This week’s stocks plunge worldwide on fear of a U.S. recession makes it clear that a review of CEO’s remuneration packages is needed. Bankers were those that got us into this mess, should their remuneration package not reflect their lousy performance?
|The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay.|
|Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index (2007-01-22 - 10%) was the second-worst (worst) single-day tumble in its history. Today New York is back and stocks are likely to plunge 7% or more.|
|Is it time to regulate remuneration packages for bankers? Yes we think so|
- 3 Banking bail-out - moral hazard or should we have thrown Northern Rock to the wolves? (we should have - the Treasury can claim it will be repaid some Euro 33.4bn of its loans from a new bond issue raised against Northern Rock’s mortgage assets; unfortunately, this latest bit of financial engineering works only if the Treasury guarantees the bonds from whose proceeds it will be repaid. The implied subsidy in that guarantee may turn out to be significantly higher than Northern Rock’s present market value - but Northern Rock does business in Northeast England, a Labour Party stronghold…. go figure)
With stock prices falling since the begginning of this year, it is just a matter of time until sharholders will turn their attention toward the remuneration packages that are being paid to the CEOs that got us into this disaster in the first place.
The question is if the information is buried somewhere in the annual report to shareholders. Mor likely is the scenario where this information is tough to find, read and figure out as one expects of a Ph.D. thesis and, the information is quite likely incomplete.
Good reporting on the remuneration and reward packages for executives requires the clear articulation of the:
- overall reward policy and
- the principles followed for each component paid as part of a package, and
- the purposes behind each element of pay (i.e. what is it supposed to achieve?)
One can probably illustrate this with building a house. Besides having a good foundation (e.g., capital base) a few more things are needed as outlined below.
first or ground floor
The foundation needs to be solid and provide you the information that gives you the confidence that remuneration policies and reward structures are fair and transparent by:
- - getting a prominent display of the main elements of pay and
- being explained concisly and clear how they are being calculated
Here we want to see an explanation about:
- - how the company’s strategic aims are reflected in rewards AND
- how underperformance will affect an executive’s rewards package for this year
Here we want to see a benchmark showing:
- - comparison with practice across a relevant peer group
If all of this sounds cumbersome, it need not be and, most importantly, the effort is worth it. The focus on exectutive rewards is not going away. Moreover, companies that get their reporting right will benefit from better relations with their investors and, thereby avoid uncomfortable moments at the Annual General Meeting of shareholders and in the press reporting these gaffs.
Check out for ideas on how the remuneration reporting can be improved by the industry experts - make the changes today that will be required tomorrow anyway by implementing:
CyTRAP Labs’ take on this issue
The overall remuneration strategiy may be fine, however, how it is reported may draw the sting from investors. Moreover, with the credit crisis that is in part due to taking too high risks and financing creditors that should not have be financed in the first place (a result of CEOs greed for higher returns and better pay?) will again put the light on remuneration packages.
How can it be that shareholders loose their shirts (see the stock prices dropping like dead flies around the globe this week) but top management is still getting bonuses that nobody feels are justified whatsoever?
We brought you information about how lucrative the severance packages are that those executives got whose banks have made the greatest losses in the most recent credit crisis here:
ZKB boss Hans Voegeli had to leave under a cloud and governance structures at ZKB still leaves something to be desired:
But we predict several more bankers will be fired by the time shareholder meetings will be over this spring. For instance, if shareholder value matters and executives are being held responsible for their actions, Marcel Ospel (USB) will have left by the end of March 2008. If not, shareholders’ interests have not been served appropriately. That simple.
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