Directors Remunerations and Corporate Governance

Haroon Shafi PhD 18503

In mid 1980s increasing level of remuneration in top level executives of various UK base firms draw attention of public. Which stimulates the media, public and legislators to come up with idea of some sort of scrutiny level of which demonstrate the balance between pays of top level executives and their performance in the firms (Brian and Johnston, 1993).More attentions focuses to this issues and as a short consequences it was firmly declare that Chief Executive Officer will not play any part in any process of determination of pays. According to institutional shareholder committee (1991) report there should be a compensation committee which is appointed by Board, containing mainly Non-Executive Directors and executive directors should not be allowed to play any role in determination of own pay packages and this committee should be in the annual reports for public awareness. Subsequently Cadbury report (1992) support recommendations of aforesaid committee and argued that executive directors should have no part in deciding their own pay packages and compensation plan. Brian and Johnston (1993) argued that in 1990s if a firm has a remuneration committee then it was obligatory for a firm to disclose this committee in annual reports otherwise it was regarded as non effective committee if firm is not mentioning in the annual report. In 1995 Cadbury committee was formed to addresses the concerns of shareholders and public on high pay structure of executives. According to Cadbury report (1995) remuneration criteria of top executives should includes multiple factors while

determining pay packages which includes market value of top executives, nature of work, performance on given tasks, competition in market, size of firm etc. Jensen, (1989) argued that Classical method adopt by agency theory is to give share management in equity is most appropriate way to reduce agency problem and to protect the interests of both shareholders and management. Further argued that performance based incentive mechanism of top management is also preferable in most cases to protect the wealth of shareholders. Exercise of corporate governance practices in Pakistani firms is at low level. Ramiz and Mangla, (2009) argued that according to survey conducted by International Finance corporation and SECP on Corporate governance practices in Pakistan and found that 50 percent of firms in Pakistan doesnt have committee of non-executive director and 55 percent corporations does not have any formal mechanism for determination of compensation and pay packages of executives. According to amended code of SECP on corporate governance remuneration of executives it is recommended that compensation packages of top level executives should be align with the interests of shareholders. Sufficient, attractive and performance base compensation packages is necessary to retain the executives in organization for protection and maximization of shareholders wealth. This code also argued that there must be a remuneration committee consisting majority of non-executive directors who are more independent in judgment and free from any business affairs.

References:

Brian G. M. Main & James Johnston (1993): Remuneration Committees and Corporate Governance, Accounting and Business Research, 23:sup1, 351-362 Cadbury, Sir Adrian (1992), Committee on the Financial Aspects of Corporate Governance, Draft Report (27 May). Greenbury, S. R. (1995). Director's Remuneration. London: GEE Publications. Jensen, M. C. (1989) Eclipse of the Public Corporation. Harvard Business Review, 67 (September-October), 61-74. Rehman, R. u., & Mangla, D. I. (2011). Corporate Governance and Performance of Financial Institutions in Pakistan. working paper.