Thursday, May 17, 2012

Storm over executive pay

A fresh storm has erupted on both sides of the Atlantic on the subject of executive pay. There has been a shareholder revolt at Citibank, Barclays and other places. Shareholder vote on pay is non-binding but negative votes do cause boards and managements to pause in their tracks.

Linking pay to performance has proved elusive despite the best of efforts. I am convinced that neither boards nor management will settle for moderation. If  you can loot and get away with it, why not?- this really is the sentiment in boardrooms.

What is to be done? I came across two off-beat suggestions in an article by Philip Stephens of the FT:

The effort should start with two simple measures to increase transparency and to frame pay levels in the context of wider society. The first, which should be included in Mr Cable’s legislation, would require chief executives to make a personal statement at the front of the company annual report.
The statement would set out in plain English the total in pay, bonuses, incentives and benefits in kind the CEO had received for the relevant year. It would measure these against short- and medium-term company performance – earnings per share, dividends, the share price and the like. The chief executive would then bring the two together to justify his or her pay. This would be countersigned by the head of the remuneration committee. The whole thing need not run to more than a single sheet of A4. 

....The second measure would further extend accountability by giving an oversight role to MPs. Each year, the Treasury committee, or perhaps the business, innovation and skills committee, would schedule hearings with chief executives to discuss the level of boardroom remuneration.
Invitations would be sent to a cross-section of the richly rewarded but “bureaucratic” performers as well at those at the very top of the pay tree. The focus would be exploring the spread of the something-for-nothing culture more commonly associated with benefit cheats.
The second proposal is especially radical. It seeks parliamentary oversight over executive pay- and in free market Britain, of all places. I can't see the corporate world accepting it. Not in the UK, lesser still in India. But this could well be the answer.

Incidentally, you will surprised how little discussion there is of top management pay in board meetings. The matter of pay is left to a sub-committee of the board and the full board really has little say. Perhaps, the RBI must mandate that pay for the top 10 executives must be discussed and approved by the full board. 

1 comment:

Anonymous said...

Whether it is the full Board that has the say or few members thereof in Remuneration Committee that signs off the appointment letter of CEO - The conundrum is how to evaluate CEOs performance?

Financial metrics such as market share, turnover, cash profits, ROI, market capitalization, PE multiple, etc


Qualitative metrics such as governance, fraud, ethics, brand, sustainability, leadership etc.

The latter one is the challenge, but can still be defined & articulated.

The need of the hour is to develop an exhaustive Metrics that includes all the different parameters with reasonable weightages, based on which CEOs should be assessed and their variable pays should be paid. And furthermore, these criteria/metrics and its assessment at the end of year should be published in the annual reports (together with statement that you suggested in blog) for shareholders to assess. Research & management institutes can play a pivotal role in developing such an Exhaustive Metrics.

Likewise, we also need a metrics to evaluate performance of Independent Directors, as some of them too take handsome sitting fees.