12 May HOW DOES EQUITY AS A PAY COMPONENT WORK TO REDUCE THE HORIZON PROBLEM?
The issues
that your report must address are:
1. One of the problems in the shareholder/manager agency relationship
that pay contracts are designed to overcome is the risk aversion problem.
Outline what the problem is, and how the contract between managers and
shareholders can be designed to reduce risk aversion.
2. How does equity as a pay component work to reduce the horizon problem?
What role, if any, does accounting information play in specifying the
contractual terms of bonus plans designed to reduce the horizon problem?
3. The article discusses a range of non-salary components that are
contained within the
1
management compensation packages of top-100 companies. What is the
purpose of including non-salary components in executive pay arrangements?
4. Why would managers prefer short-term cash over long-term equity
bonuses? Why does this not align with shareholder interests?
5. Shareholders of Australian entities have the ability to vote to show
either their support or dissatisfaction with companies remuneration reports.
While this is non- binding on the Board, they are obliged to take note of
shareholders views. Explain why shareholders might choose to vote against
reports with too high a proportion of pay as short-term cash bonuses rather
than long-term incentives.
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Pay
backlash prompts shift to bonuses
By Patrick
Durkin
Boards of top-100 companies are paying their chief executives larger
annual cash bonuses to avoid an embarrassing investor backlash over pay,
experts say.
The fixed pay of CEOs at the top 100 listed
companies has doubled over the past five years to an average of $1.8 million
increasing four times faster than pay for ordinary workers, according to a
survey of executive pay by the Australian Council of Super Investors [ACSI], which
advises 40 superannuation funds that manage more than $250 billion.
The increase compares to a rise of 26.8 per cent in average weekly
earnings and a gain of 76.8 per cent in the benchmark S&P/ASX 100 Index
over the same period.
ACSI said the more alarming trend was that CEOs were now much more
likely to receive an annual bonus. Only four missed out in 2006, compared with
one-quarter in 2002.
ACSI said annual bonuses had grown from an average of $769 000 in 2001
to $1.66 million, and more CEOs were receiving them.
More and more boards seem to be placating executives unhappy at
having to meet demanding performance hurdles to get their options by paying
them more cash, said ACSI executive officer Phil Spathis.
Where is the downside for these executives, when so much of their
supposed at risk pay is delivered much sooner than later?
Telstra,
AGL, MFS, Suncorp, Babcock & Brown Infrastructure, Leighton Holdings, Toll
Holdings and Becton Property Group all faced shareholder protest votes against
their remuneration reports this year.
Two of these
top-100 companies, Telstra and AGL, faced majority votes against their
remuneration reports, and two- thirds of Telstra shareholders, including the
Future Fund, voted against Telstras pay plan and the $11 million pay packet
for CEO Sol Trujillo.
Shareholders were concerned his short-term
performance pay nearly doubled and the hurdles for his long-term performance
pay were less demanding than for other senior executives. But Geof Stapledon of
Risk-Metrics, which conducted the survey, said
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