The director remunerations may vary from different companies, but usually, it's always a mixture of salaries, bonuses, call options, shares benefits, and prerequisites. It is determined by corporate size, corporate performance, board compensation, ownership structure and human capital features (Mnzava, 2012 p 43). These remunerations are usually configured in such a way that it takes into account the normal government regulations, tax laws and the executives desires in the organization and lastly the reward for performance (Geller and Renneboog, 2016 p 48). The origin of the director’s remunerations can be traced back to the 1980s that experienced a general overwhelming rise in the salaries of the directors relative to average workers wage in the United States of America. These trends were replicated in some countries on a small scale. There are pieces of literature that have asserted that these raise was occasioned by the competition for the lesser brilliant talents that were available during the period of the 1980s that could add value to the stakeholders' values in the multinational companies (Sheridan, 2017). However, another dissenting view has asserted that these raise were occasioned by the emergence of a socially dangerous phenomenon that were brought about by the social and political changes that had left so much power in the hands of the executives which included the powers to control their remunerations. Other studies have however found the middle ground and asserted that indeed the executives should be aligned with social objectives. Therefore in most cases, the executive goals is an important part of the corporate governance and should always be determined in most cases by the company’s board of directors. The company law requires that directors should be effectively compensated for the services they offer to an organization The following essay is critically going to examine merit and drawback of using directors' remuneration packages and how to solve the deficiencies with corporate governance strategies.
Merits of directors’ remuneration package
The first reason why many scholars have supported hefty director's remunerations package is to attract and retain the best talent and hold on to existing top performers in an organization. Thus, it will require a company to have an attractive director compensation package to attract and retain the best directors. It is argued that corporations that don't pay well usually lose their top available skills to the best companies that offer the best remunerations. Therefore for any company to attract new talent and hold on to the existing talent the company must have the best remunerations package within the staff remuneration and the hiring plan. A case study of the United States shows that the companies in this state have competitive remuneration package for the directors and this has enabled the companies in the US attract and retain talents and high performers in their organizations. This goes a long way of shareholders where they want to attract talents who can help in maximizing shareholder value (Budd, Naastepad, and van).
Another reason why the director remunerations are very important is the fact that skilled top-quality labor are scarce and therefore in high demand. Therefore many companies are competing with each other to make sure that they get the most senior qualified talent that they can get (Aslam, 2019). Thus they have to tailor the compensation package in a way that attracts these few personnel to their organization. Strong remuneration adds to the employers branding, it makes the business to appear more attractive, and it is this that enables organizations to get hold of those brilliant brains at the expense of their competitors. Therefore it important to know that directors will always love to go to areas where the remuneration package is one of the best. This was illustrated through a Review of Banks in 2009 in the western countries a case of the United Kingdom which depicts that highly skilled personnel to fit into a particular executive company role are limited, and many companies are competing for the available talents.
Having a directors compensation package also serves as a tool for motivating and encouraging the directors. When they know that their organization is concerned about what they gain from the skills and services they are offering to the company, they will be motivated to do their work excellently and competently. This will, in turn, bring about an improved performance by the directors (Rahim and Nelson, 2018). The directors will be sure to work hard and give their best into the organization. Another reason why the directors should be given the best remunerations is that it can increase the happy moments of the individual during work. When a director is pleased with the remuneration package that he is receiving he is motivated to work harder for the company. Some scholars have asserted that happy employees are more likely to be more productive than more satisfied employees. These employees are more satisfied and are productive; they achieve almost all the targets that the company has set. These employees are more likely to view themselves as part of the companies just as these rules work on the employees they are most likely to work on the directors such that the directors that are satisfied with the remuneration package will be motivated to work even harder. In another research that was carried in London, almost 37% of the employees asserted that they would indeed leave a current job for equivalents responsibilities as longs as the remunerations were better. These statistics indicated that a remuneration package was essential in any organization. This will enhance the satisfaction of both the directors and the shareholders (Goh, 2016).
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Challenges of the directors’ remuneration package
Issues have been raised concerning excessive compensation in the print and electronic media as well as in academic literature. One of the major drawbacks of directors’ remuneration package is that it encourages laxity of the directors. This has a great impact on the performance of an organization. According to Aslam, (2019), remuneration is highly tied to performance. Thus directors should be compensated based on their performance. However, this is not usually the case. The package is designed in a way that it attracts people to an organization and some may come in for the sake of their interest. Many people pursue these positions due to the privileges that come along with them; thus they make themselves appear fit for those positions (Budd and Naestpad). When they get into the organization, however, they forget that they are there to deliver thus a decline in their performance is noted. These positions also attract corruption and bribery and so some directors get to these positions not on merit but out of ‘favors.' This will, in turn, increase the chances of unproductivity and success of the organization. A case of Pakistan shows that many of the non-board directors in the organizations did not get those positions through the legit means. Thus, they lack in knowledge of the tasks they are expected to carry out in those firms and so they cannot make any impact to the firms they are in (Aslam, Haron and Tahir, 2019 p 8). It was realized that those directors were attracted to the positions by the remuneration package and after getting into these positions, they only lavished themselves with the firms’ luxuries at the expense of the firm.
These compensation package has also been noted to bring an increase in the global financial crisis. This is because companies use a lot of money in compensating their directors who hardly bring any economic gains to the companies. The directors have been noted to have an adverse effect on the financial status of a company. Many companies have to secure loans to compensate the directors, and this leads to high debts on equity which affects an organization's financial performance (Aslam, Haron, and Tahir, 2019 p 17). A case study of the United Kingdom indicated that between 1998 and 2010, the UK employee remuneration had grown by 4.7%. This showed that with the passing years, the finances organization incur in remunerating their directors keeps on increasing. Director remuneration was viewed as a total and complete scandal to the economy of a country because it led to the capitalism crisis which in turn brought about inflation (Koutsoukis and Roukanas, 2014). This will be against the desire of the shareholders whose main aim in business in maximizing profits and capital. Ntim, Lindop Osei and Thomas (2015) in their study conducted in South Africa stated that the relationship between the executive remuneration and organization financial performance had been decreasing due to a shift from performance related components to compensation of CEOs which created a disconnect between the CEO and organizational performance. Another study found out that the propensity of executives to enhance their remuneration influenced remuneration contracts for directors and shareholders making them be no longer optimal (Bussin and Modau, 2015).
Directors’ remuneration package is also portrayed to have high aspects of unfairness. This is noted in the cases where we are comparing remuneration of directors to that of other employees in the organization. The ratio of the chief executive officer compensation is noted to be far much higher than that of the average workers. A case of the UK in 2009 showed that the CEO is paid an amount that is 81 times that of an average worker. In the same year, a report from the US indicated that the CEO was paid 271 times what an average worker got. These are but a few examples that depict the unfairness in these remuneration packages. A study conducted by Petrin (2015) p 4 showed that this resulted in complicated broader societal issues of distributive justice and fairness. The concern of unfair compensation brought about by the hefty directors’ remuneration can discourage other employees leading to underperformance which negatively impacts the success and productivity of a firm. This is unlike what the shareholders expect that is fairness and transparency.
Addressing directors’ remuneration package challenges through corporate governance
Corporate governance refers to a system of rules, processes, and practices by which an organization is directed. It involves ensuring equity of interest of the shareholders, management, suppliers, financiers’ customers, community and the government (Ticker, 2015). Several corporate governance mechanisms can be employed to help address the challenges originating from directors’ remuneration package.
To begin with, the corporate governance team should build a reliable and qualified board of directors and evaluate their performance before giving them any tasks and before giving them the directors’ remuneration packages. This means that the grant of remuneration package should be strictly based on performance and qualification to prevent financial constraints and to be in debt by the organization which mainly occurs when directors are using much of the organization's resources, yet they are performing poorly.
The team should also set directors’ fees that will attract suitable talented candidates and which will not create conflicts between their duties and independence. They should also ensure that they have transparently laid down recruitment procedures which cannot be interfered with. Measures to deal with corruption and bribery should be stipulated, and strict rules against those who may be involved should be laid down. This will help to acquire qualified directors based on merit rightfully.
The board of directors should establish measures of performance for the directors and other executive officers. They should set targets and evaluate the directors based on the goals set for them. They should conduct regular assessment and evaluation of their performance and this way they can tie directors’ remuneration to performance. This will help improve directors’ performance which in turn will positively influence the performance of the entire organization. Effective board monitoring limits the managerial tendency to pursue personal interests and agendas such as pursuit for director remuneration packages and instead focus on organization performance (Ghouma, 2017; Garcia, 2016 and Saad, 2016).
It should ensure that the organization has come up with a remuneration committee comprised of independent directors who will develop and oversee the compensation plans and procedures. This committee should be given the task of evaluating the systems of directors' remuneration in that organization (Garcia, 2016). They should determine the factors to be considered when remunerating the directors and should ensure that the directors’ package is fair compared to that of other employees in the organization. The committee should also come up with a clear policy that says that the underperforming directors shall not be entitled to some benefits that are contained in the package. It should also state that in case a director is laid off due to poor performance, they have no right to claim these benefits. This will help create transparency and accountability between shareholders and directors regarding remuneration.
Corporate governance will also help directors understand the need of having shareholders interest before theirs for the sake of the organization. With this understanding, the directors will know that the interest of the shareholders is to see their company succeed and that the success of the company is for the benefit of them all. This will help deal with the challenge of directors being in positions for their gain. The directors will not be there for the luxuries they are gaining, but they will put efforts to see that the company succeeds.