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Published byShanna Gilbert Modified over 9 years ago
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Directors’ Remuneration 1
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Public Concerns O Board decides what to pay its members. O True shareholders approve, but they rarely turn down Board’s recommendation. O Distinction between greed and justifiable remuneration for services. O Relationship between effort and results. O Distinction between executive and NEDs 2
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The Salary Only Approach O Does not provide enough motivation. O Promotes status quo mentality O Restricts initiative and entrepreneurship O Promotes mobility of directors 3
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Performance Based Pay O Promotes incentive / motivation O Targets must be realistic O Measurement of achievement should be reliable and transparent O However, this loses sight of the difference between efforts and results. 4
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Balance in Remuneration O Ideally, directors’ pay must have an assured pay plus a performance related element. O How to keep a balance between “assured” and “results-based” pay elements. O Results based element is an incentive – so a higher portion should be results based, but it may promote fudging of results O Too high an assured element may lead to complacence. 5
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Balance in Remuneration O Known before the performance O Salary and benefits O Computed after the performance O Bonuses tied to results O Balance between short term and long term rewards. O Annual Component O Long Term Component 6
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Long Term Remuneration O Free shares (stock awards) O Share options O For the year O Every year on an ascending scale 7
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Determination of Bonus What should be bonus based on? O Quantity or money value O Profits or volume (e.g. market share) O Defining the base figure Measurement of the base figure O Short term impact O Long term impact of base figure change Intent in setting the above two. 8
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Case: Anite plc O Bonus of CEO and CFO was based on Earnings before depreciation and amortizations. O Company made a large number of acquisitions, so its EBITDA went up, but due to heavy amortization of acquisition goodwill, Net Income actually went down. O Yet CEO and CFO were paid heavy bonuses. 9
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How much is enough? O Only good pay will get/retain good directors. O Too high a pay is negative: O Agency issue O Public image O Too low pay is also negative: O Promotes dishonesty O Fails to retain good directors 10
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Various Base figures O Net Profit O EPS or Dividends O Total Shareholders Return O Balance Sheet size O Non-financial targets O Combination 11
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Provisions of CC of CG O Bonus basis should be relevant, stretching and designed to enhance shareholders value. O Consideration should be given to long term incentive schemes. O All schemes should be approved by shareholders O All targets should coincide with company’s objectives. 12
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Share Options O Its an option, not an obligation O Issue (Exercise) price is set when option is granted: O Generally, but not always present price O Its proposed that it should be above current price O Exercise Time: O Between two future dates O But generally no restriction on sale of option O Proposed to put such restriction 13
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How to issue shares under option O Out of fresh issues O Articles should permit it. O Out of “Bought Back” shares O Cost element O Buy from the market: O Cost element 14
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Impact of Option Exercise O If fresh issue at an exercise price: O No apparent cost to company, but there is real cost. O Dilution of shareholders voting power O Impact on EPS and share price O If out of “bought back” shares O Direct cost, reflects on Income Statement 15
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Making Options work O Reasonableness of Exercise Price O Reasonableness of size of option O Ascending scale of award O Reasonableness of Exercise period O Restriction on: O Sale of options O Sale of shares after exercising the option 16
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Problems with Options O Makes the EDs focus only on share price O Make share price movement unpredictable O Have no value when share prices go below exercise price due to no fault of directors. 17
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Some Suggestions O Exercise price should be above current price. O Options should be awarded in small tranches, in an ascending order of target achievements, and over a long period. O Restriction on disposal of acquired shares under option plan. 18
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Service Contracts O Directors can be given service contracts, defining their remuneration. O Executive Directors more commonly get service contracts. O NEDs generally do not get a service contract in Pakistan. O Service Contract may allow additional fees: O Questionable under CC of CG 19
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NED’s Remuneration O USA, Europe and FE countries pay significantly to NEDs. O In Pakistan, NEDs generally get only meeting fees. O If it were to be assumed that NEDs are a potent way of getting good governance, they must be provided a “motive” to do well. Fear of persecution is negative. 20
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Remuneration Committee O Comprises generally of INEDs. O Can get professional advice in setting suitable basis of directors’ remuneration. O Ensure directors’ conduct by: O Not allowing additional fees O Not allowing any other linkages with the company O Evaluate actual computation of bonuses O Must produce a report for shareholders 21
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Remuneration Committee O Set remuneration policy O Covering all aspects like pay, bonus, severance, perks O Maintain its independence O Set performance targets and basis of measurement O Stay aware of what is happening in the corporate world – and its remunerations O Disclosure per law / practice 22
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How much disclosure? O Remuneration policy O Names of members of remuneration committee O Details of all payments / options / benefits given to each director and how they were computed O Link between directors remuneration and company performance. 23
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Role of Shareholders O Approve Remuneration Policy. O Get a report from Remuneration Committee O Approve remuneration package of each and all directors O Vodafone Case 24
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