Executive Compensation Essay

The following is an essay which discusses the issue of whether Shareholders should have a say on Executive Compensation. Corporate governance can be defined as a set of procedures by which an organisation is regulated. The framework ensures transparency and accountability in business dealings whilst taking into account stakeholders’ interests. Executive Compensation, a formerly marginalised topic in British society and corporate world, has been brought to the frontline of British society by extensive media coverage, due to the subprime mortgage disaster which caused the collapse of some banks, most notably, RBS and Lehman Brothers. In a post recession world, Government regulators have enforced more regulations and demanded for more transparency

Shareholders defined as people who have shares in the company have the primary goal to maximize their investments. Neate reports that the profits of the company “dropped by $1.5 billion, however the Chief will get a $3.3 billion cash bonus” (The Guardian, 2013). Shareholders want to maximize their interests and according to corporate governance, Managers are accountable for their actions and they should have shareholders’ interests at heart; an opposite of this is illustrated in this article. This situation explicitly suggests that Shareholders revolted because pay and performance were not linked together with Executive pay. Profits have fallen which means that there could be a reduction in dividends given to the shareholder. Shareholders and Board members should reward Managers for success, not failure. If Managers meet set targets and increase the profits of the company, they should have an increase in pay to reflect their actions and vice versa if a Manager does not meet targets. Shareholders must have a say on Executive pay as an incentive must be in place to guarantee the maximization of profits, the main goal of a

The argument assumed in this paragraph is a case whereby the Shareholders implement a pay with performance wage. If an Executive keeps exceeding profits of the previous year thereby maximizing dividends of the shareholders whilst increasing pay, a case of managerial hubris might develop. The CEO develops an aggressive expansion strategy and a risk appetite which results in investing in high risk stocks which produce high returns but are volatile and unstable. This case occurs as the Executive wants to please the shareholders goal of the continual surge of dividends, whilst increasing their prestige and pay as it gets harder and harder to surpass the previous year profits. A report by Manigent justifies the previous assertion by concluding that the aggressive expansion of RBS “in relation to poor decision making in relation to risk” caused the downfall of the bank.RBS acquisition of ABN AMRO contributed towards the downfall of both banks (Manigent, 2013). RBS already operating with a high leverage were exposed to the subprime market and gained toxic debts and assets from ABN whilst having an unrealistic integration plan. Most importantly, to address the statement put forward, this takeover was purely fuelled by managerial rather than strategic ambitions. The CEO, Fred Goodwin, who was over