Remuneration of Chief Executives during Crisis - Essay Example

?Remuneration of Chief Executives during Crisis Introduction During the recent global financial crisis many banks’ were faced with inevitableforeclosures. Such foreclosures also affected customers’ savings thus resulting in a terrible credit crunch. Financial crisis affects not only a country’s government but also its citizens. In this case, the government attempted to bail out some banks although it was not totally successful. On the other hand, customers were increasingly unable to keep up with their mortgage payments. In the U.S, for example, this was followed by acquisition of properties from defaulters. Despite a given financial situation, the banks’ chief executives have always enjoyed a constant pay through basic salaries and bonuses. Their positions have been secured by tenures and extensive pension plans. The banks have defended such payments as a way of protecting the interest of the bank by ensuring that they beat the competition for CEOs in the country. It is this unfounded huge salaries and allowances to CEOs despite financial situation, global or local, that needs to be reviewed. Such review should assist in ensuring that banks do not incur unnecessary expenditure when they should be recording increased investments and value for the shareholders. This paper will look into various ways that the remunerations of the chief executives of banks can be determined. In drawing up the analysis, various factors that add up to their pay such as pensions, office tenure, bonuses and gross salary will be looked into. Components to Be Monitored In determining the total remuneration of a CEO, various components should be given consideration. Such components are given priority owing to the fact that they motivate better performance by the CEO come the following financial year. They should also act to retain the person in office and within the bank to beat the market demand of such personnel. The components include salaries, bonuses, compensations, stock options and incentive plans. Salaries Like any other employee in a bank, the CEO is entitled to an annual or monthly based salary. Owing to the high number of companies willing to pay large sums for a given CEO, competition for such personnel has heightened considerably in many countries. Given a bank’s need for a well performing CEO, it is essential to ensure that a CEO is paid accordingly in an effort to retain them. Considering the constant nature of the salary, financial crisis should be given consideration when coming up with figures (CNN Money, 2013). For some banks like Citi bank in the United States, the CEO’s salary is determined and approved by the shareholders. This ensures that the figure protects the interests of the bank’s owners. Any increase or decrease should be given room in cases where either is deemed necessary. In an Annual General Meeting (AGM), the shareholders may approve to reduce or increase the CEO’s salary as an effort to protect the interests of the bank during crisis (New York Times, 2009). Bonuses CEOs are usually awarded bonuses based on their previous performances. In most of the banks, the bonuses are based on profits realised within a given year. Such bonuses act as motivation to the CEOs and incentive for better future performance. With bonuses, complexity arises when it is eminent that the following year will be faced with financial crisis. Bonuses are essential as they act as incentives to the CEOs although over a very short period. Such incentives are meant to ensure that the CEO performs better by increasing on the growth of the bank through increased profits and shareholder value. It is the same bonuses that have been misused by many CEO to increase their pay. CEOs may lie about the profits realised by presenting deceiving figures to the board. Such an action has seen banks award bonuses to CEOs based on misleading information. To save banks during financial crisis or within a period preceding the crisis, bank financial accounts should be properly audited to ensure that the presented data by the CEOs are materially true. The information presented should offer the current position of the bank’s financial position and shareholders rightfully awarded their dividends. Such actions will ensure that bank interest towards shareholders stays transparent and a global crisis does not leave the CEO better off when the bank, on the other hand, heads for collapse. Stock Option Stock options are essential in determining the state and the bank’s position in terms of retaining its employees and attracting qualified executives to run its various departments. In order to ensure that the CEOs are attached to the banks and to see that performance is improved within the bank, stock option award should be considered. The stock option should be secured through agreement in an effort to ensure that the CEO serves the bank with consideration of the interests in the bank (Touryalai, 2012). Incentive plans In normal bank operations and payoffs to the CEOs, the incentives may make up to nine percentile of the CEOs pay. The incentives may include retirement benefits, and such sums termed as golden hellos or golden parachutes. Unlike in the United Kingdom, many banks offer restricted stock for the CEOs. In an effort to safeguard the interest of the bank and its shareholders, incentives such as stock should be eliminated (CNN, 2008). This can be as an act to ensure the interests of the banks’ clients are safeguarded through protection of their savings. The shares can also be distributed to other shareholders within the bank. Firm interests Many CEOs have always safeguarded their own interests within the banks. Such interests have risen owing to the need to save themselves from being fired or failing on bank’s performance. Such actions have seen the CEOs focus on short-lived projects that last the bank for a very short time. This makes the bank be unprepared for crisis that may arise in future. In solving arising matters, solutions provided may solely focus on the problem at hand with little or no consideration of progressive nature of the problem. This makes the firm unprepared for major catastrophes such as the recent global financial crisis. A CEO’s remuneration should be focused on long term projects that are implementable and strategies placed in bailing out the bank in case of arising crisis. This will make the CEO and the bank management more prepared and, thus incur only a minimal loss. France (EUR) BNP Paribas Credit Agricole SocGen TR Executives** 2007 9.489.381 (4) 3.153.809 (5) 6.497.519 (3) 2008 8.672.349 (5) 3.870.074 (6) 2.714.256 (5) Bonus Executives 2007 1.463.785* 777.200* 3.900.830 2008 0* 0* 0 TR CEO** 2007 3.560.609 2.500.054 3.302.044 2008 3.387.922 1.835.911 618.681 Bonus CEO 2007 2.158.918* 607.200* 2.003.350 2008 0* 0* 0 TR CEO 2007 / TR CEO 2008** 1,05 1,36 5,34 TR Executives2007 / TR Executives2008 1,09 0,81 2,39 2007 net profit (loss) EUR8.3bn EUR 4.5bn EUR 0.9bn 2008 net profit (loss) EUR 3.4bn EUR 1.2bn EUR 2bn 2009 net profit (loss) EUR 1.07bn EUR 0.6bn 2009 Compensation ratio 27,7% *Variable remuneration paid in the following year **TR includes variable remuneration paid in respect to the previous year The above table, retrieved from Guido Ferrarini’s “Troubled Banks, Systemic Risks and the New Standards for Bankers’ Pay. A View from Europe” demonstrates how executive remunerations impact on the net profit or loss of a company with France as one of the examples that Guido Ferrarini illustrates. The implication is that there are significant constraints that executive remuneration has on the development of companies and their resilience during times of financial hardships. Conclusion In conclusion, it should be understood that from an economic perspective, creativity, and or increased effectiveness in a company is not necessarily guaranteed by the pay an executive gets. This is because it causes increased application of common procedures and familiar trends as many executives would like to maintain such pay by not involving in high risk projects which are potentially beneficial but untested. The executive remuneration process is also arguably affected by financial crises as they promote low profit margins when many productive elements are relieved of work to save money while the executive’s pay remains constant during the hard times. Nevertheless, it is important to understand that executive remuneration does have positive impacts especially with regards to motivating lower level employees to aspire for similar positions in a company hence increasing hard work. References CNN Money, 2013. How to handle employee stock options, viewed 6 February 2013 from http://money.cnn.com/magazines/moneymag/money101/lesson10/index.htm New York Times, 2008. Text of Draft Proposal for Bailout Plan, viewed 6 February 2013 from http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=0 Touryalai, H., 2012. Highest And Lowest-Paid Bank CEOs; Dimon Makes $15M More Than His Closest Rival, viewed 6 February 2013 from http://www.forbes.com/sites/halahtouryalai/2012/06/20/highest-and-lowest-paid-bank-ceos-dimon-makes-15m-more-than-his-closest-rival/ CNN, 2008. Q&A: How will the UK bailout work? , viewed 6 February 2013 from http://edition.cnn.com/2008/BUSINESS/10/08/uk.bailout.questions/index.html Read More