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Paying Senior Executives

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Principles of remuneration are now includedin the corporate governancecode of many countries. In a system ofgood corporate governance, the remunerationof directors and key senior executives shouldbe suffi cient to attract and retain individualsof a suitable calibre. At the same time, thestructure of an individual’s remunerationpackage should motivate the individual towardsthe achievement of performance thatis in the best interest of the organisation andits shareholders as well as those of the individual.The UK Corporate Governance Codestates as a principle that, ‘Levels of remunerationshould be suffi cient to attract, retainand motivate directors of the quality requiredto run the organisation successfully, but acompany should avoid paying more than isnecessary for this purpose.

 

A signifi cant proportionof executive directors’ remunerationshould be structured so as to link rewards tocorporate and individual performance.’It is widely accepted that senior executivesshould be able to earn a high level of remunerationin return for the work they do andthe responsibilities they carry. If a companydoes not offer an attractive package, it willnot attract individuals of the required calibre.It is also generally accepted that the level ofremuneration should be linked in some wayto satisfactory performance. If an executiveperforms well, he should receive more rewardsthan if he performs only reasonablywell. The central issue for corporate governanceis concerned with the link between payand performance.The remuneration package should includea performance related element.

 

If the directorsuccessfully achieves predetermined levelsof performance, he should be rewardedaccordingly. The purpose of performancerelated remuneration is to give a director anincentive to achieve the performance targets.This is why potential performance relatedpay should be substantial. It is clearly in theinterest of good corporate governance that directorsshould be motivated to perform, butit is equally important that the performancetargets set for each individual director are;(i) suffi ciently challenging and (ii) related toobjectives that are in the interests of the companyand its share holders. Targets shouldtherefore be challenging and large rewardsshould not be paid for average performance.

 

The best remuneration packages align theinterests of the individual directors with thoseof the company and its shareholders. However,some shareholders may focus on shorttermperformance with the intention of sellingtheir shares if the share price rises. Othershareholders may intend to invest for thelonger term, but could be persuaded to sellby a large rise in the share price. The interestsof shareholders are therefore both shortterm and longer term. A supporting corporategovernance principle on senior executive paystates that the performance-related elementsof a remuneration package for a senior executiveshould be ‘stretching ’ and should also bedesigned in a way that aligns the interests ofthe executive with the interests of shareholdersand promotes the long-term success of thecompany.

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