We have consistently argued that all non-individual bonus and incentive schemes
(as well as pensions schemes for that matter) should be made available to all
employees on a pro-rata basis related to base salary. Bonus packages
(including all cash and stock elements as well as a long-term
incentive schemes) should not be just tailored for the benefit of a
small group of top executives.
Discretionary Bonuses should continue to be based on individual
performance. For example, the CEO could decide the bonus of any head of division who in
turn could determine the bonus due to his staff and so on all the way down the
To avoid a ratcheting up of the bonus levels, however, there will have to be
strong checks on the CEO's overall compensation. This would give CEO's a
strong motive to keep a keen eye on compensation levels. We think the best way
to avoid excessive payments would be to (1) link CEO pay in the main to the
level of bonus due to all staff (firm wide bonus), (2) to ban any long-term
contractual payments after the initial contract term (set when the CEO is
has expired and (3) to put all additional bonus payments or perks to a
shareholder vote BEFORE they are being allocated.
Bonus payments for CEO's are in any case a dubious innovation of the last
management culture of the past 10 - 20 years. One would assume that a good
salary package should be enough to do a good job, esp as the overall success
of an organisation is due to the efforts of all the employees. Some top
companies such as BP or Nestle have been around for decades and the incumbent
CEO is building on the contributions of all previous employees.
Retaining his position and a not inconsiderable salary plus all the perks
associated with his office should be enough reward for the CEO (as should
simple pride in a job well done). The alternative is also simple - if the
performance is not sufficient it will be loss of office. It is for that reason
that any organisation should have a strong culture of management development
so that at any point in time there are good candidates for promotion among the
senior managers. This is not only a Macchiavellian requirement but simple
common sense as a CEO could be victim of an accident or medical condition at
any time or decide to jump ship to another position.
MORE ON EXECUTIVE COMPENSATION
About Pro Governance
Our Mission is to
campaign for the protection of investors and savers by promoting
good corporate governance.
We also believe that the wider spread of share ownership is in
itself a public good and may sometimes even be preferable to higher
Shareholders in publicly listed companies are widely dispersed and cannot
micro-manage the affairs of the companies they are invested in. The
international nature of today's shareholder registers make this also
impossible for large institutional investors.
On the other hand, abuses that have developed over the past few years make
it imperative that company managements are supervised in a more efficient
Tax incentives and institutional constraints have favoured the growth of
large institutional investors at the expense of small individual
shareholders. This makes it more important than ever that these investors
behave like fiduciaries and have the interests of their clients at heart.
This means that the business of
money management cannot be treated like any other profit-maximising business.
Like the medical, legal or academic professions the interest of the clients
has to have priority when critical decisions have to be made with regard to
companies the money managers are invested in.
We at Pro-Gov think that the establishment of an effective international forum
combining representatives from the national organisations of individual
shareholders and investors will be an effective step in the direction of
improving corporate governance.
At the moment the corporate
Governance discussion is limited to academics, journalists in the quality
business press, institutional shareholders and companies and their business
associations as well as politicians. The one party missing on the table are
the real investors who - with some exceptions - voiceless in the debate.
isn't what's illegal; it's what's legal"