Directors’ Remuneration

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Public ConcernsO 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

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The Salary Only Approach

O Does not provide enough motivation.O Promotes status quo mentalityO Restricts initiative and

entrepreneurshipO Promotes mobility of directors

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Performance Based PayO Promotes incentive / motivationO Targets must be realisticO Measurement of achievement should

be reliable and transparentO However, this loses sight of the

difference between efforts and results.

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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.

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Balance in Remuneration

O Known before the performanceO Salary and benefits

O Computed after the performanceO Bonuses tied to results

O Balance between short term and long term rewards.O Annual ComponentO Long Term Component

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Long Term Remuneration

O Free shares (stock awards)O Share options

O For the yearO Every year on an ascending scale

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Determination of Bonus What should be bonus based on?

O Quantity or money valueO Profits or volume (e.g. market share)O Defining the base figure

Measurement of the base figureO Short term impactO Long term impact of base figure

change Intent in setting the above two.

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Case: Anite plcO 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.

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How much is enough?O Only good pay will get/retain good

directors.O Too high a pay is negative:

O Agency issueO Public image

O Too low pay is also negative:O Promotes dishonestyO Fails to retain good directors

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Various Base figuresO Net Profit O EPS or DividendsO Total Shareholders ReturnO Balance Sheet sizeO Non-financial targetsO Combination

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Provisions of CC of CGO 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.

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Share OptionsO Its an option, not an obligationO Issue (Exercise) price is set when

option is granted:O Generally, but not always present priceO Its proposed that it should be above

current priceO Exercise Time:

O Between two future datesO But generally no restriction on sale of

optionO Proposed to put such restriction

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How to issue shares under option

O Out of fresh issuesO Articles should permit it.

O Out of “Bought Back” sharesO Cost element

O Buy from the market:O Cost element

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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 powerO Impact on EPS and share price

O If out of “bought back” sharesO Direct cost, reflects on Income

Statement

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Making Options workO Reasonableness of Exercise PriceO Reasonableness of size of optionO Ascending scale of awardO Reasonableness of Exercise periodO Restriction on:

O Sale of optionsO Sale of shares after exercising the

option

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Problems with OptionsO Makes the EDs focus only on share

priceO Make share price movement

unpredictableO Have no value when share prices go

below exercise price due to no fault of directors.

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Some SuggestionsO 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.

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Service ContractsO 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

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NED’s RemunerationO 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.

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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 feesO Not allowing any other linkages with the

companyO Evaluate actual computation of bonusesO Must produce a report for shareholders

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Remuneration Committee

O Set remuneration policyO Covering all aspects like pay, bonus,

severance, perksO Maintain its independenceO Set performance targets and basis of

measurementO Stay aware of what is happening in

the corporate world – and its remunerations

O Disclosure per law / practice22

How much disclosure?O Remuneration policyO Names of members of remuneration

committeeO Details of all payments / options /

benefits given to each director and how they were computed

O Link between directors remuneration and company performance.

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Role of ShareholdersO Approve Remuneration Policy.O Get a report from Remuneration

CommitteeO Approve remuneration package of

each and all directorsO Vodafone Case

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