Pic Courtesy: International Herald Tribune
Hello,
This time I have chosen a topic, a bit controversial, but has been debated in the Corporate Governance circles for quite some time…
Who decides on CEO compensation? Does the board control it or the CEO controls that? What are the parameters that determine the CEO compensation? Should that be based only on growth or profitability or both or shareholder interests?
The above are some of the questions always posed in front of the Board of Directors and also in Corporate Governance. Adding to it, is the other dimension of whether the Government have a role in regulating the CEO compensation. And why is this gaining prominence and importance now? As the organizations grow, and the markets converge, the size of Corporate’s get bigger and bigger, sometimes larger than the Government of a country. This makes the CEO of that organization more powerful and if not governed or monitored properly can lead to chaos. Especially when the stock markets are flourishing and the common man is now turning towards stocks and other form of investments for their future.
Need for Regulation:
Let’s look at some of the reasons why the regulation is being looked at:
- Agency Theory believes that managers are not truly altruistic and are self interested. It also states that the Directors will act in their own interests and not on the interests of their shareholders
- To make it true, there are real world examples from the Corporates like Satyam, Lehman Brothers where the Executives have compromised on the ethics of running the business
- The practical exposure of a Corporate to the Managerial and Class Hegemony, where it states that the Executive Directors, by way of their self image bolstered by their access to information and the knowledge of on going operations along with decision making power, may dominate board decisions
Counter effects of Regulation:
Now let’s look at some of the counter arguments why the regulation is not desired:
- The Executive Managers are normally high performance high pay resources, and if there is a cap on one, it might impact the other
- If the Executive Managers role is regulated, then you may not be able to achieve the right growth for the organization, as the right managers might not be available due to the restrictions imposed
- The investors prefer growth and hence would always opt for a high performing executive
So it gets really difficult to decide where to draw the line and how to regulate this critical role needs, which is important to meet for the organization growth and at the same time important to have clean Corporate governance that would entail the social benefits a Corporate is supposed to provide.
The below is a point of view that could help address the above catch 22 situation.
First and foremost, the compensation of the CEO should not be regulated, rather be directly proportional to the growth aspired by the Investors or shareholders.
Having said that, how do you have the desired governance on the Executive Management??
The proposal is to tie the compensation to the milestones of growth, performance, shareholders wealth increase and Corporate Governance ethics. There need to be a composite metrics that would have mandatory goals and desired goals, along with an incentive to earn more if there is more than 100% compliance on the mandatory goals.
A sample Composite metrics is given below:
| Goal Type | Goal Name | Compensation percent | Bonus on exceeding 100% achievement |
| Mandatory | Growth by 15% | 30% | 5% more |
| Mandatory | EPS increased by 10% | 10% | 5% more |
| Mandatory | Internal Auditors reporting to BOD and report first shared to BOD | 10% | |
| Mandatory | Establish a Compensation Committee comprised of independent directors | 5% | |
| Mandatory | Adopt a conflict of interest policy, a code of business conduct setting out the company’s requirements and process to report and deal with non-compliance, and a Whistleblower policy | 5% | |
| Mandatory | Meeting the regulatory requirements on time | 10% | |
| Desired | Growth by 20% | 15% | |
| Desired | EPS increased by 15% | 10% | |
| Desired | No audit findings that is adverse in nature | 5% |
The above is just an attempt on how we can bridge both performance as well as governance.
Please feel free to provide your comments.
findsats 