“In Anglo governance systems the CEO and director remuneration has risen dramatically in the last few decades. Is this beneficial for companies and investors? Discuss. Compare remuneration across 2 corporate governance systems.”
My individual task is to discuss remuneration in an Anglo governance system. The country that I have been appointed is the United Kingdom. Can you please answer the following questions with regards to CEO and director remunerations in the UK:
Make sure to integrate corporate governance theory and practice.
1. System it follows, how do CEO’s get paid?
2. Select a successful company in the UK to use as an example. Discuss how successful the company is, is there a correlation between CEO pay and company success?
3. Talk about external factors such as government, tax laws, minimal pay laws.
4. Recommendations for any improvements to the government. What is good, bad and what needs to be improved?
The CEOs remuneration in the United Kingdom is well structured and linked to the strategic objectives of an organization. In the light of Merino, Manzaneque, and Priego (2013) intensive analyses, this remuneration is vital in promoting business growth and stability. Shareholders want to see a situation where remuneration is utilized efficiently to incentivize, attract, and appropriately reward executives. The government wants to see the UK being a magnet for attracting and retaining top talents and creating a business culture that encourages sustainable growth as well as rewards long-term success.
According to the research conducted by Lim and Yen (2011), generous rewards are justified when an organization shows a strong long-term performance. However, over the last decade, the link between the CEO remuneration and performance of listed companies has been difficult to discern. Although concerns on directors and CEO remuneration are not new, the financial crisis has made the public, government, and shareholders more acutely aware and critical of excessive reward levels and perverse incentives. Shareholders and other stakeholders such as customers and employees want to see the executive pay that is justified and proportionate.
Executive management remuneration
To analyze the executive management remuneration in the UK a nominated organization, Hargreaves Lansdown will be used. Hargreaves lansdown plc entails a financial service company located in Bristol, which sells shares, funds, and other related products through the post to retail investors and its website in the UK. It is listed on the stock exchange and is a part of FTSE 100 index. Its board of directors consists of 10 members with Ian Gorham as the chief executive officer.
The board of the directors believes that a combination of performance and fixed pay based to the executive management guides in ensuring that the firms can lure and retain key employees. The executive management also offers an incentive to build the share value using a partly incentive- based pay. The executive management members are employed under executive service contracts, where the board formulates the terms of the contracts. The nomination and compensation committee proposes the remuneration of the member of the executive, which is in accordance with conditions in comparable companies. Then the proposal is approved at the board meeting.
CEO receives a competitive pay package comprising of a fixed salary, bonus, share option and personal benefits such as company car, broadband, free telephony and newspapers among many others. However, if it is proved afterward that, the variable components were paid erroneously; the organization might in exceptional cases reclaim part or in full variable components.
Growth in pay
Over the years, the CEOs pay has increased. For instance, the median remuneration of FTSE 100 CEOs has increased from an average of £1million to £4.2 million for a period of 1998-2011. By comparison, the remuneration in FTSE250 listed companies has increased at a slower rate. This has generated interest in the investigation of the common factors influencing the CEOs’ pay growth rate.
The company size explains the majority of the company’s executive remuneration. As the company expands becoming more complex, the role of the CEO is likely to change thus affecting the remuneration. A good example is Hargreaves Lansdown, which was launched in 1981 and by that time the CEO had limited responsibility implying a smaller pay comparing to now when the organization is one of the largest financial institution in the country. The structure of remuneration also determines the CEO pay. Inferring from Bender (2011), as most of the companies tries to address the principal-agent problem they tend to move towards large remuneration proportion. Although a number of organizations have inclined towards linking the pay to the performance, the growth rate has significantly outstripped the return received by investors (Shlomo & Nguyen, 2011). It seems that the move towards more complex pay structures has driven the increment in the overall pay since the executives expect higher remuneration for higher risk.
Transparency has also played a part in increasing the CEOs pay. Gill (2014) by summarizing the work of many others claimed that in response to the increasing complexity of remuneration, in 2002 additional reporting requirements were established to encourage firms to become more transparent on executive pay (Ndzi, 2015). This seems to have resulted in a ratcheting effect on executive pay as companies’ benchmark against each other and feel obliged to reward a pay, which will lure and retain executives. As explained by Hahn and Lasfer (2011), the increase in transparency of remuneration has also lead to the establishment of remuneration committees charged with the responsibility of justifying proposal and encouraging the stakeholders to play a more activist role.
Ahmad, Nawawi, and Salin (2016) claimed that high-level remuneration has been the effect of the global market for CEOs and they require paying a rate, which is above average to lure top talent and prevent the UK executives from going to other countries. For example, consider the case of Ian Gorham, the Hargreaves Lansdown CEO who currently is the eighth-best-paid CEO in the UK. He joined the company in 2009 as the chief operating officer before becoming the CEO in the following year. He is a top talent, a fact that is proved by his education background and his previous accomplishment not only in Hargreaves Lansdowne but also in Deloitte and Grant Thorntons. To hire his services, Hargreaves Lansdown had to pay handsomely. Although the CEO’s international mobility can be constrained, there does not exist an active market to do this at director level within the United Kingdom.
Correlation between CEO remuneration and company performance
In most of the organizations, there is a correlation between the CEO remuneration and company performance. Increase in takeover has offered powerful incentives for the firms to introduce remuneration scheme that is tied to the stock prices (Ogden and Watson,2007). Before, executive remuneration has been a matter of bonuses and salaries that were paid after attaining a certain financial target. It is widely believed that in good performing companies such as Hargreaves Lansdown plc the stock price is related to its ability to accomplish financial goals.
Most of the people are convinced that in highlighting the shareholder’s value, one of the surest approaches to align the interest of the executive with those of the shareholders is to establish stock option as a large proportion of the executive remuneration (Stathopoulos, Espenlaub & Walker, 2004). In the case of Hargreaves Lansdowne plc, such scheme as seen the company share price doubling. Although the market has been raising, stock options rewarding subpar and superior performance, the effect of linking the pay with performance has highly contributed to share price growth.
How remuneration is currently regulated
The United Kingdom has legislative requirements on the reporting process to the shareholders on the remuneration of the directors for more than fifty years. Recently, it has been established that it is a requirement for listed company to prepare a separate report on directors’ remuneration. All the registered firms are expected to adhere to basic remuneration reporting requirements, with quoted companies subject to enhanced requirements. Moreover, the listing rules offer the requirements for listed company, which involves complying with remuneration principles in the financial reporting council UK corporate governance code. Companies registered as financial institutions should also comply with the financial services authority remuneration code. Shareholders have also been offered the right to vote on the remuneration, although can be applied only on an advisory basis.
Although there is no existence of any specific requirement within the company law on the manner in which pay should be designed, shareholder group together with advisory and investment community have formulated their own detailed guidelines on the manner in which remuneration should be structured and explained to shareholders. This spells the criteria in which proxy voting advisors and investors apply in judging remuneration proposals, and it has proved to be influential and effective in shaping the pay structure over the previous years.
Companies need to improve transparency. It is essential for firms to provide accessible and clear information to the stakeholders and the public to scrutinize and challenge where appropriate. Company law already provides all quoted companies to prepare a report on directors to pay, and regulations define what should be disclosed. Although, this has increased transparency on remuneration, over time the pay reports are becoming increasingly complex and lengthy. However, there is still a scope for more useful and direct reporting. The company reporting should be made clearer, and consequently, it will become easier to compare.
There is also the need to improve the disclosure on linking the pay and the performance. The strength of the link between the pay, strategy, and performance is a significant factor when assessing the remuneration proposals. In some instances, the reported complexity implies that the symmetry between the pay, return to the shareholders and long-term objectives of the firm are lost.
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