COMPANY LAW

The Remuneration of the Executive Directors of Public Limited Companies



The Remuneration of the Executive Directors of Public Limited Companies

Introduction

Executive compensation is a controversial subject, and it is rarely far from the media's gaze. A popular view is that excess compensation is pervasive, with corporate boards frequently awarding overly generous pay packages to executives and Chief Executive Officers ("CEOs"). Disapproval of executive compensation practices has been cast much further. Recently, policymakers have outlined reforms of the governance of executive pay.

Some of the compensation structures have truly been outrageous, the likes of which we have never seen. For example, in 2005, Exxon-Mobil reported paying its CEO close to $400 million who had retired at the end of 2005. From years 1993 to 2005, the CEO of Exxon received a total compensation of $685 million. What is astonishing about a compensation structure like this is that most of the expansion in the company's market valuation was an "industry" event. That is, that the expansion of Exxon's market value was a reflection of an expanding economy, and the price of a commodity that had risen several folds during this time.

Discussion

Since the advent of the principal-agent relationship, there has been an explosion in executive compensation literature. Numerous (Coles, et. al (2006); Guay (1999); Murphy (1999)) studies have been published that examine the role of compensation and its relationship to firm performance.

British Petroleum (BP) and its incident of a blowout valve in the Gulf of Mexico in 2010 is another incident where the issues related to compensation and behavior can be highlighted. A case could be made that even an environmental disaster like the one caused by BP are an outcome of broader compensation structure and policies. It is obvious from this incident that BP 's risk control measures were not robust enough to guard against what would have been necessary to prevent such a climactic disaster. Although this paper is not the place where the role of risk control is directly examined, it is reasonable to infer that BP may not have had robust practice of imposing harsher economic penalties for endangering the environment. And that is the broader point to which I am speaking in this paper. In the end, whether the gulf spill turns out to be an unfortunate case of an industrial accident or a case of criminal negligence, one thing is clear- that U.K. corporations as well as those that operate in U.K. and other countries have clear gaps in risk and behavior management (Coles, 2006, 431-468).

The law includes a requirement for companies to include in their annual report the total compensation and benefits in kind paid during the year, to each officer, and the amount of remuneration and benefits in kind that each of these agents has received during the year by the group companies. Extensive information must be given to shareholders so that they have a clear understanding not only of the individual remuneration paid to executive directors, but also the policy for determining the ...