Executive Remuneration

Explain why Executive remuneration is a topical corporate governance issue and what the issues are. (20 marks)

Good corporate governance directly depends on a strong board of directors that assumes its oversight role of the company by ultimately driving the culture and setting the standards for behavior throughout the organization. Compensation systems, in particular for senior company executives, are therefore a critical issue that board of directors should seriously look at and ensure that executive remuneration is tied to company performance (PWC, 2009). Good corporate governance can help prevent excessive pay for top management and encourage the use of performance-related pay schemes(Cheng et al,2014).The rise in executive pay over time has been the subject of much public criticism, and this was further intensified following the corporate governance scandals that began erupting in late 2001 with the collapse of America’s big corporates such as Enron. (Bebchuk & Fried, 2006).

As companies became increasingly larger and more complex, ownership was separated from control, with company directors replacing the owners or shareholders in directing and controlling its day-to-day affairs. Shareholders choose the board of directors which in turn appoint a team of senior managers to work in the best interests of shareholders by maximizing the value of the company (Naidoo, 2009).This separation of ownership from control has led to agency costs and is a key challenge in corporate governance. The problem occurs when executives focus their attention on attaining their own self-interests rather than working on increasing the value of the firm, the ultimate goal of the shareholder. The problem is exercabated when the board of directors is weak and lacks independence. Although boards of directors are established by the shareholders, CEOs play an important role in re-nominating directors back to the board, as well as determining directors’ perks and salaries (Bebchuk &...