Changes in Executive Compensation practices-Mandatory
Excecutive compensation in the ratio of 411:1 against 42:1 is obnoxious to say the least.
There can be no earthly reason for this anamoly for after all corporative growth is a team effort, though it is not to say pay scales must be equal for every one;but at least, let there be some sense of proportion.
It stands to reason to link short term and long term performances linked to compensation with the compensation offered being more for long term, say in the ratio of 70:30(long term:short term) with a time span of three years.
Also executive perks , especially travel and food should be as can be applicable for a common man,without justifying opulence and high living.
The Obama administration is moving aggressively to reform executive compensation practices and impose more stringent governance regulations. These policy and regulatory initiatives are a result of the administration’s publicly stated beliefs that the global financial crisis of 2008 was in large part a result of executive compensation programs that were too highly-leveraged and short term, thus providing incentive for operating executives to engage in excessive risk taking – the corporate version of always swinging for the fences.
Without question, all public corporations will soon implement more stringent regulations and practices governing executive compensation.
Significant change is emerging in five areas of executive compensation and its governance.
Compensation Committees will have more clout
The Treasury Department seeks to raise the level of confidence among shareholders regarding executive performance targets and fairness in plan design by “beefing up” authority of the Compensation Committee to act in the interests of long term shareholders. Changes may likely include:
- Strengthened independence requirements for Committee members.
- Increased decision-making authority and accountability.
- Committee duties and reporting requirements will be more specifically-defined by SEC regulations.
Compensation plans must pass new tests for shareholder alignment and risk
The Administration is seeking to end the era of “heads I win big, tails I lose just a little” executive compensation practices.
While performance-based rewards clearly remain “in favor”, Treasury seeks to rein in those performance-based plans which have too often rewarded short term “wins” while seemingly ignoring long term failure. Design changes will likely include:
- Highly leveraged incentive plans will fail to pass risk management tests and be constrained.
- Incentive compensation will become more complex in design and earn-out.
- Incentive plans will have hold-back features.
- Executives will be mandated to hold more equity for longer time periods
Written by ramanan50
October 21, 2009 at 14:41