Findings have suggested that corporate governance is vital in determining if managers receive compensation linked to social performance
Findings have suggested that corporate governance is vital in determining if managers receive compensation linked to social performance. Compensation for Corporate Social Responsibility (CSR) in turn leads to more CSR activities (Hong, Li & Minor, 2015).
The agency problem creates conflict of interest which needs to be mitigated. Executives receive their salaries, bonuses and stock options in a different form from shareholders who receive dividends and thus executives might use their authority to pay themselves high salaries and benefits. Decisions can be made by executives to retain profits rather than pay out dividends in order to minimize financial risk. Executives tend to work towards improving financial performance of the firm when their pay is related to the profitability of the firm. Shareholders might design incentive schemes for directors in a bid to align shareholder and executive interest (Talha, Sallehhuddin & Masuod, 2009). Directors will be rewarded for maximizing shareholder interests. The interests fall away when no value is added.
A remuneration committee is usually set up at board level to recommend to the board a compensation structure for the executives. The objective of the structure would and should be to attract, retain and motivate management to manage the business in the interest of shareholders (Talha, Sallehhuddin & Masuod, 2009).
In the interest of corporate governance, disclosure of individual director salaries is now mandatory for publicly listed companies in most Asian countries. This is to enhance transparency and mitigate the risk of excessive benefits. This protects shareholders and potential investors from misappropriation by executives (Talha, Sallehhuddin & Masuod, 2009).
The National Code on Corporate Governance requires that all balance sheet and off-balance sheet compensation awarded to, earned by, paid to, or to be paid directly or indirectly to, all key members of senior management, including the chief executive officer be disclosed. A survey, conducted by the Institute of Chartered Secretaries and Administrators in Zimbabwe (ICSAZ) between August and October 2017 revealed that 31% of companies listed on the Zimbabwe Stock Exchange were yet to disclose remuneration packages as required by the National Code (Office of The President and Cabinet (OPC), 2014. The disclosure would allow shareholders and potential investors to better understand the link between executive pay and organizational performance.
In Malaysia, the Companies Act requires that shareholder approve the remuneration of directors and top management (Talha, Sallehhuddin & Masuod, 2009). In Thailand the board of directors approves top executives remuneration while directors’ remuneration is approved by shareholders. Regarding stock based incentives the remuneration committee recommends such before approval by the board. Expert advice is usually sought in determining the remuneration of top executives I particular the CEO.
There is a shift to stronger pay sensitivity and longer term contracts linked to public policy recommendations that executive pay should be tied to the performance of the firm (Boschen ; Smith, 1995). It was found that in Canada, CEO pay rises with size of the organization. The pay was also tied to company performance (Zhou, 2000). After 2003 it became a requirement of the Ontario Securities Regulation for all publicly traded firms to disclose the remuneration of top executives. It was found that CEO pay increased by 0.25% for every 1% increase in the firms’ sales. The earnings of Canadian CEO’s were seen to change by $5.62 for every $1000 change in shareholder wealth against that in the United States of America which was $5.93 for the S ; P Industrials (Zhou, 2000).On examining the determination of executive compensation in the 1000 leading companies in the United Kingdom it was found that moving from the level below the CEO to the Group CEO position was associated with an approximate 60% increase in compensation (Conyon, Peck ; Sadler, 2001).
Shareholders use stock options, restricted stocks and long term contracts to motivate the CEO to maximise shareholder value in what is called the contract approach to executive pay (Conyon, 2006). The contract reduces opportunism on the part of the CEO. In the management power view the board cooperates with the CEO and agrees on excessive contracts that are not in the interest of shareholders. (Conyon, 2006).
The CEO receives a basic pay which is benchmarked against other firms in the industry. They receive an annual bonus based on accounting measures in addition to stock options. The total compensation may include restricted stock, long term incentive plans and retirement plans.
Jack Welch of General Electric in 2000 received total compensation of $125 million broken to $4 million salary, $12.7 million bonus, $57 million in options and $48.7 million in restricted stock grants. Under his leadership General Electric’s share price soared. Regardless of his outstanding performance his severance package of $417 million caused media outrage. In addition to the severance package he was promised a pension plan of $9 million per year for life.
Bob Nardelli of Home depot came under fire as shareholders fought his compensation of $131 million in 2006. On resignation due to the scandal his severance package was $210 million. Shareholders had complained about the weak performance of stocks, slowing profits and a regulatory probe about Home Depot’s option practices. On announcing his resignation the stock gained 3% (“Home Depot CEO Robert Nardelli resigns – Jan. 3, 2007”, 2018).
Bill Maguire of Unites Health received $280 million on retirement. He had been found guilty of backdating stock options to make extra money and was fined heavily and forced to leave in 2006 (“TOP 10 LARGEST CEO SEVERANCE PACKAGES OF THE PAST DECADE”, 2018).
Hank McKinnel of Pfizer got $188 million in severance pay and $83 million after the company lost $140 billion while he was in charge (“TOP 10 LARGEST CEO SEVERANCE PACKAGES OF THE PAST DECADE”, 2018).
In 2003 Steve Jobs of Apple received a salary of $1 instead receiving $75 million in restricted stock grants. Stock options closely relate to performance while salaries do not. Average annual remuneration for CEO’s in the S&P 500 firms was $9 million in 2003. Large firms require more talented managers and therefore pay more. The probability of termination due to poor performance gives the CEO the drive to maximize shareholder value. The increase in the demand for skilled CEO’s increases pay.
External appointments to CEO positions usually receive higher compensation.
Salary increases are due to more diligent and independent boards.
Technology and Pestel have occasioned increases in compensations.
Severance packages encourage CEO’s to reveal information that might cost them their job.
Risk and uncertain environments require higher incentives.
Weak boards can lead to high CEO pay. Weaknesses caused by the no experience or serving in too many boards or instances where directors are appointed by the CEO.
In 2014, Warren Buffett refused to vote for a Coca Cola pay plan that experts said would transfer $13 billion to management over four years. He abstained saying it was unheard of to vote no in a compensation meeting. Buffett receives a salary of $100000 from Berkshire Hathaway with no stock options for him and any other executives in the company.
According to Hannes (2010) executive pay in the United Sates shifted in the 1990s to an equity based system from a cash based system. This method encourages executives to commit fraud or to window dress financial reports. The cases of Enron, Tyco and WorldCom are telling of this.
After the 2007-2009 financial crisis debate has built on giving shareholders a non-binding vote on recommendation regarding executive pay. The concept was mainly supported by corporate governance watchdogs. In America it is now a requirement once every three years to disclose executive and director’s remuneration (Mangen ; Magnan, 2012). This can reduce pay deficiencies as shareholders are involved in the pay setting process. This works to reduce CEO power over the pay setting process.
United States executive pay during the period 1993 to 2003 has grown beyond the increase that could be explained by changes in firm size (Bebchuk ; Grinstein, 2005).
The Zimbabwe Auditor-General, Mildred Chari, revealed in her 2016 audit report of state enterprises that NSSA management contracts had amounts in excess of the framework approved by the Secretary of Public Service, Labour and Social Welfare. The contract had up to $3000 extra on salaries (LANGA, 2017).
ZBC CEO, Happison Muchechetere, was getting $44500 per month with his two General Managers getting $26876 each. This was happening when ordinary employees were going for 7 months without receiving their salaries. The CEO would allegedly bribe ministers with cars in order for him to rent seek without board disapproval. Muchechetere was taking $22500 per quarter as bonuses whilst ZBC had a debt of $40 million. Revenue of ZBC was $275000 per month. Cuthbert Dube who was involved in the PSMAS scandal as Board Chair of ZBC singlehandedly approved these hefty salaries (Rusvingo, 2014).
Harare City Council had high salaries against poor service delivery. The Town Clerk, Tendai Mahachi, in 2014 was getting $37 642 with Directors getting upwards of $33000. Mahachi was suspended in July 2015 to pave way for investigations of malpractice after he had failed to provide proof before Parliament that his salary had been approved by council. On termination on three months’ notice he demanded $3 million in termination benefits he was however offered $500000 by council.
PSMAS CEO, Cuthbert Dube, was getting total compensation of $500000 per month while the organization was failing to meet its debt obligations of up to $38 million. In 2012 the wage bill was $33.4 million with almost half of it paying the top 14 executives (Ncube & Maunganidze, 2014). On termination, Dube, wanted to walk away with $3 million which he was denied by the High Court.