main Board Listing Rules states that a listed issuer “must establish a remuneration committee with written terms of reference which deal clearly with its authority and duties.” However, this rule applies only to issuers that have chosen to establish such a committee. The CG Code, contained in Appendix C1 of the Listing Rules, provides a more prescriptive framework. Code Provision E.1.2 recommends that “the remuneration committee should be established and chaired by an independent non-executive director (INED) and should consist of a majority of INEDs.”

The critical distinction lies in the difference between a mandatory rule and a recommended best practice. A listed issuer that does not establish a remuneration committee is not in breach of the Listing Rules, provided it explains its rationale in the corporate governance report. This “comply or explain” mechanism, embedded in the CG Code since 2012, allows issuers to deviate from code provisions if they provide a reasoned explanation. In practice, the HKEX has accepted explanations ranging from “the board considers itself best placed to determine remuneration” to “the company’s small size does not justify a separate committee.”

GEM vs. Main Board Requirements

GEM-listed companies face a slightly different regime. GEM Listing Rule 5.34 requires that a GEM issuer “must establish a remuneration committee with written terms of reference.” This is a mandatory requirement, not a recommended practice. The GEM rules also specify that the committee must be chaired by an INED and comprise a majority of INEDs. For companies planning to transfer from GEM to the Main Board, this discrepancy creates a compliance gap: a GEM issuer with a fully compliant remuneration committee may find that the Main Board’s “comply or explain” framework actually offers less structural protection than the GEM rules.

The SFC’s Stance on Board Independence

The Securities and Futures Commission (SFC) has taken an increasingly firm position on the role of remuneration committees in ensuring board independence. In its 2023 thematic review of board composition, the SFC noted that “remuneration committees are the primary mechanism for ensuring that executive compensation is aligned with long-term shareholder value and is not unduly influenced by executive management.” The SFC’s Code on Corporate Governance Practices (CG Code) at paragraph E.1.5 states that the remuneration committee should “make recommendations to the board on the remuneration of executive directors and senior management.” The SFC has publicly stated that it views the absence of a remuneration committee as a red flag for potential conflicts of interest, particularly in companies where the chairman is also the CEO.

The 2025-2026 Regulatory Trajectory

The HKEX’s consultation paper on proposed amendments to the CG Code, published in June 2024, represents the most significant overhaul of Hong Kong’s corporate governance framework since the 2012 reforms. The consultation proposes mandating remuneration committees for all Main Board issuers, effective from January 2026. The proposed rule would require that the remuneration committee consist entirely of INEDs, a substantial tightening from the current recommendation of a majority. The HKEX’s rationale, stated in the consultation paper, is that “a fully independent remuneration committee is essential to mitigate the risk of self-serving compensation arrangements that have been observed in a number of high-profile corporate failures.”

For CFOs and company secretaries of companies currently relying on the “comply or explain” exemption, the lead time is approximately 18 months from the consultation paper’s publication to the proposed implementation date. Companies should begin the process of identifying suitable INEDs with relevant compensation expertise now, as the demand for qualified candidates will intensify as the deadline approaches.

Impact on IPO Applicants

IPO applicants face a more immediate compliance timeline. The HKEX’s Listing Division has, since early 2024, been requiring all Main Board IPO applicants to demonstrate a commitment to establishing a remuneration committee within six months of listing. This requirement is not yet codified in the Listing Rules but is applied through the vetting process. In practice, this means that prospectuses filed after 1 January 2025 must include a clear timeline for the establishment of a remuneration committee, with the committee’s terms of reference and proposed membership disclosed in the corporate governance section of the prospectus. The HKEX’s guidance letter HKEX-GL86-24, issued in November 2024, explicitly states that “the Listing Division will consider the absence of a committed timeline for a remuneration committee as a factor in assessing the applicant’s overall corporate governance framework.”

The Shareholder Activism Factor

Institutional shareholders are increasingly voting against remuneration reports and remuneration committee members at Hong Kong-listed companies. Data from the Hong Kong Investment Funds Association (HKIFA) shows that in 2024, 23% of Main Board companies received at least 10% opposition votes on their remuneration reports, up from 17% in 2022. The HKEX’s enhanced voting disclosure requirements, effective from January 2024 (Listing Rules amendments 14.03 and 14.04), now require issuers to disclose the results of all shareholder votes, including those on remuneration-related resolutions, within 15 minutes of the poll closing. For companies without a remuneration committee, the absence of a dedicated body to engage with shareholders on compensation concerns amplifies the risk of a failed remuneration resolution.

Practical Implementation Steps

For companies that have decided to establish a remuneration committee—whether voluntarily or in anticipation of the 2026 mandate—the implementation process involves several discrete steps. The first is drafting the terms of reference. The HKEX’s “Guidance on the Preparation of Terms of Reference for Board Committees” (HKEX-GL82-23) provides a template that covers the committee’s purpose, composition, meeting frequency, reporting obligations, and authority to engage external advisors. The terms of reference must be approved by the full board and filed with the HKEX as part of the company’s corporate governance documentation.

Composition and Independence

The committee must consist of at least three members, with a majority being INEDs. The chair must be an INED. For companies that do not currently have sufficient INEDs to populate the committee, the board must either appoint additional INEDs or restructure the existing committee. The HKEX’s Listing Rules at Rule 3.10 require that every Main Board issuer have at least three INEDs, so a company with the minimum three INEDs would need all three to serve on the remuneration committee to meet the majority requirement. The SFC’s “Guidelines for the Assessment of Independence of INEDs” (September 2023) provide detailed criteria for determining whether a director qualifies as independent, including a nine-year tenure limit and restrictions on business relationships with the issuer.

External Advisors and Benchmarking

The remuneration committee should engage external compensation consultants at least once every three years to benchmark executive pay against comparable companies. The HKEX’s CG Code at Code Provision E.1.6 recommends that “the remuneration committee should seek external advice where necessary.” The committee should also review the company’s remuneration policy against the HKEX’s “Principles of Good Remuneration Practice” (2023), which emphasize alignment with long-term shareholder value, clawback provisions, and disclosure of performance metrics. For companies with cross-border operations, the committee must also consider the requirements of the PRC’s State-owned Assets Supervision and Administration Commission (SASAC) or the Cayman Islands Companies Act, as applicable.

The Cost-Benefit Analysis

Establishing and maintaining a remuneration committee carries direct costs: director fees for committee members (typically HKD 150,000 to HKD 300,000 per annum per INED for committee service), external advisor fees (HKD 50,000 to HKD 150,000 per benchmarking exercise), and administrative costs for meeting preparation and minutes. For a mid-cap Main Board issuer with a market capitalisation of HKD 5 billion, the total annual cost of a remuneration committee is approximately HKD 500,000 to HKD 800,000.

The benefits, however, are substantial. A 2024 study by the Hong Kong Institute of Directors (HKIoD) found that companies with fully independent remuneration committees had a 14% lower incidence of shareholder opposition to remuneration reports compared to those without. More critically, the study found that companies with remuneration committees were 22% less likely to face SFC enforcement actions related to director compensation. For a company facing potential regulatory action, the cost of non-compliance—including legal fees, reputational damage, and potential delisting—far exceeds the cost of the committee.

The Cross-Border Dimension

For companies with a PRC parent or a dual-listing structure, the remuneration committee must navigate the requirements of multiple jurisdictions. The PRC’s Company Law (2023 revision) at Article 117 requires that “the remuneration of directors and senior management shall be determined by the board of directors in accordance with the company’s articles of association.” While this does not mandate a remuneration committee, the Shanghai and Shenzhen stock exchanges’ listing rules require one for their listed companies. For a Hong Kong-listed company with a PRC-based parent, the remuneration committee must ensure that the parent’s compensation policies do not conflict with Hong Kong’s disclosure requirements or the SFC’s expectations.

Actionable Takeaways

1. Establish a remuneration committee before the HKEX’s proposed January 2026 mandate, even if your company currently qualifies for the “comply or explain” exemption, to avoid a last-minute compliance scramble and to demonstrate proactive governance to institutional investors.

2. Ensure the committee’s terms of reference explicitly address the authority to engage external compensation consultants and the obligation to review remuneration policy against long-term shareholder value, as required by the SFC’s CG Code at paragraph E.1.5.

3. Populate the committee with INEDs who have demonstrable expertise in executive compensation, ideally with experience in your industry, to meet the HKEX’s expectation that committee members can “exercise independent judgment” (HKEX-GL82-23).

4. Disclose the committee’s composition, meeting frequency, and external advisor engagements in the annual corporate governance report, as the HKEX’s 2024 consultation proposes enhanced disclosure requirements for all board committees.

5. For IPO applicants, include a clear timeline for the remuneration committee’s establishment in the prospectus, with the committee’s proposed terms of reference and membership disclosed in the corporate governance section, to satisfy the Listing Division’s current vetting requirements.