Company’s performance and director’s remuneration



With the advent of globalization, the world seems to be ever expanding. Modern technology is improving tremendously at a gradual pace and that has resulted in an enormous enhancement in the general awareness of people. Hence it is of no revelation that people have realized the value and importance of money. They are not ready to compromise in any field of life, especially where the matter of money is implicated. Wealth maximization is the need of the hour. Each and every individual believes in being lucid and locating his resources in such a place where utmost utilization and lucrative returns are surefire.

What has just been said pertains more in reference to companies. Investors and shareholders assess director's performance on the basis of the returns the company is receiving. Investors and shareholders are also ardent to know whether they are paying a fair price (remuneration) to directors with respect to the return they receive (company's performance). Therefore there are several studies conducted on executive compensation, especially in respect to the companies in UK. Much of the literature focuses on the relationship between the director's remuneration and the firm's performance in the stock market. Moreover it is a highly argued issue that the directors of top public companies are paid too much as compared to their input in the working, management and the overall performance of the company. It is also argued that a steep upward trend in the salaries of directors is the root cause of the low performance of the related companies. Open resentment against directors remuneration being more than what is rational, may cause harm to the company's reputation in the stock market as well as in general. The shareholders often support the view that a director's remuneration should be proportional or relative to the performance of the company in the stock market.

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UK being the third largest economy in the world and corporate governance being a major issue in the UK, we are going to focus on the local companies in the UK and Wales.

In the large companies in the UK, the shareholders and the financial market have considerable powers over directors. In the UK the percentage of non executive directors in the board of directors is about 40% (Conyon, Gregg and Machin 1995). Principle agent theory states that a directors remuneration depends should depend upon the company's performance in the stock market so that the top directors are motivated to maximize the shareholder's interest .To elaborate this view in a better way we are going to obtain the financial data of the local companies and various reports that reveal the relationship between the remuneration of the directors and the performance of the company.

An overview of the income and data services report, that the most important variable for evaluating company's performance is the profit earned and the growth percentage achieved in terms of earnings per share. We can also analyze a company's achievement in terms of the attainment of the set targets. The two very important surveys in this direction, namely the hay survey and the monk survey reveal that profit is the most significant measure to assess a company's performance.

When the value of the shareholders money is such an important variable, then the question arises is- is it worth paying so much to the directors? The answer to this question requires a brief insight into the remuneration policies of a company and the issue of wealth maximization of the shareholders should always have the highest importance. The remuneration policies of a company should be designed as such that the plans and policies aim at ensuring motivation at the directorial and managerial level. It should provide a layout for attaining maximum growth in a long run. Success should be aimed at within an apposite framework so that it exhibits a unambiguous relationship between the performance of the company and the salaries paid to the directors of the company. The remuneration structure of a company is often laid down by the nomination committee rather than the remuneration agency. Individuals cannot be directly involved in the decisions regarding directors remuneration. The remuneration committee may however seek input from individuals regarding remuneration policies. The key factor is the communication and engagement between directors and shareholders and therefore there is a need for a more efficient system of communication at the higher level. It must be ensured the board and the management as well as the shareholders are provided with sufficient information by the remuneration committee. This step will facilitate in ensuring an well-versed decision making. There are also certain ways which can encourage the directors to perform better for the profit maximization of the companies in the stock market; some of them are bonus payments, profit related pay and share options etc.

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Shareholders are entitled to the remaining profits of the company; if the salaries of the directors are raised, then less is left to be distributed among the shareholders. The purpose of a company therefore becomes wealth maximization of the shareholders.

The recent literature and the market trends give a clue about the diminishing relativity between the two variables namely the performance of the company and the remuneration of the director. To analyze the relationship, it becomes mandatory to examine the case of companies which have faced some issues regarding director's remuneration and its relation with the overall performance of the company. We will scrutinize some companies belonging to the United Kingdom with the help of some figures. In the UK there is a positive relationship between the director's salary and the company's performance in the stock market (McKnight1996, Conyon 1997, Ingham andThompson1995) in the decade lasting from the 1980s to the 1990s; the rate of raise in director's salary was very high. It was about 20% on an average. It was very weakly linked to the performance of the company. The above statistics were drawn from the economic performance of more than 300 large companies in the United Kingdom. Moreover the weak link between the two variables got completely vanished after the year 1988. It happened because, despite a higher raise in the remuneration of the directors, the company performance, measured either in terms of earnings per share or stock market performance, showed a steep downward. This took place in the recessionary period up to the year 1991. Hence, the concept of establishing a relationship and evaluating the relationship between the performance of the company and the payout of the directors becomes all the more crucial for the growth of the company.

In the United Kingdom, during the late 1980s, we come across many major financial scandals and many large companies going bankrupt such as Ahold and Enron. This has given rise to the ire of the general public, press and authors. Therefore to overcome such situations, many effective mechanisms were introduced so that better supervision on the part of the shareholders can be facilitated. It also ensured better accountability on the part of the executives. Many reports provide a basis for such mechanisms. The first name that comes to mind among such reports is the Cadbury report which was revised subsequently a number of times. Then there is the green bury report and the Hampel report. These two reports led to the formulation of a joint code. This combined code has been revised again in 2003. This revision integrated the recommendations of the Turnbull, Smith and Higgs reports.

When the remuneration of the director is such an important consideration for the growth of the company, we are left with the question as to how to calculate the salary of the director of the company. In calculating the recompense of the director, the first most crucial variable is the size of the company. Absolute and relative share performance significantly explains long term compensation. We can also conclude that the approach of management has a divergent control over the level of executive compensation. We also notice that using alternative monitoring mechanisms leads to higher levels of long term incentives. Therefore utmost care should be taken in creating the structure of a director's payout.

Looking at the market trends and recent undertakings in the company sector, we notice that there are a number of acquisitions and mergers which are taking place in the market.

After deep research and various studies, it has been found out that the two most common motives of corporate mergers and acquisition are maximization of shareholders wealth and increasing senior management's efficacy. This can be stated especially for the companies performing in the United Kingdom. This information proposes that if shareholders profit from a merger then the senior management also receives some part of the profit. More interestingly, we find out that if acquisition or merger results in a reduction in stock market value for the acquiring firm, their higher executives come out having increased financial gains.

Thus we can conclude that for the optimum utilization of available financial resources, it is of great importance that the remuneration of the director is decided very carefully so that it turns out into better performance by the company. This will lead into increased profits and increased goodwill of the company. Thus the shareholders as well as the directors of the company may share the profits without any disagreement.

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