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CorpG Remmuneration
Corporate Governance
| Section | Key Point | Points |
|---|---|---|
| S1 P1 | Introduction | It sits at the intersection of agency thoery, empirical evidence on pay-for-perfromance and contested normative debates about fairness and the socail license of large corporations |
| S1 P2 | Purpose (Agency Theory) - Jensen & Meckling 1976 | Align CEO invecentives with shareholder interests, reducing agency costs which arise from the seperation of ownership and control |
| S1 P3 | Remmuneration Comitee | They determine the pay (independent NEDs) under the UK CGC 2024 - Greenbruy Report to ensure that they hjave no part in determining their own pay - shareholders annual remuneration report - 3yrs |
| S2 P1 | Structure of Pay | 1) Fixed - Base Salary 2) Variable - Anual Bonus 3) Variable LTIP - REM Commitee and Pension 4) Variable - Benefits |
| S2 P2 | Base Salary | -provides a fixed annual payment determined by the RC with refrence to role, responsiblity, and external market benchmarking from independet R consultatnts |
| S2 P3 | Annual Bonus | - Performance linked bonus ( SR) incentive (1y) typically capped at 100-200% of salary - Can be tied to PBT, Growth or Costs - Under CGC 2024 a proportion is differed into shares for 2-3 years which can be subjectected to malus and drawback provisions |
| S2 P4 | Long-Term Incentive Plan (LTIP) | Share or Share options with conditions over the 3-5yrs EG M&S uses TSR relative to peers in the FTSE100 as the growth of EPS , median as comparator and max is upper Q OBJ align CEO incentives with S LR value creation Doubts Melrose CEO 4600% 58m |
| S2 P5 | Pension and Benefits | Must align with wider workforce contributions (5-10%) of salary from (25-30%) for FTSE 100 companies Benefits such as transport allowance, private health, reallocation exp, and other small factors which take up a small proportion |
| S3 P1 | Different Views Edmons et al.(2017) | 1) shareholder view 2) rent extraction view |
| S3 P2 | Shareholder View | -However high, justtified attracts and retains executives who generate high shareholder value - based on market forces talent -Cabiax and Landier - model showing the rise in pay relative to the scale of oporations (small factor makes big difference) |
| S3 P3 | Rent Extraction (Bebchuk and Fried, 2004) | -CEOs exploit their pwoer in Rpay from independt R commites to pay above markets beyond just - slection influence over members (bias due to big company) > inflate benchmarks and complexities hidden to shareholders |
| S3 P4 | Arguement of Theory | - neither view is sufficient to explain pay levels and other factors such as benchmarking conventions, proxy advisors rec, and regulatory constraints also independently shape pays (not consistent) |
| S4 P1 | Three Goals of Pay and Non Standard Constraints (Edmans et al., 2023) - missing from simple agency theories | driven by 3 goals 1) Alignment of incentives with shareholders 2) Retention of CEO against external comp 3) attraction from the external talens market |
| S4 P2 | Fairness of pay model | boards should theoritically pay below what is required exceeding it would be regarded as socailly unacceptable even when busineses make compelling arguements |
| S4 P3 | Pay Stickness | Pay is difficult to reduce in poor perfromance as it impacts reputation and morale concerns -essentially difficult to punnish |
| S5 P1 | Boards vs Investors | -There is persistent disagreement between boards and investors |
| S5 P2 | Edmans et al (2023) | 1) Board emphasising international talent competition and retention while investors consistenty emphasise the absence of demonstrative pay peformance relationship |
| S5 P3 | Jensen and Murphy (1990) | CEOs wealth increases only 3.25 for every 1000 incrase in shareholder value - posive but small proportion performance related pay acts as a poor incentive in practice as agency theory predicts |
| S6 P1 | UK FACTS | -High Pay Centre Data (2025) median CEO pay at 3.5m (FTSE 100) besides Melrose - growing faster than US due to pay structure change -FT times, change in tone of inst investors who are backing the right manamgent overall rather than scrutiny in pay |
| S7 P1 | Suggestions | 1) Extending vesting and holding periods to 5-7 years to align incentives and conditions to be met 2) Mandating symmetric malus and drawback provisions to be applied if targets are missed 3) Process Improvement - commity indepedence (Rachaeteering) |
Created by:
csrix