The discourse on executive compensation is one feature that has dominated corporate governance to a larger extent, partly due to the recent economic turmoil and the general awareness of the inequality perpetuated by the huge differences in income amongst the population. This increased discourse has seen the emergence of vibrant movements such as the Occupy Wall Street Movement which has led to stringent analysis of executive payments in all public listed companies. In light of these latest developments, this study takes a critical look at the issues that has dogged executive pay in 2011 through 2012.
The end months of 2011 were really critical to most of the company directors in the US as they had to put up with the intense conflicting pressures that viewed executive pays from different angles. The directors therefore had a tough task of designing executive pays for 2012 which had to take into account the different opinions. All these were to be done in view of the fact that there was a widespread outrage in America that most of the company executives were paid beyond the reasonable amounts, and also that there was a newly enacted law and regulation which emphasized executive pay on the performance derivative while at the same time checking on the intended risk-taking. However, the balancing figure has been bleak day by day depending on the fact that corporate directors have an obligation to ensure that there companies are profitable and subsequently see executive compensation as one of the fundamental motivation factors to ensure profitability (Scott Hirst, 2012). Therefore, the issues that were looked as critical in determining executive pay in 2012 include the following:
Compensation and Risk Practices:
Many financial analysts are of the opinion that executive compensation should be one of the formidable tools used to guard against unnecessary or excessive risk taking for the company which might actually expose the company to serious losses like what happened in the 2008 financial crisis. In light of this latest development in the relationships between compensation and risk practices, companies are lately redefining rules that will significantly see executives more rational towards risks. The redefined rules have exclusively made it possible for the company shareholders and regulators to know those employees who are in a position to expose the company to more risks. Also, the rules make it possible for the corporate directors to apply pay programs that potentially reduces the affinity of company executives to engage in risky businesses (Scott Hirst, 2012).
Towards the end of 2011, many financial analysts were of the opinion that in order to guard against unnecessary risk flavor by the executives, then there should be a complete change of the pay packages with emphasis shifted to long term corporate goals as opposed to the short term goals adherence. This change of strategy as is said around financial quarters has the capacity of tying the wealth creation for the executives on the long term gains for the shareholders. This is particularly achievable if the executive incentives are issued using derivatives such as corporate equity which are based on achieving targets that runs for several years. Actually, most of the financial views towards the end of 2011 were that the new program should ensure that the executives are made to hold their earned equities in the company until they retire which also had the effect of increasing the retention ratio for the executives in the company besides increasing their loyalty (Scott Hirst, 2012 and Dan et.al 2012).
Effects of Dodd-Frank Act on Executive Compensation:
The Wall Street Dodd-Frank reforms together with its close associate, Consumer Protection Act were both seen in 2011 as critical determinants for executive compensation although they had not been promulgated by the end of the year 2011. However, the expectation to fully promulgate laws and provisions in 2011 that would pave way for the implementation of Clawbacks and CEO Pay disclosures was seen as a dramatic turn in determining new pay package for the executive officers (Scott Hirst, 2012 and Dan et.al 2012).
Clawbacks also called pay recovery policies came into public limelight in the year 2002 with the introduction of Sarbanes-Oxley Act. This Act has been seen as the turn around for executive compensation with its requirement that in the event financial restatements that squarely is due to misconduct of the CEO and Chief Financial Officer, then the company has the right to recover the incentives earlier awarded to the two twelve prior to the restatement. The application of clawback was expanded further with the introduction of Troubled Asset Relief Program (TARP) which required incentive bonuses recovery even if there is no misconduct by the company executives (Dan et.al 2012).
By the end of 2011, the Dodd-Frank Act had gone a notch higher and expanded the application of Clawback by essentially requiring the United States Security and Exchange Commission to increase the mandate of National Securities Exchanges and National Securities Associations to demand that every publicly listed company adopt a clawback policy. Following the adoption of clawback, it has become a requirement that accounting restatement arising from material non-compliance due to failure to follow the procedural financial rules by the company executives will automatically result into repayment from the current or former executive officer. What al these latest development imply is that there is need for the publicly listed companies to put on check the compensation packages for the top most executives of the companies (Dan et.al 2012).
Disclosure of the ratio of CEO to Median Employee Payee
This been another stringent component of the Dodd-Frank Act which has developed criticisms from different financial quarters in equal measure. The major arguments against this requirement have been that it has the potential of generating unintended consequences besides it being a costly undertaking. Despite all these arguments, the bottom line is that this requirement brings a lot of effects to the current compensation procedures for the companies’ top executives (Scott Hirst, 2012 and Dan et.al 2012).
Say-On-Pay and Pay for Performance
This is considered as one of the stringent elements of Dodd-Frank Act that has been in operation since 2011 that is definitely geared towards controlling the compensation packages usually advanced the executives. The Say-On-Pay and Pay for Performance guards against arbitrary awarding of compensation to executives by fundamentally requiring companies to provide a non-binding vote that essentially allows for approval or disapproval of the executive pay package as outlined in the presented proxy statements. The year 2011 was the fist time the say-on-pay was in operation and most of the companies succeeded with majority of them garnering over 90% of the shareholders’ approval, something that showed how different the shareholders’ perception was different from that of the general public as represented by the Occupy Wall Street Movement (Scott Hirst, 2012 and Dan et.al 2012).
Despite the overwhelming say-on-pay approval by majority of the companies by their shareholders in the year 2011, 2012 and subsequent looks different especially with increasing focus on complacencies. This has been stimulated by the increasing debate in the both the political and the public arena of the serious pay disparities between the CEOs and rank-and-file employees. Most importantly, there has been tremendous activism by various shareholder groups and further signaling has been crippling in showing that those companies that did not score over 70% of shareholder votes on the say-on-pay policy will have to redefine their compensation programs. Therefore, the only significant way to ensure that company executives continue to wallow in fat salaries is by ensuring that such compensation packages are directly sensitive to the total shareholder returns per year. If not, there are sufficient signs that to shows that the business of compensation for the company executives will have to be changed drastically (Gretchen Morgenson, 2012).
C.E.O.’s and the Pay-’Em-or-Lose-’Em Myth
Besides Dodd-Frank Act, several other articles have diffused the idea that companies have to continue paying their CEOs highly or else the company risk loosing them to other competitors. Mr. Charles M. Elson and Mr. Ferrere through their research published in the New York Times advertently make it clear that it is almost not real for a chief executive to transfer his skills to another rival company. Therefore, using the peer group benchmark that shareholders have to part with huge of expenses as salaries for their top executives is wrong and should be overlooked when computing payment package for their employees (Gretchen Morgenson, 2012).
In conclusion, what all these articles are saying is that executive compensation should not be seen as an end to itself, but as any other process within the company that work together to achieve the desired results for which they are employed. Executives should also be very flexible and allow reduced remuneration especially when the economic conditions are not good.