Remuneration structure & incentives Flashcards
What are three requirements of successful remuneration?
Corporate Governance Code
- Sufficient to attract, retain and motivate
- Avoid paying more that necessary (optimise)
- Significant fraction should compose of performance linked benefits
–> performance of the company AND individual
However: guidance is ambiguous
How can remuneration mitigate the agency theory dilemma?
- Remuneration is part of the bonding and monitoring cost
- It encourages agents to pursue shareholder interests over their own as their utility is maximised through remuneration
What is understood by efficiency wages?
Workers have different productivity and remuneration requirements r (both are unknown to the employer)
–> Supply: = 0 if W<r, >0 if W>r
- If firm needs to produce x units, they will often employ workers with lower wage requirement
- However, as remuneration and productivity are not linearly correlated, often the cost is minimised when more expensive workers are employed
What were the trends in top 50 CEO remuneration between 2018-2019? (3)
- Compensation has increased by 300%
- 50% of that remuneration was attributed to Elon Musk, by Tesla
- Even accounting for this outlier, the total remuneration has increased by 97%
How did market trends compare to the CEO compensation trends? (2)
- Market cap has increased by only 3%
- Shareholder returns have decreased by 1%
What were the ratios of a mean and median CEO to the mean and median employee at a FTSE100 company in 2018?
- Median CEO to median employee = 72:1 (117:1 when comparing CEO to a median worker)
- Mean CEO to mean employee = 114:1(128:1 when comparing CEO to a mean worker)
What 5 countries offer highest compensation for their CEOs?
- US
- Switzerland
- Netherlands
- UK
- Canada
Countries with strong financial sectors
What are the 6 components of executive pay?
- Salary
- Performance linked bonus
- Share options
- LTIPs
- Benefits such as healthcare
- Pension scheme
Why does base salary level is upwards scaling?
- Remuneration consultants advice on base salary using salaries of comparative companies
- The consultants have conflicts of interest
What are the problems with performance related bonuses?
- Often use accounting profits as a measure of performance
- These can be manipulated through creative accounting - Manipulation occurs for two reasons:
- To ensure debt covenants are met
- To meet bonus criteria (Healy, 1985)
What are the 2 changes implemented regarding share options?
- Options used to be rewarded at a discount, Greenbury Report advised otherwise
- Options used to be tax deductable - now must be reported in financial statements
What are two possible manipulations of share options by managers?
- Evidence of executives timing i.e., the share options rewards being granted shortly before favorable news/positive stock movement
- Backdating of option grants
How do LTIPS differ from share options? What is an advantage and disadvantage?
- Are granted for free as a performance remuneration
- Cannot be executed for certain amount of time to ensure long-term performance
Positive:
- shareholder wealth maximisation
Negative:
- room for abuse as agents influence construction of their bonus benchmarks
What two legislations have impacted the remuneration structure?
- Securities Act (1933): equity based remuneration must be disclosed in financial statements
- Internal Revenue Code (1993): performance based remuneration is tax exempt, fixed salary can only be claimed as expenses up to £1mil
Why is base salary important to the agents?
As agent’s utility is a function of wage (a+BV), effort and risk aversion, risk averse agent’s utility is maximised when fixed salary > performance related bonus
