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8/13/2019 Directors Remunerations and Corporate Governance
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Directors Remunerations and Corporate Governance
Haroon Shafi
PhD18503
In mid 1980s increasing level of remuneration in top level executives of various UK base firms
draw attention of public. Which stimulates the media, public and legislators to come up with idea
of some sort of scrutiny level of which demonstrate the balance between pays of top level
executives and their performance in the firms (Brian and Johnston, 1993).More attentions
focuses to this issues and as a short consequences it was firmly declare that Chief Executive
Officer will not play any part in any process of determination of pays. According to institutional
shareholder committee (1991) report there should be a compensation committee which is
appointed by Board, containing mainly Non-Executive Directors and executive directors should
not be allowed to play any role in determination of own pay packages and this committee should
be in the annual reports for public awareness. Subsequently Cadbury report (1992) support
recommendations of aforesaid committee and argued that executive directors should have no part
in deciding their own pay packages and compensation plan. Brian and Johnston (1993) argued
that in 1990s if a firm has a remuneration committee then it was obligatory for a firm to disclose
this committee in annual reports otherwise it was regarded as non effective committee if firm is
not mentioning in the annual report. In 1995 Cadbury committee was formed to addresses the
concerns of shareholders and public on high pay structure of executives. According to Cadbury
report (1995) remuneration criteria of top executives should includes multiple factors while
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determining pay packages which includes market value of top executives, nature of work,
performance on given tasks, competition in market, size of firm etc.
Jensen, (1989) argued that Classical method adopt by agency theory is to give share management
in equity is most appropriate way to reduce agency problem and to protect the interests of both
shareholders and management. Further argued that performance based incentive mechanism of
top management is also preferable in most cases to protect the wealth of shareholders.
Exercise of corporate governance practices in Pakistani firms is at low level. Ramiz and Mangla,
(2009) argued that according to survey conducted by International Finance corporation and
SECP on Corporate governance practices in Pakistan and found that 50 percent of firms in
Pakistan doesnt have committee of non-executive director and 55 percent corporations does not
have any formal mechanism for determination of compensation and pay packages of executives.
According to amended code of SECP on corporate governance remuneration of executives it is
recommended that compensation packages of top level executives should be align with the
interests of shareholders. Sufficient, attractive and performance base compensation packages is
necessary to retain the executives in organization for protection and maximization of
shareholders wealth. This code also argued that there must be a remuneration committee
consisting majority of non-executive directors who are more independent in judgment and free
from any business affairs.
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References:
Brian G. M. Main & James Johnston (1993):Remuneration Committees and Corporate
Governance, Accounting and Business Research, 23:sup1, 351-362
Cadbury, Sir Adrian (1992), Committee on the Financial Aspects of Corporate Governance,
Draft Report (27 May).Greenbury, S. R. (1995).Director's Remuneration. London: GEE Publications.
Jensen, M. C. (1989) Eclipse of the Public Corporation.Harvard Business Review,
67 (September-October), 61-74.
Rehman, R. u., & Mangla, D. I. (2011). Corporate Governance and Performance of Financial
Institutions in Pakistan. working paper.