The Compensation for the Executive Managers at Disney - Case Study Example

Walt Disney Company Introduction Walt Disney Company is a diversified company that has affiliates and subsidiaries in entertainment and media enterprise on an international scale.it comprises of media, parks and resorts, studio[Wal14], consumer products and interactive media[Wal14]. Its headquarters is located at Walt Disney Studios in Burbank, California. Considering its revenue, it is the largest media conglomerate in the world. This paper will focus on meeting held by the management and the board of directors after recommendations were made by International Shareholders Service Inc. (ISS). It will also analyze the challenges and make recommendations addressing these problems. Summary of the Problem The ISS recommendations made the company top management and board of directors to plan for an emergency meeting to discuss the issues arising from the recommendations on March 1, 2012. ISS had recommended that the clients of this company to vote against the re-election of 4 board members. Furthermore, they were advised to vote against Disney proposal to ratify named executive officers compensation plan. Furthermore, ISS argued that the appointment of CEO as the chairman of board demonstrated his influence on the board. The meeting was to analyze the influence of these recommendations could have influenced the voting of the shareholders at the annual general meeting. 20 years ago the company experienced great profits when Eisner came in its leadership by making earnings rise from $98 million to $2,345 million and at the same period the films grew from 158 to 900 features. There were disagreements between Eisner and Disney that led to resignation of Disney as a board of directors initiating a campaign against him. That campaign led to the negative vote of shareholders up to 43% against him. Reforms in Shareholders Involvement There are a number of American registrations that pertain to company relation with the stakeholders. Some of the most famous being the Dodd-Frank Wall Street Reform as well as Consumer Protection Act[Jen05] that was formulated on July 2010. These reforms advocate for the American companies to give the shareholders a non-binding vote on the compensation plan for the named executive managers in the top administration. This form of requirement is referred to as Say on Pay (SOP). That registration requirement as introduced in US in 2011 and as introduced first in the UK in 2003. Currently, other countries such as Australia, Netherlands, Sweden and Norway. Role of SOP Reforms This reform was initiated with the main aim of allowing shareholders to express their take on a compensation program for the company’s selected executive management officers. It was ratified in an annual shareholders’ meeting. It was argued that casting a non-binding vote on the compensation program as declared in the proxy statements. If the company would receive some negative votes, would motivate poorly managed organizations to improve their compensation program. Even though it was non-binding, if a compensation program would receive more negatives, it would lead to questioning of such a program and hence come up with better approaches. In addition, it would attract public and media attention that would allow scrutiny of its operation. Theory of Compensation Plan for Executive Officers The theoretical approach to compensation plan to top executive officials in a publicly traded company is a sensible consideration. The executive pay is always under the scrutiny of shareholders in an organization. According to Michael, Dalida and Prabhala (2010), the cost of agency tends to address conflicts of interest and incentives between management of the company to the shareholders. The argument portrays that the incentives of risk-neutral executive managers with less than 100% ownership of the company should be in consideration due to shareholder concern. For example, a manager with 3% ownership stake experiencing 100% of the cumulative benefits may end up consuming all and incurring only 3%. Such occurs shows that there is sensitivity in regard to managerbwealth and that of shareholders. A well structured compensation plan may be a key ingredient in corporate governance. Such a plan helps in designing the managerial incentives and that of the shareholders. It has the ability to align managerial incentives and that of shareholders that would serve in making financial and investment decisions. The compensation plan comprises of a bonus, stocks, options, severance packages, and performance-based termination. A number of conflicting issues arise in the compensation plan as discussed below. The main argument created here is on what extent the executive compensation plan varies with that of the shareholders. According to the research carried out by Jensen and Murphy (2010), the period between 1974-1986 executive compensation had increased by $3.25 in every $1000 increase in shareholder’s cumulative wealth. From that research, it is true that the executive compensation is too insensitive to the shareholder wealth. Though these disparities have been mended in a number of companies, there is still a challenge in aligning the two settings. These variations is because of an increase in executive stock options since the 1980s[Mur02]. Policy Response Responding to policies on the debate about excessive compensation is a sensitive area in the business field. Michael, Dalida and Prabhala (2010) argues against legislating on the compensation program pointing that it should be left to the company itself to determine its compensation for the top management. In addition, accounting rules and tax treatments should not be used to favor either side of the divide. Internal Revenue Service Code Section 162 (m), addresses these challenges by limiting the tax deductibility of the compensation to $1 million with exclusion arising only when the compensation is performance based. Chidambaran and Prabhala (2009) argues that such policies intended to curb specific parts of the compensation could result in compensation being squeezed out at additional cost to the shareholders. When the corporate governing body is weak managers tend to have greater influence on their compensation. As a result, they can extract rents protecting themselves against the consequences of poor performance. In the case of Disney, the dissatisfaction on the shareholders shareholders to executive officials who enjoy too much discretion over their own pay. The management has a higher probability to to influence the outcome of board members insinuating that the body responsible for determining compensation may lack independence. In the case of Walt Disney Company, the higher compensation benefits for the top executive is under scrutiny by the shareholders and ISS. The two bodies have a common view that the management is influencing the company and board team in extracting rents. Despite the firm value gain as a result of good management, Michael, Dalida and Prabhala (2010) holds on to the argument that better compensation governance planning should be embraced by the organization. The arguments placed by the ISS have effects on the shareholders views of the organization as well as the institution itself. Recommendations (a) Improving the Board of Governance The compensation bargaining in most industries has been on a long procedural events that is aimed at controlling the compensation package for the top executive. However, there should be a level of freedom in the corporate board and some training in financial matters to the compensation committee. As the business environment changes, there are chances of reviewed the committee on a long term basis. There are instances the business will experience high growth and setting the compensation plan for the top managers at such a time would risk the business success. The first step towards achieving an all inclusive compensation committee, board would be through creating of an independent committee board. The committee should be made up of independent members recruited by the board and not controlled by the CEO. Secondly, there should be experienced financial analyst with expertise in the various audit components. Such a committee would be liable for making valid arguments on the state of compensation plan for the top officials. The valuations carried out by the compensation committee should be all inclusive and competencies should be embraced. Furthermore, the financial transactions carried out by executives should be disclosed to the board to ensure that sensitivity is enhanced. The analysis should particularly concentrate on the sensitive transactions that influence directly the compensation of the top management and the value of the company. Such transactions should be disclosed fully to the board as well as the compensation committee. (b) Empowering Shareholders Through Say on Pay The recommendations, evaluate the need for ensuring that all activities that include top-management compensation plans, salary, equity-linked compensation, and severance packages receive the ratification by the shareholders. The ratification may be carried out through a proxy vote by the shareholders. In cases where the management has influence over the board and compensation committee, the shareholders are crucial to the company. There should be some level of influence of the shareholders to influence the compensation plan for the top management to ensure alignment of compensation package of the top management and wealth of the shareholders[Mur02]. This recommendation makes an assumption that the shareholders are able to make a valid financial analysis of the company and the compensation package for the top management. Walkling (1996) argues that a nonbinding has no serious effects on corporate performance and shareholder intended values. However, Walkling points out that their role is effective in identifying management that has issues such as bad governance. The compensation committee should have a feeling about the shareholders view of compensation. However, it is not advisable to create a binding shareholder intervention in that case. In case the governance of the company is working effective and efficient, the board may ignore the shareholders advisory say on pay vote, only when there is complete justification to do so[Jen05]. Conclusion As seen earlier in the discussions, there are a number of ways in which the compensation plan should involve. The compensation for the executive managers at Disney would monitor through by the board and compensation committee. It can be deducted that CEOs still influences the decision of the board and compensation committee. As a result, it is recommended to the board to carry out analysis of a nonbindingsay on the pay concern of Walt Disney Company. However, this does not imply that the shareholders should have a binding say on papy vote[Hol03]. Works Cited Wal14: , (Walt Disney Company), Wal14: , (Walt Disney Company 2014), Jen05: , (Jensen and Michael 2005), Mur02: , (Murphy and Kevin), Mur02: , (Murphy and Kevin 2002), Hol03: , (Holmstom, Bengt and Steven 2003), Read More