The Company Executive Remuneration - Coursework Example

Title: The Company Executive Remuneration By: Gladys Gichuri Date: 28th April 2009 In a company, the management is the body in which the power to make all decisions is vested. This makes the management a supreme body that is responsible for developing the business systems that will be used in running the company. The issue of remuneration of executives and directors becomes heats up when all the shareholders have to decide the amount to reward the company drivers. This is mainly because the shareholders will differ on the model that the company should use to remunerate the executives and the directors. In many cases, voting is done with the exclusion of the directors regardless of their stake in the company or their level of ownership. This ensures that there is a fair system in place. This however, does not happen all the time. There are those companies where the remuneration of the management is left to the discretion of the same management and therefore they have to decide how to pay themselves (Sverige & Kodgruppen 2004). A basic fact is that, when you own property, you are more likely to take care of it than when you are watching over the property of another person. There is a greater level of seriousness that comes along with ownership. This is mainly triggered by the feeling of attachment and involvement. The same case applies in a situation where a company decides that the management will earn from their efforts. This is mainly by creation of a remuneration model where the directors and the executives earn from the bonuses of their shares. This will serve as a wakeup call for hard work since the executives want to earn more and therefore they will put more effort into the running of the company. This will include strictness in management of funds and administration of company transactions. When the remuneration of the company directors and executives is not fixed, rather, it is determined by the yields of the company, they will ensure that the company keeps improving in financial performance to realize more profits and hence an increase in their bonuses. Making the executive’s and director’s remuneration subject to the financial performance of the company will also reduce chances of fraud and corruption in the company management. This is because as much as a director would like to be corrupt and either embezzle some funds alone or team up with fellow directors to fraud off the company, it will be like stealing from themselves. This is because any reduction in the company funds reflects in their remuneration sheets. It therefore looks like a seesaw where an increase in company performance reflects on the director’s pay slips and a poor financial performance in the company reduces the director’s earning (Braiotta, Hickok & Biegler 2004). The director remuneration model based on company financial performance should ensure that in case of a loss in the company, compensation to the company is done by reducing the shares that a director owns and this is done proportionally depending on the level of service of any company executive. This will show the seriousness of the remuneration model to the management and to make this policy even stricter, a reduction in the ownership of shares should be irreversible unless the director follows down the procedure of share procurement again. This information must appear in the company constitution and article of association. Such a remuneration model reduces any interests that a company executive could have that are intended to rip off the company (Roche, 2005). A good example is a case where a director wants another company that he owns to be supplying goods like stationary top the company and since he is in charge of making decisions. He could entice the other directors to endorse his company to supply the stationary. He then quotes a high price on the supplies so as to make major profits and therefore earn more money that he is supposed to. This will create a weak point in the company’s cost efficiency and therefore will reflect by the company realizing lower profits. After the lower profits all the directors will suffer since their bonuses will be lower. This is because they teamed up top allow one of them to supply expensive goods to the company. No one would like a low bonus and therefore no company executive will allow another to defraud the company by charging an expensive cost. This model of tying the company executive’s earnings to their performance makes the executives to act as a watch over each other. The business environs in the company therefore become corruption free and all relevant protocol is followed to the point in all company transactions (Parkinson, 1995). The company executive remuneration model that attaches the earnings of the directors in relation to the law of unintended consequences will prove unfair to the management. This is because the executives may implement a policy in good faith hoping that it is for the greater good of the company. Later on the policy might be disastrous and cost the company in a major way. A reduction in the earnings inform of bonuses will not be fair since they were aiming at a profit but landed a loss. Based on a pundit’s perspective, it will still be fair because they could have keenly analyzed a policy before they implement and therefore they will still be paying for what they have cost the company. A look at the same case from an ordinary share holder’s case will show that the law of unintended consequences will still be fair since the ordinary share holder also earns dividends on the profits and since their income will also be reduced, it will be a fair case for everyone (Vitols 2003). In extreme cases where the law of unintended consequences applies, I would advice that the shareholders come up with a disclaimer clause in the company constitution where the directors are exempted from loss beyond a certain point. This will ensure that the director’s right of company share ownership is not withdrawn completely since the management also feels the pinch while they earn from their hard work. An alternative would be creation of a remuneration policy where the management owns shares, gets a fixed retainer for the hard work that they do in running the company on behalf of the shareholders and earns a commission that is a percentage of the share bonuses beyond a certain target. The retainer should be minimal or just enough to cover the executive’s operating costs and also to ensure that it is not satisfactory for them so that they can work hard. This is what happens in most of the companies when they realize that the policy of tying the company executive’s earnings to bonuses could be very unfair (Armstrong & Murlis 2007). The law of unintended consequences could also be unfair in case the company is defrauded off money by an independent entity through a transaction that was aimed at benefitting the company. This will therefore punish an innocent management and therefore the remuneration model of tying the executive’s earnings to the bonuses will be very unfair. Again, from a pundit perspective, the directors should ensure that the systems they have in place to run the company arte fit enough to detect any form of fraud. They therefore deserve punishment anytime such a case arises. This will also align the interests of directors who could try a white collar theft arguing that it is unrealized fraud. It is therefore very advisable that when a company employs this model of remunerating the executives with share bonuses, the directors should ensure that they are well equipped and they know how to deal with borderline accountancy policy choices that could be too good to let go only to realize later when they have cost the company a big loss (Koller, Goedhart, Wessels, McKinsey & Copeland 2005). In respect to the positive theory of accounting discretion, the company management will watch over each other and since every transaction must be approved, there will be a streamlined system of doing business. This will easily weed out any personal interests and since all the financial records will be available to all the executives, the accounting information will always be openly accessible. The shareholders will not need to worry over their investment since the directors will be forced to be trustworthy by the remuneration system that is set in place (Conyon, Greg & Machin 1995). In conclusion, the advantages of tying the remuneration of company directors and executives to bonuses and share ownership has great advantage to the company, the shareholders and themselves. This is mainly because it is an undying trigger for hard work and since all companies aim at growing, the achievement of a past financial period will be the parameter to consider while evaluating performance in the next financial period. Consequently, the executives and the directors strive to ensure that they do better with every new financial period to increase their incomes and also to meet the expectations of the company shareholders and keep up with the competition from other firms in the same business. References: 1. Michael Armstrong, Helen Murlis 2007 A Handbook of Remuneration Strategy and Practice Kogan Page Ltd 2. Sigurt Vitols 2003, Negotiated Shareholder Value: The German Version of an Anglo-American Practice December WZB Markets and Political Economy Working Paper No. SP II 2003-25 3. Sverige, Kodgruppen, 2004, Swedish Code of Corporate Governance: A Proposal by the Code Group. Norstedts Juridik AB, 4. J. E. Parkinson, 1995, Corporate power and responsibility: issues in the theory of company law, Oxford University Press, 5. Julian Roche 2005, Corporate governance in Asia, Routledge, 6. Louis Braiotta, Richard S. Hickok, John C. Biegler, 2004 The audit committee handbook, John Wiley and Sons, 7. Tim Koller, Marc Goedhart, David Wessels, Thomas E. Copeland, McKinsey, 2005 Valuation: measuring and managing the value of companies, John Wiley and Sons, 8. Martin Conyon, Paul Gregg and Stephen Machin, Taking Care of Business: Executive Compensation in the United Kingdom The Economic Journal, Vol. 105, No. 430 (May, 1995), pp. 704-714 Read More