Directors’
Remuneration
1
Public Concerns
O Board decides what to pay its members.
O True shareholders approve, but they rarely
turn down Board’s recommendation.
O Distinction between greed and justifiable
remuneration for services.
O Relationship between effort and results.
O Distinction between executive and NEDs
2
The Salary Only Approach
O Does not provide enough motivation.
O Promotes status quo mentality
O Restricts initiative and entrepreneurship
O Promotes mobility of directors
3
Performance Based Pay
O Promotes incentive / motivation
O Targets must be realistic
O Measurement of achievement should be
reliable and transparent
O However, this loses sight of the difference
between efforts and results.
4
Balance in Remuneration
O Ideally, directors’ pay must have an assured
pay plus a performance related element.
O How to keep a balance between “assured”
and “results-based” pay elements.
O Results based element is an incentive – so a
higher portion should be results based, but it
may promote fudging of results
O Too high an assured element may lead to
complacence.
5
Balance in Remuneration
O Known before the performance
O Salary and benefits
O Computed after the performance
O Bonuses tied to results
O Balance between short term and long term
rewards.
O Annual Component
O Long Term Component
6
Long Term Remuneration
O Free shares (stock awards)
O Share options
O For the year
O Every year on an ascending scale
7
Determination of Bonus
 What should be bonus based on?
O Quantity or money value
O Profits or volume (e.g. market share)
O Defining the base figure
 Measurement of the base figure
O Short term impact
O Long term impact of base figure change
 Intent in setting the above two.
8
Case: Anite plc
O Bonus of CEO and CFO was based on
Earnings before depreciation and
amortizations.
O Company made a large number of
acquisitions, so its EBITDA went up, but due
to heavy amortization of acquisition
goodwill, Net Income actually went down.
O Yet CEO and CFO were paid heavy bonuses.
9
How much is enough?
O Only good pay will get/retain good directors.
O Too high a pay is negative:
O Agency issue
O Public image
O Too low pay is also negative:
O Promotes dishonesty
O Fails to retain good directors
10
Various Base figures
O Net Profit
O EPS or Dividends
O Total Shareholders Return
O Balance Sheet size
O Non-financial targets
O Combination
11
Provisions of CC of CG
O Bonus basis should be relevant, stretching
and designed to enhance shareholders
value.
O Consideration should be given to long term
incentive schemes.
O All schemes should be approved by
shareholders
O All targets should coincide with company’s
objectives.
12
Share Options
O Its an option, not an obligation
O Issue (Exercise) price is set when option is
granted:
O Generally, but not always present price
O Its proposed that it should be above current
price
O Exercise Time:
O Between two future dates
O But generally no restriction on sale of option
O Proposed to put such restriction
13
How to issue shares under
option
O Out of fresh issues
O Articles should permit it.
O Out of “Bought Back” shares
O Cost element
O Buy from the market:
O Cost element
14
Impact of Option Exercise
O If fresh issue at an exercise price:
O No apparent cost to company, but there is
real cost.
O Dilution of shareholders voting power
O Impact on EPS and share price
O If out of “bought back” shares
O Direct cost, reflects on Income Statement
15
Making Options work
O Reasonableness of Exercise Price
O Reasonableness of size of option
O Ascending scale of award
O Reasonableness of Exercise period
O Restriction on:
O Sale of options
O Sale of shares after exercising the option
16
Problems with Options
O Makes the EDs focus only on share price
O Make share price movement unpredictable
O Have no value when share prices go below
exercise price due to no fault of directors.
17
Some Suggestions
O Exercise price should be above current price.
O Options should be awarded in small
tranches, in an ascending order of target
achievements, and over a long period.
O Restriction on disposal of acquired shares
under option plan.
18
Service Contracts
O Directors can be given service contracts,
defining their remuneration.
O Executive Directors more commonly get
service contracts.
O NEDs generally do not get a service contract
in Pakistan.
O Service Contract may allow additional fees:
O Questionable under CC of CG
19
NED’s Remuneration
O USA, Europe and FE countries pay
significantly to NEDs.
O In Pakistan, NEDs generally get only meeting
fees.
O If it were to be assumed that NEDs are a
potent way of getting good governance, they
must be provided a “motive” to do well. Fear
of persecution is negative.
20
Remuneration Committee
O Comprises generally of INEDs.
O Can get professional advice in setting
suitable basis of directors’ remuneration.
O Ensure directors’ conduct by:
O Not allowing additional fees
O Not allowing any other linkages with the
company
O Evaluate actual computation of bonuses
O Must produce a report for shareholders
21
Remuneration Committee
O Set remuneration policy
O Covering all aspects like pay, bonus,
severance, perks
O Maintain its independence
O Set performance targets and basis of
measurement
O Stay aware of what is happening in the
corporate world – and its remunerations
O Disclosure per law / practice
22
How much disclosure?
O Remuneration policy
O Names of members of remuneration
committee
O Details of all payments / options / benefits
given to each director and how they were
computed
O Link between directors remuneration and
company performance.
23
Role of Shareholders
O Approve Remuneration Policy.
O Get a report from Remuneration Committee
O Approve remuneration package of each and
all directors
O Vodafone Case
24