In the Light of the Global Financial Crisis - Essay Example

?In the Light of the Global Financial Crisis, Discuss How the Remuneration of Chief Executives of Banks Should Be Determined Table of Contents Table of Contents 2 Introduction 3 Discussion 3 Recommendations 5 Conclusion 5 References 6 Introduction The global financial crisis has been major bane in the recent times which has significantly influenced the growth and sustainability of economies around the world. The financial crisis in the global context started during the year 2007 and gradually became a severe one with the incidents such as the fall of Lehman Brothers, in September 2008. It can also be observed that in most of the global nations such as Canada, Australia and Singapore, the economic downturn was also very influential. There are also macroeconomic factors for the occurrence of the crisis that include practices in accounting and lack of transparency among others. It has also been observed that major risks or weaknesses related to financial crisis lay in the fact that financial crisis occurred due to certain pre-crisis situations which arrived in relation the supervision and regulation of various activities. A few of the micro prudential regulations were poorly structured that contributed in systematic risks. Most of the banks became solvent due to the Basel capital rules (World Bank, 2012). Moreover, the global financial crisis has enabled to underline a critical agency problem which occurred due to excessive rise in the chief executives remunerations especially during the period of 2004 to 2007 in countries such as Australia and the United States (Ariff & et. al., 2012). With this consideration, the paper intends to discuss how the remuneration of chief executives of banks should be determined in order to ensue that the ill-effects of the crisis can be mitigated. Discussion The global financial crisis had brought about a greater concern regarding the usage and structure of remuneration which was based on the incentive systems. The executives of the banks were observed to be yielding their benefits on the short-term visions which became apparent upon the value and stability of the organization in the long term basis. It has been observed that banks with large and small amount of compensations had undertaken risks which resulted in significant losses during the crisis situation. It has further been observed that there were various variations relating to the structure of remunerations paid to the chief executives in banks in different countries. According to a study, in around six investment banks in the US the remuneration subscribed to the executives was nearly 2% of the total compensation on an annual basis, which was much lower from the remuneration provided to executives in the European countries which was ranging from 20 to 35%. Consequently, most of the European countries were in support and adapted the framework of corporate governance relating to the concern of remuneration aspect. The concept of surpassing payment of executives has also been paid greater attention to. . In this regard, it can be observed that the issues relating to financial crisis are specified to the corporate governance relating to the separation of position of Chairman along with the CEO, as the requirements of both the personnel are quite similar in issues relating to remuneration (The World Bank Group, 2011). With regard to the remuneration of the chief executives of banks, the remuneration committee should ensure by taking the responsibility that the organizations are selecting comprehensible policies of remuneration with respect to every employee in the organization. In response to the financial crisis which occurred in 2008, it can be observed that the payment of bonuses to the executives during and after the period of global financial crisis played a pivotal role in the remuneration aspect. The executives were paid their remunerations according to their performances in most of the banks. The rescheduling or rearrangement of incentives can be paid to the employees for showing greater sustainable performances. The committee should affirm its high remuneration structure to efficient employees who have performed relatively on a satisfactory basis and who can adapt to the critical risks situations. The compensation and remuneration of the executives can be provided with incentives and other related benefits which could be beneficial for the organization as additional allowances and remunerations would motivate employees in providing their best efforts facilitating the banks to grow effectively. The adjustable portion of the remuneration can be connected with the achievement of targets for executives for ensuring the success of the banks. With the accomplishment of the targets by various personnel in the banks, additional revenue or payments can be rewarded to the executives for monitoring and evaluating their performances as well as the performances of the other personnel in the bank towards the achievement of the objectives (Chartered Institute of Management Accounts, 2010). Recommendations The global financial crisis had been one of the important aspects causing severe economic downturn. In this context, it can be stated that remuneration of chief executives of banks has become one of the debatable issues after the occurrence of the financial crisis globally. The chief executives of the banks are the governing bodies who implement the rules and the regulations. There are also other responsibilities of them such as motivating and providing periodic reviews regarding performance of the employees in the banks. Therefore, it can be suggested that the remuneration of chief executives of banks can be determined according to the performances provided by executives in the banks. Effective communication is necessary amid employees and the management for obtaining desired objectives. The executives benefiting the banks towards the achievement of their objectives and taking additional risks regarding critical situations in scenario such as financial crisis can be rewarded with higher remunerations along with other benefits. With efficient corporate governance the remuneration of the executives can be determined with the approval of the shareholders who are a major part of the organisational culture of the banks as well. Conclusion From the above observation, it can be stated that financial crisis in the global context had been an important global incident. In this context, the global financial crisis has brought about a debatable issue relating to the remuneration of executives. It has been observed that after the financial crisis most of the European countries have adopted a policy of corporate governance regarding the issue of remuneration packages to the executives in banks. Moreover, it can be recommended that performances of executives in banks should be provided major consideration in future to ensure minimisation of such issues. References Ariff, M. & et. al., 2012. Regulatory Failure and the Global Financial Crisis: An Australian Perspective. Edward Elgar Publishing. Chartered Institute of Management Accounts, 2010. Executive Remuneration Schemes and Their Alignment with Business Sustainability. Designing Integrated Remuneration Systems. [Online] Available at: http://www.cimaglobal.com/Documents/Thought_leadership_docs/CIMA%20Executive%20remuneration%20schemes%20and%20sustainability.pdf [Accessed March 05, 2013]. The World Bank Group, 2011. Crisis Response. Remuneration and Incentive Alignment. [Online] Available at: http://rru.worldbank.org/documents/CrisisResponse/Note13.pdf [Accessed March 05, 2013]. World Bank, 2012. Global Financial Development Report 2013: Rethinking the Role of the State in Finance. World Bank Publications. Read More