As the World Economy becomes more uncertain shareholders and stakeholders are wanting more control when it comes to corporate governance. Executive pay is at the top of this list. Investors are revolting against the pay of top executives.
BBC online reports “chief executives in 87 of the FTSE 100 companies took home an average of £5.1m in basic pay, bonuses, share incentives and pension contributions in 2010-11. This represents a year-on-year increase of 33%, while the average increase in company value was 24%” (BBC News Online).The correlation between pay and performance have been lost.
In Britain WPP PLC an advertising company awarded the CEO Martin Sorrell a 60% pay raise in 2011 (Hodgson). This sparked an investor protest. In result “shareholders voted three out of every five shares against the company's executive compensation plan for 2011 (Hodgson).”
The British Government in the past week has revealed new legislation in regards to shareholder power of top executive pay. In the past shareholders could vote on executive pay, but their vote was non binding. The new legislation would override the current laws and make the shareholder vote binding. The Wallstreet Journal reported “Shareholders would have an annual binding vote on director pay unless a company leaves its policy unchanged, in which case the vote will take place every three years. Investors will also vote on exit payments” (Bryan).
This legislation must be approved by Parliament, but is expected to pass.(Bryan)
Resources:
BBC News Online http://www.bbc.co.uk/news/uk-16458570
U.K. Reveals New 'Say on Pay' Laws
Bryan-Low, Cassell. Wall Street Journal (Online) [New York, N.Y] 20 June 2012: n/a.
Shareholder Unrest Grows In England, Now Hits WPP
Hodgson, Jessica; Sonne, Paul. Wall Street Journal [New York, N.Y] 14 June 2012: B.1.
I found this post very interesting. I think it's this move in legislation is long over due. It has gone on long enough that executives pay themselves more than they have earned at the expense of shareholders. Shareholders have the right to take more control and their vote should bee binding.
ReplyDeleteI agree with you Gloria, This should have been implemented a long time ago. Executives should not be rewarded on shares they have in the company, they should be regulated. Top executives are leaders therefore they should be compensated for the work they are doing and the results of their work. If top executives are doing a horrible job, to them, it might not be important because they are still making all that money. Others investing in the company should have more say as to how the compensations are distributed among top executives based on performance. I believe this is a great move.
ReplyDeleteThis is why executive pay should be largely in the form of stock options. As price of the companies stock goes up, so will the executive's pay. Compensation should be mainly in the form of incentives which are directly linked to firm performance. This is also why agency costs should be prevented if all possible by having board members consist mainly of outside directors. More protective provisions are also important in the bylaws in order for shareholders to maintain control of the company.
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