Executive Remuneration - Essay Example

Running head: Executive Remuneration Executive Remuneration Number: Due: Introduction Most often due to the public opinion, shareholder, the media paying more attention to the executive policy remuneration, there need to be right legal procedures and commercial practices that are to be involved in setting the remuneration of the executives in public limited companies. There have been a lot of issues relating to the executive’s remuneration and there have been much focus on: The criterion that is used to compensate directors, and how the share options play a role in the remuneration, what the remuneration committee are involved in regard to setting the compensation for executives, how suitable the measures that link the director’s performance to the remuneration and the extent to which the shareholders exercise their powers in relation to directors compensation (Robert 2012). These debates on the director’s compensation has been seen in most countries more notably the Royal Bank case involving Stephen Hester and this has led to most companies developing their own measures and procedures to be followed in the remuneration of executives to avoid much pressure from the government and the public interest. The perception that Hester received much remuneration package while the shareholders were rewarded lowly in terms of their performance contribution to the company has raised much debate. According to Lee (2002), the level of executive’s compensation has continued to raise much heat to the public. Therefore the much interest from the public, state regulators, and the media have seen most companies taking more time and paying a lot of attention to investigate, documenting and announcing executive remuneration. In order to cool down the much heated debate, public limited companies should implement the following practices and legal procedures. Coming Up With A Compensation Committee Once a company has a specialized committee that knows her functions is a better way to ensure that the committee has time and devotion to attend matters related to the executive compensation. The compensation committee usually operates within certain regulated legal authority, and resolution that is written by the full board of directors. The legal restrictions are put in place to avoid much conflict between the board and the executive staff over the amount of compensation (Gordon 2006). The management of the company is not however allowed to control how the compensation exercise is carried out and therefore the Compensation Charter Committee gives the Committee powers to work with members outside the management or in their absence. Employ Procedures on Compensation of a Disqualified Person An organization that is tax-exempted must be able to prove to the required authority reasons for selecting to compensate a disqualified person. This removes any doubt from the public about the selection of such a person. Documenting the compensation decisions by organizations should serve as a way of open exercise and this would serve as a free and fair exercise (Greenbury 1995). He continues to assert that proper documentation of the decision process calls for the compensation committee to state the terms under which they reached in giving the director a given amount of remuneration, the date the remuneration was approved, the members of the governing body that were present during the exercise and the members who voted to approve the compensation of the executives or those who voted against to reject the compensation of a given executive not being compensated. The documentation of the decision to compensate an executive should also note the data that were used by the selection committee, the source of the comparable data and the actions that were taken by any member of the selection committee who might have been against the decision of the selection panel. The selection committee must to write down the criterion that it used to determine whether a given compensation for an executive was higher or lower than what was expected from the comparable data that was used. Adopting a Conflict of Interest Policy All companies should have a conflict of interest policy that they should adopt as a requirement for public charities. This is a mandatory requirement and companies that do not have must provide an explanation for the same. This implies that if a member of the selection committee has a conflict of interest, then the selection committee must take the necessary steps to address the issue at their meeting. The actions would include having the member not attending any further decision making meeting relating the matter that is seen to have been the cause of the conflict. In addition, such a member is not expected to vote on any issue related to the matter. According to the Combined Code of Corporate Governance (1998), it asserts that the company is expected not to get involved in any business with a company that has a conflict. Adopt a Compensation Policy This must be created in order to have consistency in determining any future compensation for the company. This policy on compensation determines the measures the company uses in order to compensate the executives. Some of the performance selection criteria include: Shareholder return, share price, profit-based measures, return on capital employed and the earnings per share. According to Sykes (2002), there are a number of problems associated with the way in which executives are compensated. Using the Right Comparability Data The compensation exercise must be fair and free in that the executive being compensated must have contributed significantly to given duties and responsibilities. The measure of this should not be biased. Moreover, the compensation must be reasonable amount as compared to the data implying that the remuneration should not be too low or too high. This is only possible through the use of comparative data to determine the compensation package to avoid any further issues related to compensation. The appropriate data include the amount of compensation that is paid by similar organizations, in similar positions. Moreover, the positions compared must have similar services, like enterprises, and similar circumstances. Assessing the Remuneration in Comparison to Other Organizations According to the Charity Lawyer (2012), it is not of any importance to compare the salary of other executives in different organizations and other factors in a different manner. One may argue that total remuneration would be reasonable than comparison with other factors. It is therefore the responsibility of the selection committee to ensure that the right measures are taken in doing the right compensation as it does not make any difference since eyebrows might be raised even though the compensation is reasonable and this would not protect the organization from taxation. All the analysis involving finance must be included in the report by the selection committee and reported as compensation. Approval of the Remuneration In the Daily Dose of Nonprofit Law (2012), asserts that the compensation of the executive must be approved by the board involving the directors and selected shareholder members. Different boards have in various organizations varied members that approve the executive compensation package. The directors after approval of the compensation paid to the executives need to base their decisions on the certified opinion of an independent body so that there are no conflicts that come into place when the report is released. Shareholder Powers to Challenge Excessive Director Compensation Executives have become the most paid professions in the world. Most countries have decided to turn to shareholders in order to avoid the excessive compensation of executives. For example, in 2002, the UK informed all firms to give a remuneration executive report that would be voted by shareholders at their annual general meeting. Therefore, the use of mandatory shareholder votes has been viewed as the most appropriate way to control the executive compensation. The shareholder voting exercise in the annual general meeting is a good form of governance that shows the shareholders have the incentives to support proposals that might serve in their benefit (Bebchuk & Fried 2004). However, critics argue that the use of shareholder voting does not serve in the interest of the firms as they might not be aware of the information and knowledge that are needed in increasing business decisions (Bainbridge, 2005). This further implies that they would not cast their votes in a strategic manner to enable organizations reward for the performance of their executives that would see the firms realizing their goal. The research in the U.S shows that the voting regulations have been a success in the control of executive pay. The research provided a clear understanding of the different companies that were selected and their proposals on the issue of executive pay. The regulations of shareholder votes served to control the pay of executives (Lee 2002). Therefore having elections and the shareholders having a greater say of whom should be elected on board has been the regulation in place to control executive pay. The regulations that have been put in place allows one shareholder to be nominated at least in every seat to ensure that the right procedures are followed in the compensation for executives and there is no collusion during the compensation process. The shareholders are allowed too to have their own representatives on the boards. This ensures that in case of any decisions any the compensation selection committee it is duly documented and that it is free and fair to use of comparative data. The shareholders have been given the powers to compensate the executives through the use of stock and stock options. This implies that the company does not lose much as most of the company’s investment is in the banks. This allows for more investment than if the executives are compensated through monetary fees. The shareholders are also responsible for assessing the graph of the company against the comparison group and have it signed on the remuneration report. This ensures that fairness is followed during the compensation process and that the director is awarded using the right performance measure (Sykes 2002). Reluctance of the Investors on Executive Pay The reluctance of the the investors have mainly been due to the fact that there are favorable measures that can be used to stop high executive pay unlike the regulations of the shareholder mandatory vote that is put in place. Changing the corporate culture would be a nice measure that is aimed at addressing the issue. Therefore most organizations should be accountable for their executive compensation decisions than using the shareholder powers to keep the firms on toes (Robert 2012). The shareholders especially the government believes that being more transparent and credible, giving the companies more independents are important in building trust between them and the companies. By companies coming up with measures that solves the conflicts and knowing that good performance by executives should always be rewarded is vital. Some of the measures include: Implementing and having measures in place that addresses the issue of weakness in the corporate governance reduces the risk of conflicts in the company. However, critics believe that the investors are part of the problem and therefore the government through political influence are able to affect the company. They are more often keeping mum on the issue of executive pay because they are too benefitting from them in and indirect manner. This implies that most government officials are big money investors in these organizations and thus they are not concerned at how much the bosses earn. Most of them such as those investing in pension funds are looking at overseas players and other fund operators such as the hedging process of their funds (Gordon 2006). Moreover, it is clear that most companies are independent and their decisions are final. The government would have no say though to enforce the rules that would see a pay cut on the executive’s salary. They therefore apt to be mum on the issue. Addressing the issue would mean all the shareholders having a collective meeting that would be aimed at changing the company culture something that is hard to do. This is because companies are for a collective benefit of people that individuals. Moreover, the shareholders are part of the executives and thus trying to enforce the change would not be possible. The Scottish government however was reluctant to have Stephen Hester turn down the offer that was offered to him. The government had stated that the right procedures were followed in ensuring that the director was awarded the bonus in the right manner. The government spokesman made it clear that Hester was awarded the compensation as a reward on the developments he had made to the Royal Company a year before. The procedure and legal practices are clear on the matter that the remuneration should be fair and appropriate. The results that were achieved by Hester were recommendable. In order to measure the performance of a director prior to compensation the selection committee should be able to assess the market based measures the director has contributed to the company. Moreover, the profit the director has made to the investment and the individual contribution measures. References Bainbridge, S, 2002, ‘Why a Board? Group Decision Making in Corporate Governance,’ Vanderbilt Law Review, 55 (1), pp. 1 – 54. Bebchuk, L, and Fried, J, 2004, ‘Pay Without Performance: The Unfulfillead Promise of Executive Compensation,’ Harvard University Press: Boston, MA. Charity Lawyer, 2012, ‘Setting Compensation ofNonProfit Executives,’ retrieved 21 March 2012 . Daily Dose of Nonprofit Law, 2012, ‘Dealing With an Out of Control Executive Committe,’ retrieved 21 March 2012 . Gordon, J, 2006, ‘Executive compensation: if there’s a problem, what’s the remedy? The Case for ‘Compensation and Discussion Analysis,’ Journal of Corporation Law (Summer), pp. 102-130. Greenbury, Sir R, 1995, ‘Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury,’ Londo: Gee Publishing Ltd. Lee, P, 2002, ‘Not Badly Paid But Paid Badly,’ Corporate Governance, An International Review, Vol. 10, No. 2. Robert, P, 2012, ‘News Business: RBS Chief Stephen Hester’s $963,000 Bonus Criticized,’ retrieved March 21, 2012 . Sykes, A, 2002, ‘Overcoming Poor Value Executive Remuneration: Resolving the Manifest Conflicts of Interest,’ Corporate Governance: An International Review, Vol. 10, No.4. The Combined Code on Corporate Governance, 1998, ‘Corporate Governance,’ retrieved 21 March 2012 . Read More