Description of the Issue

Discuss about the Corporate Governance and Remuneration.

Corporate governance is related to the system of the rules, processes and practices which direct and control the company. The process of corporate governance is related to the ways which the organization balances the interests of the various stakeholders including, management, suppliers, customers, shareholders, financers, community and the government. Corporate governance also aims at providing the framework which helps in attaining the objectives of the company. This takes into consideration all the major aspects of management which include, action plans, corporate disclosure, and measurement of performance (Banik, Gupta and Bhaumik 2016).

The corporate governance related process of the organizations are mainly influenced by the board of directors. The board of directors are considered to be direct stakeholders of the company. The directors are chosen by the shareholders of the company and are appointed by the other members of the board. The major task of the board is to make the important decisions which are related to the appointment of the corporate officers, dividend related policies and the compensation of the executives. The responsibilities of the board are related to the decisions that need to be taken related to environmental and the social concerns along with the financial decisions of the company (Appiah and Chizema 2015).

The compensation or payment that is made to the executives is mainly composed of financial compensation or non-financial rewards. This is a mixture of the salary, shares, bonuses paid to the various executives of the organization. The major principles related to executive compensation are described below,

• The compensation provided to the executives need to be aligned closely with the long-term interest of the shareholders with the corporate strategies and goals. This should include significant criteria which is performance-based and is related to the long-term value of the shareholder. This needs to reflect the downside risk and upside potential of the organization (Barontini, Bozzi and Ferrarini 2017).
• The compensation that is to be provided to the top executives and the CEO should be decided by the independent directors of the company.
• The committee of compensation needs the executives to build the and further maintain a significant equity investment in the organization.
• The compensation committee needs to include experienced, independent experts who can provide advice related to the compensation levels of executives.
• The compensation committee needs to oversee the various executive compensation programs so that they can comply with the regulations and laws of the company and they are aligned with the best practices (Chan, Watson and Woodliff 2014).
• The corporations need to provide accurate, complete, timely and understandable disclosure to the shareholders.

The remuneration that is provided to the executives has become an issue related to the corporate governance in the organizations. The remuneration of the executives includes, the base salary, stock related options, share plans, bonus, pension and the other benefits. The compensation that is provided to the executives of the company has been criticised due to the levels of pay, relationship of pay with the performance of the company, and failure of the pay setting of executives. This is an important issue that has been risen in the recent times with respect to the corporate governance area of the organizations (Colli and Colpan 2016).

The pay packages provided to top executives have become a topic of curiosity for the various professionals in the entire business world. The interest of general public has also increased based on the high level of corporate failures and the failures which have impacts that are devastating in nature. The general public are major shareholders of the organization and it is the responsibility of the board of directors to control process decision-making in the organization based on the interests of shareholders. However, there is always a possibility that the managers or the executives can use the assets of the company to enhance their lifestyles. They can take advantage of their power to control for living a luxury life at the cost of the company (Courteau et al. 2017). The executive pay related issues have therefore become major problems in the corporate governance of the organization. The organization can establish good governance related policies only if the compensation packages of the executives include requirement related their own performance and the performance of the organization as well.

Basis of Review of the Remuneration of Executives

The governance of the executive compensation is related to the four major building blocks which are described as follows,

Structure – Balances and checks, responsibilities and roles and documentation.

Knowledge – Training and education, understanding of the components of the plan, outcomes of potential pay.

Communication – Internal communication related strategy for the key stakeholders, strategy related to external communication, governance and media.

Process – Procedures of the board meetings, yearly compensation calendar, decision-making process related to payment, management and selection of the advisors (Dimopoulos and Wagner 2016).

The compensation that is provided to the executives need to be reviewed on a regular basis in the following ways,

• Written review needs to be conducted in a formal manner which gives the executives a chance to report on the progress that is made by them against the goals that have been set by the organization. The board members need to reflect on their annual performance and their compensation is analysed on that basis.
• A process of goal-setting needs to be introduced which is a major part of the entire review process of the organization. The board needs to discuss and further formalize the goals of the organization and their personal goals as well (Iliev et al. 2015).
• The compensation package needs to be reviewed by the organization once in a few years. This process can be outlined as a part of the entire employment contract made with the executives.
• The compensation provided to the executives of a particular organization needs to be compared and analysed based on that provided by the other companies in the industry.
• The compensation package needs to be approved by all the board members of the organization. The entire board needs to be informed about the compensation that is provided to the executives. This helps in implementing the perspectives of all the members in the group (Kowalewski 2016).

The compensation is used a tool attract and then retain the highly skilled employees in the organization This plays a significant role for the organization to succeed in a competitive environment. The board of directors have the responsibility to oversee and implement the policies related to compensation of the employees. The compensation has a direct link with the interests of the various executive officers both on an individual level and as a team. The compensation is equity-based in nature and is effective in the process of accomplishment of the organizational objectives. This helps in building a link between the interests of the shareholder with the executive officer (Larcker and Tayan 2015).

 The compensation committee and the board of directors need to establish goals that are meaningful and the compensation is provided based on performance. The performance related goals need to be followed after they are implemented and the previously set targets should not be adjusted. The corporations need to set their performance based on long-term factors which affect the organizations. The compensation related plans of the executives also need to be formulated based on the long-term strategies and goals. The performance based incentives that are provided to the employees need to be based on the accomplishments of the individuals and the organization (MEHTA and Joshi 2016). The incentives should be based on not only the financial performance of the organization it should be based on the leadership related qualities of the executives. This will help the organization in providing long-term value to the shareholders. The performance based incentives provided to employees can help in measuring the long-term accomplishments of the executives. The CEO or other executives can receive performance-based incentive with respect to the targets that have been set based on previous years (Naseem, Zhang and Malik 2017).

Critical Review of the Governance of Organization

The compensation provided to the CEO or the executives need to be carefully determined by the independent directors. The committee which decides the compensation of executives needs to comprise of professionals from diverse backgrounds. The members of the committee need to be changed on a periodic basis so that fresh perspectives can be brought in an organization. The members of the committee need to have knowledge about the compensation that is to be provided to the executives of the organization (Kowalewski 2016).

The review of the governance is unique for each and every organization and it depends on the factors like, ownership of the organization, legal structure of the company, culture, regulatory environment and the outcomes that are sought from the review. The review related approach is customised for the needs of the organizations. The area of governance related review includes,

• Determining the system of governance which adds value or burden to the company.
• Addressing the issue of the concern with current structure of governance
• Alignment of the system of governance with the new or existing strategic direction.
• Adoption of the leading practice related to the governance with respect to the procedures and policies.
• Compliance with the international and national standards and codes (Colli and Colpan 2016).

The board of directors is responsible for the actions and the decisions of the particular organizations, which have specific policies and procedures. The documents that are required for the review of the governance are as follows,

• Board charter – The policy document that defines the responsibilities, roles, authorities and the senior management.
• Policy related to risk management and the various frameworks.
• Board agenda.
• Induction program and policy of the board.
• Committee charters.
• Strategy related to communication with the stakeholders.
• Whistleblowing policy of the organization (Chan, Watson and Woodliff 2014).

The recommendations that can be provided to the organizations so that they can solve their corporate governance related issues for the payment policies of CEO and the executives deal with the development of policies. The issue can be solved by developing the committee that has been discussed in the report. This committee can be helpful in deciding the appropriate remuneration of the CEO and the executives. They will also monitor the compensation rates of the executives so that it can be appropriate to the market and the position of the company in the industry. The compensation levels of the executive officers and the CEO can be determined and approved by the compensation committee. The organization needs to be transparent about its policies related to the compensation of the CEO and the executives. This is important for the purpose of maintaining trust related to the corporate governance policies. The annual evaluation of the performance of the executives with the compensation paid to them is significant in formulating good corporate governance.

References

Appiah, K.O. and Chizema, A., 2015. Remuneration committee and corporate failure. Corporate Governance, 15(5), pp.623-640.

Banik, A., Gupta, A.D. and Bhaumik, P.K. eds., 2016. Corporate Governance, Responsibility and Sustainability: Initiatives in Emerging Economies. Springer.

Barontini, R., Bozzi, S. and Ferrarini, G., 2017. Executive remuneration standards and the “conformity gap” at controlled corporations. Journal of Management & Governance, 21(3), pp.573-597.

Chan, M.C., Watson, J. and Woodliff, D., 2014. Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), pp.59-73.

Colli, A. and Colpan, A.M., 2016. Business Groups and Corporate Governance: Review, Synthesis, and Extension. Corporate Governance: An International Review, 24(3), pp.274-302.

Courteau, L., Di Pietra, R., Giudici, P. and Melis, A., 2017. The role and effect of controlling shareholders in corporate governance. Journal of Management & Governance, 21(3), pp.561-572.

Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.

Iliev, P., Lins, K.V., Miller, D.P. and Roth, L., 2015. Shareholder voting and corporate governance around the world. The Review of Financial Studies, 28(8), pp.2167-2202.

Kowalewski, O., 2016. Corporate governance and corporate performance: financial crisis (2008). Management Research Review, 39(11), pp.1494-1515.

Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.

MEHTA, D.M. and Joshi, K., 2016. Role of regulators in maintaining standards of Corporate Governance. International Journal of Research in Finance and Marketing, 6(3), pp.34-39.

Naseem, M.A., Zhang, H. and Malik, F., 2017. Capital structure and corporate governance. The Journal of Developing Areas, 51(1), pp.33-47.