The theory and practice of directors remuneration new challenges and opportunities

www.ebook3000.com The Theory and Practice of Directors’ Remuneration New Challenges and Opportunities This page intentionally left blank www.ebook3000.com The Theory and Practice of Directors’ Remuneration New Challenges and Opportunities Edited by Alexander Kostyuk Ukrainian Academy of Banking of the National Bank of Ukraine, Sumy, Ukraine Markus Stiglbauer Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany Dmitriy Govorun Ukrainian Academy of Banking of the National Bank of Ukraine, Sumy, Ukraine United Kingdom À North America À Japan India À Malaysia À China Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2016 Copyright r 2016 Emerald Group Publishing Limited Reprints and permissions service Contact: permissions@emeraldinsight.com No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center Any opinions expressed in the chapters are those of the authors Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78560-683-0 ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004 Certificate Number 1985 ISO 14001 www.ebook3000.com Contents List of Contributors xi Introduction from Editors xiii Practitioners’ Outlook xvii Academic Outlook xxiii Director Remuneration is a Matter of Growing Importance in the EU xxiii Legislation on Directors’ Remuneration xxiv Corporate Governance Codes xxiv Remuneration Should Be Guided by Market Demands and Linked to the Company’s Results xxv EU Commission Recommendation xxvi Some of the Experience of Member States xxvii Three Recommendations on Disclosure of Remuneration Policy xxviii Remuneration Should Promote the Long-Term Sustainability xxix Remuneration Policy xxx Remuneration Policies in the Financial Services Sector xxxi Section I Theory of Corporate Governance and Directors’ Remuneration CHAPTER Corporate Governance and Remuneration Udo C Braendle and Amir Hossein Rahdari Introduction The Theory of the Firm À The Theory of Transaction Costs? Beyond the Firm and Market Dichotomy Incomplete Remuneration Contracts Agency Theory Adverse Selection Moral Hazard Different Agency Conflicts 3 11 13 14 15 v vi CONTENTS Management and Collective Production Outlook and Conclusion References 16 18 19 CHAPTER Directors’ Remuneration and Motivation Udo C Braendle and John E Katsos Introduction Agency Theory and Managerial Compensation Base Salary Bonus Stock Options Employee Motivation Current Intrinsic Motivator: Takeover Threats Well-Balanced Packages Conclusion References 21 21 23 26 26 27 29 30 31 32 32 CHAPTER Executive Compensation in the 21st Century: Future Directions Udo C Braendle and Amir Hossein Rahdari 35 The 21st Century Compensation and Motivation Compensation Plans: Pay-Performance Link Redefining Performance Evaluation in the Age of Sustainability Conclusion References 35 36 37 38 41 41 Section II Cross-Industrial Remuneration Practices Analysis CHAPTER Financial Companies Regina W Schroăder Introduction The Crisis and Its Effects on Remuneration Governance in Financial Institutions Elements of the Corporate Governance of Financial Institutions Pre- and Post-Crisis Remuneration Governance European Initiatives for Enhanced Governance and Remuneration Corporate Governance www.ebook3000.com 47 47 48 48 50 50 50 Contents Remuneration Structuring Variable Bonuses over Time Discounting Alternative Discounting Functions Exponential Discounting Hyperbolic Discounting Quasi-Hyperbolic Discounting Evaluation Conclusion and Prospects References 51 52 52 53 53 54 54 55 55 56 CHAPTER Industrial Companies Yusuf Mohammed Nulla Introduction Background Literature on CEO Compensation Research Design Results Directors Remuneration Policy Directors Remuneration Design Directors Remuneration Factors Board’s Role in Directors Remuneration Accounting Regulation Conclusion References Section III 59 59 59 60 62 62 64 65 66 67 67 68 69 Cross-Country Remuneration Practices Analysis CHAPTER Directors’ Remuneration in the United States Andrew J Felo Introduction Remuneration Regulation and Reporting Remuneration Design Empirical Evidence on Director Remuneration The Determinants of Director Remuneration Characteristics of Firms Adopting Outside Director Stock-Option Plans Director Remuneration and Compensation Committees Director Remuneration and Compensation Consultants Director Remuneration and Board Independence from CEO Director Remuneration and Board Overlaps 73 73 75 78 81 81 81 82 83 83 84 vii viii CONTENTS Summary of Determinants of Director Remuneration The Impact of Director Remuneration on the Firm and Its Stakeholders Market Reaction to Adding Equity to Director Remuneration Plans Director Remuneration and Financial Reporting Director Remuneration and Dividend Paying Director Remuneration and Shareholder Lawsuits Director Remuneration and Corporate Social Performance Summary of the Impact of Director Remuneration on Stakeholders Remuneration Challenges References 84 85 85 87 89 89 90 90 91 92 CHAPTER Directors’ Remuneration in the United Kingdom Jean J Chen and Zhen Zhu Remuneration Regulation The Greenbury Report 1995 The Combined Code on Corporate Governance 1998 and Its Subsequent Revisions The UK Corporate Governance Code 2010 The UK Corporate Governance Code 2012 Remuneration Design (Schemes) Remuneration Reporting Directors’ Remuneration Report Regulations 2002 The 2012 Directors’ Remuneration Reporting Reform Remuneration Challenges Problems in UK Executive Remuneration Challenges for Remuneration Policy Acknowledgements References 95 95 96 98 99 101 103 110 110 111 113 113 115 115 116 CHAPTER Directors’ Remuneration in Germany Markus Stiglbauer, Julia Wittek and Sven Thalmann Remuneration Regulation The German Two-Tier System Remuneration Regulation of the Management Board and Supervisory Board Remuneration Design (Schemes) Remuneration of the Management Board Remuneration of the Supervisory Board Remuneration Reporting www.ebook3000.com 119 119 119 120 122 122 126 127 Contents Remuneration Challenges References 128 130 CHAPTER Directors’ Remuneration in Italy Marco Artiaco Introduction Remuneration Regulation Listed Companies Bank and Banking Holdings Government-Owned Unlisted Companies Unlisted Companies Remuneration Design Schemes Remuneration Reporting Conclusions References 133 133 134 135 139 141 142 142 146 152 154 CHAPTER 10 Directors’ Remuneration in Spain Montserrat Manzaneque, Elena Merino and Regino Banegas Remuneration Regulation Regulation for Listed Companies Regulation for Financial Institutions Remuneration Design (Schemes) The Remuneration Policy for Directors in Spain A Question Linked to the Board Structure Remuneration Systems’ Elements in Spanish Companies Practice Regarding Remuneration Systems in Spain (2004À2011) Remuneration Reporting Remuneration Challenges References 157 157 157 163 166 166 169 175 176 180 181 CHAPTER 11 Directors’ Remuneration in Ethiopia Hussein Ahmed Tura Introduction Profile of Ethiopian Companies The Emerging Separation of Ownership and Control in the Ethiopian Share Companies Directors’ Remuneration in Ethiopian Share Companies Remuneration Regulation Remuneration Design (Scheme) Remuneration Reporting Remuneration Challenges 185 185 186 187 190 190 192 194 195 ix 252 ROBERTA PROVASI AND PATRIZIA RIVA The survey by Assonime gives more analytical details but what is relevant here is the generally positive conclusion that the Report expresses about the situation observed The document points out, indeed, that the drafting of specific Remuneration Reports increased significantly the amount of information available to investors The disclosure level is often a best practice one: there are not many countries where similar information is available on an individual basis (i.e., for each member of the administrative and control corporate bodies) This is especially true for the so-called ex post information (about the remuneration actually paid) References Assonime (2015) Corporate Governance in Italy: Compliance, remunerations and quality of the comply-or-explain Retrieved from http://www.assonime.it/ AssonimeWeb2 Accessed in February Baums, T (2001) Bericht der Regierungskommission Corporate Governance Köln, p 104, 236 Baur, D G (2008) Decoupling from the owners and society? An empirical analysis of executing compensation in Germany Retrieved from http://ssrn.com/abstract= 1140139 Bebchuck, L A., & Fried, J M (2004) Pay without performance, the unfulfilled promise of executive compensation Cambridge, MA: Harvard University Press Becht, M., Bolton, P., & Roell, A (2002) Corporate governance and control ECGI Finance Working Paper No 02 Bender, R (2004) The determination of directors’ remuneration in UK listed companies London: Centre for Business Performance, ICAEW Bhagat, S., & Black, B (1999) The uncertain relationship between board composition and firm performance Retrieved from SSRN, p ss Brick, I E., Palmon, O., & Wald, J (2006) CEO compensation, director compensation, and firm performance: Evidence of cronyism? Journal of Corporate Finance, 12, 403 CEBS (2009) High-level principles for remuneration policies Retrieved from http:// www.c-bs.org/getdoc/34beb2e0-bdff-4b8e-979a-5115a482a7ba/High-level-principlesfor-remuneration-policies.aspx Chance, D., Kumar, R., & Todd, R (2000) The “repricing” of executive stock options Journal of Financial Economics, 57(129), 153 Cheffins, B R (2003) Will executive pay globalise along American lines? Corporate Governance, Volume 11 COM (2004) Comunicazione della commissione “modernizzare il diritto delle società e rafforzare il governo societario nell’Unione Europea Un piano per progredire” del 21 maggio 2003 [COM (284) 2003 def.], Riv soc., 568 Core, J E., Guay, W R., & Larcker, D F (2003) Executive equity compensation and incentives: A survey Economic Policy Review, 9(2003), 27 Fernandez, A J (2003) La retribución de los consejeros, in E Bueno (dir.), El gobierno de la empresa En busca de la trasparencia e la confianza Madrid, 2005, 207 www.ebook3000.com The European Approach to Regulation of Director’s Remuneration Ferrarini, G (2005) Grandi paghe, piccoli risultati: “rendite” dei managers e possibili rimedi (a proposito di un libro recente) Riv soc., p 879 Ferrarini, G., Moloney, N., & Vespro, C (2003) Executive remuneration in the EU: Comparative law and practice ECGI, Law Working Paper No 09/2003, June Retrieved from http://www.borsaitaliana.it/comitato-corporate-governance/homepage/ homepage.en.htm Italian Corporate Governance Committee (2014) Annual report 2014 — 2nd report on the compliance with the Italian corporate governance code Retrieved from http:// www.borsaitaliana.it/comitato-corporate-governance/homepage/homepage.en.htm Accessed in December 11 Melis, A., Carta, S., & Gaia, S (2008) Shareholder rights and director remuneration in blockholder-dominated firms: Why Italian firms use stock options? Riva, P., & Provasi, R (2015) Assessment of going concern for the Italian listed companies: An empirical study Review of Business & Finance Studies, 01/2015, 6(1), 27À34 Santosuosso, D U (2010) Conflitti di interessi nella remunerazione degli amministratori “L’attività gestoria nelle società di capitali Profili di diritto societario italiano e spagnolo a confronto,” A cura di: A Sarcina — J.A García Cruces, Cacucci, Bari 253 This page intentionally left blank www.ebook3000.com Index ABI Principles of Remuneration (2011), 96n3 Accounting regulation, 67À68 Act to Improve Supervision of Board Remuneration and Amendment of Further Stock Corporation Law Provisions, 129 Adverse selection, 13À14 Advisory vote, 113 Agency conflicts, 15À16 Agency costs, 23 Agency theory, 5, 11, 31, 133, 143 adverse selection, 13À14 collective action problem, 12 company’s shareholders, 13 different agency conflicts, 15À16 key elements, 11 and managerial compensation, 23 base salary, 26 bonus, 26 opportunism, 23 principal-agent model, 23 say on pay votes, 25 short-termism, 25 stock options, 27À29 strengthening shareholders’ voting rights, 24 moral hazard, 14À15 AGM See Annual general meeting (AGM) AIB See Awash International Bank (AIB) “Alternative Mechanism”, Annual bonus plan, 103À104 Annual Corporate Governance Report, 178À179 Annual directors’ remuneration report, 110À111 Annual general meeting (AGM), 111, 246, 247 Annual remuneration report, 97 Antitrust law, “Apply or explain” approach, 98 Appropriateness of Management Board’s Remuneration Act, 121, 123 Audit committee compensation, 87 Awash International Bank (AIB), 199 [B]odies corporate, 199 BaFin See German Federal Financial Supervisory Authority (BaFin) Bank and banking holdings in Italy, 139À141 Bank directors’ remuneration, 203 Directives, 204 economic significance, 205 in Ethiopia, 206 NBE, 203 Banking Business Proclamation No 592/2008, 197 Basel Committee on Banking Supervision (BCBS), 207, 214 Base salary, 26, 103 BCBS See Basel Committee on Banking Supervision (BCBS) 255 256 INDEX Big bath accounting, 38 Big BathÀCap earnings manipulation, 37, 38 Binding vote, 112 BIS See Department for Business, Innovation and Skills (BIS) Black-Scholes formula (1973), 105 Blue Ribbon Commission, 74, 80 Board independence from CEO, 83À84 Board overlaps, 84 Body corporate directors, 199 Civil Code, 202 Commercial Code, 200 defendant, 201 Federal High Court, 201 National Bank, 203 NIB, 199 Bogey, 37 Bonus, 26 awards, 65 “Bonus-Malus” system, 37 Borsa Italiana, 135n1 Boundary systems, 18 Bounded rationality, 10 Cadbury Report, 95 Capital Requirements Directive (CRD), 238 Capital Requirements Directive III (CRD III Directive) See Third Capital Requirement Directive (CRD3) CD&A See Compensation Discussion and Analysis (CD&A) CEBS See Committee of European Banking Supervisors (CEBS) CEO compensation system, 59, 60 balance of power, 62 literature on, 60À62 plans, 61 See also Executive compensation CG Code, Italian remuneration reports to, 244 Corporate Governance Committee, 245 eventual caps, 249 parameters, 247À248 remuneration and directors’ role, 250À251 remuneration policy, 246À247 “Remuneration Reports”, 246 short-and mediumÀlong-term oriented variable components, 248À249 survey by Assonime, 252 Circular 4/2011, 166 Classical contracts, Classical firm, Coase Theorem, Code of Self-Discipline of Listed Companies, 135À136 Codes of Good Governance, 159À160 Collective action problem, 12 Collective production, 16À18 Combined Code on Corporate Governance (1998), 98À99 Commercial Code, 185, 190À191, 192, 196, 198À199 Committee of European Banking Supervisors (CEBS), 139, 164, 165, 238 CEBS Guidelines, 96n1 Community Recommendation 913/ 2004, 232 Companies Act See Ley de Sociedades de Capital (LSC) Company law, Compensation committees, 77, 82À83 consultants, 83 equity, 79À80 equity-based, 28, 31 See also Executive compensation Compensation Discussion and Analysis (CD&A), 76 Complete contract, www.ebook3000.com Index “Comply or explain” approach, 100n7, 136, 137 Conference Board survey, 80 Consob Legislative Decree No 58 of 24 February (1998), 136À138 Consob Scheme, 246À247 Contract, 10 Corporate governance, 3, 7, 50À51 changes in, 51 elements of financial institutions, 48À50 proposals, rules, 135 See also Financial governance Corporate Governance Annual Report, 162, 178 Corporate social performance, 90 Corporate social responsibility (CSR), 15, 36, 39 CRD3 See Third Capital Requirement Directive (CRD3) CSR See Corporate social responsibility (CSR) Current intrinsic motivator, 30À31 DAB plans See Deferred annual bonus plans (DAB plans) DAX, 123, 125 Decisive elements, 143 Defendant, 89 Deferred annual bonus plans (DAB plans), 104 Department for Business, Innovation and Skills (BIS), 112, 114 Detailed audit financial information, 111 Determinants of director remuneration, 81À85 and board independence from CEO, 83À84 board overlaps, 84 257 characteristics of firms adopting outside director stockoption plans, 81À82 compensation committees, 82À83 consultants, 83 Diagnostic control systems, 17À18 Director, 198 Director compensation guidelines, 75 Directors’ remuneration agency theory and managerial compensation, 23 base salary, 26 bonus, 26 opportunism, 23 principal-agent model, 23 say on pay votes, 25 short-termism, 25 stock options, 27À29 strengthening shareholders’ voting rights, 24 board’s role in, 67 current intrinsic motivator, 30À31 design, 65À66 employee motivation, 29 in Ethiopia Commercial Code, 185 emerging separation of ownership and control, 187À190 Ethiopian companies profile, 186À187 non-financial and financial companies, 188 in Ethiopian share companies, 190 challenges, 195À207 design, 192À194 regulation, 190À192 reporting, 194 factors, 66À67 in Germany challenges, 128À130 design, 122À126 258 INDEX regulation, 119À122 reporting, 127À128 in Italy, 133À134 design schemes, 142À146 regulation, 134À142 reporting, 146À152 and motivation, 21 executive contracts, 21 high-powered incentive contracts, 22 shareholders, 22 participation of employees, 207À210 policy, 64À65 in Spain, 157 annual report on remuneration of directors, 179À180 board structure in, 168 recommendations to directors remuneration in, 158 regulation for financial institutions, 163À166 remuneration challenges, 180À181 remuneration design, 169À176 remuneration regulation, 157À163 remuneration reporting, 176À180 takeover threats, 30À31 in United Kingdom challenges, 113À115 design, 103À110 regulation, 95À103 reporting, 110À113 in United States, 73 Blue Ribbon Commission, 74 challenges, 91À92 corporate social performance, 90 design, 78À81 determinants, 81À85 dividend paying, 89 empirical evidence on, 81 financial reporting, 87À88 market reaction to adding equity to director remuneration plans, 85À86 regulation and reporting, 75À8 shareholder lawsuits, 89À90 well-balanced packages, 31 Directors’ Remuneration Report Regulations (2002), 95, 110À111 Directors’ Remuneration Reporting Reform (2012), 111À113 Discounting, 52À53, 55 functions, 53 Dismissal of executives, 21 Dividend paying, 89 Dodd-Frank Act, 75, 76 Dodd-Frank Financial Reform bill, 25 Earnings before interest and tax (EBIT), 26, 123 Earnings management, 87 EBA See European Banking Authority (EBA) EBIT See Earnings before interest and tax (EBIT) Economic contract, 10 Economic Value Added (EVA), 123 Employee motivation, 29 Enel CEO, 151 Enel Remuneration System (2013), 149À152 Enterprise and Regulatory Reform Bill (2013), 115 Epitomes of transformative CSR, 36n1 Equity-based compensation, 28, 31 Equity-based pay models, 230 Equity compensation, 79À80 ESMA See European Securities and Markets Authority (ESMA) ESOs See Executive share options (ESOs); Share option plans (ESOs) www.ebook3000.com Index Ethiopian Commercial Code See Commercial Code European and German regulation of remuneration system incentive-compatibility, 220 incentive-compatible remuneration system, 221 European and international recommendations, 164À165 European approach to director’s remuneration regulation Action Plan, 226À227 action plan, 231 EU interventions, 237À244 European Commission, 225, 227 Italian Remuneration reports to CG Code, 244 Corporate Governance Committee, 245 eventual caps, 249 parameters, 247À248 remuneration and directors’ role, 250À251 remuneration policy, 246À247 “Remuneration Reports”, 246 short-and mediumÀlong-term oriented variable components, 248À249 survey by Assonime, 252 literature review, 228À231 Recommendation 2004/913/EC, 232À233 Recommendation 2005/162/EC, 235À237 remuneration of individual directors, 234À235 policy, 233À234 share-based remuneration, 235 See also Directors’ remuneration European Banking Authority (EBA), 216 European Commission, 225, 227 European Community, 225 European legislation to German implementation, 213 259 European Parliament and Council, 214 implementation of remuneration regulations in Germany, 219À220 incentive-compatibility of European and German regulation of remuneration system, 220 incentive-compatible remuneration system, 221 prerequisites of incentivecompatible remuneration system, 215À216 regulative remuneration standards of EU, 216À219 European Securities and Markets Authority (ESMA), 216 European Union interventions, 237 “Action Plan”, 243 Directive 2007/36/EC, 244 European Parliament, 241À242 golden parachute, 240 Recommendation, 239 Recommendation for Financial Institutions, 239À240 Rem HLP, 238 EVA See Economic Value Added (EVA) Executive and non-executive directors, 198À199 Executive compensation, 133À134 and motivation, 36À37 plans, 37À38 redefining performance evaluation in age of sustainability, 38 CSR, 39 hypotheses, 40 Puma innovative accounting system for sustainability, 40 in 21st century, 35À36 See also CEO compensation system 260 INDEX Executive contracts, 21 Executive directors’ benefits provision, 65 Executive remuneration in FTSE 250 companies, 114 Executive share options (ESOs), 97 Exercise barriers, 123 Explicit incentives, 21 Exponential discounting, 53À54 Extrinsic motivation, 23, 29 Federal Supreme Court Cassation Division, 201n42 FEDEX days, 37 Financial companies, 47 crisis and effects on remuneration governance in financial institutions, 48À50 European initiatives for enhanced governance and remuneration, 50À51 financial governance, 47 remuneration, 51À55 See also Industrial companies Financial governance, 47 See also Corporate governance Financial institutions, 48 corporate governance elements of, 48À50 crisis and effects on remuneration governance in, 48 pre-and post-crisis remuneration governance, 50 stakeholder groups, 49 Financial reporting, 87À88 Financial Reporting Council (FRC), 98À99 May 2010 consultation document, 100À101 September 2012 consultation document, 101 Financial scandals, 39 Financial Service Authority (FSA), 96n1 Financial Stability Board (FSB), 213n1 Financial Stability Forum (FSF), 164 Firm size, 66 Fixed annual remuneration, 192 Fixed compensation package design, 144À145 Fixed remuneration, 169, 171 Fraudulent financial reporting, 87 FRC See Financial Reporting Council (FRC) Free riding, 12 French Law, 229 FSA See Financial Service Authority (FSA) FSB See Financial Stability Board (FSB) FSF See Financial Stability Forum (FSF) FTSE All-Share Index factsheet, 109À110 Full value shares, 79 GCCG See German Code of Corporate Governance (GCCG) General shareholders meeting (GSM), 192 German Code of Corporate Governance (GCCG), 121, 122, 124, 126À127 German Commercial Code, 127 German Corporate Governance Code See German Code of Corporate Governance (GCCG) German Federal Financial Supervisory Authority (BaFin), 216 German Government passed the Management Board Remuneration Disclosure Act See Vorstandsvergütungs— Offenlegungs-gesetz (VorstOG) www.ebook3000.com Index German law, 229 German Stock Corporation Act (GSCA), 119À120, 122, 126 Germany German Prime Standard, 126, 127 German two-tier system, 119À120 implementation of remuneration regulations in, 219À220 Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG), 121, 123 Gesetz zur Verbesserung der Kontrolle der Vorstandsvergütung und Änderung weiterer aktienrechtlicher Vorschriften (VorstKoG), 129 Golden parachutes, 174À175 Government-owned unlisted companies, 141À142 Greenbury Report (1995), 95, 96À97 GSCA See German Stock Corporation Act (GSCA) GSM See General shareholders meeting (GSM) Hampel Report (1998), 98 Higgs Report, 99 High-level Principles for Remuneration Policies (Rem HLP), 238 Hostile takeovers, 30 Hyperbolic discounting, 54 IFRS See International Financial Reporting Standards (IFRS) IMF See International Monetary Fund (IMF) Implementation report, 112 Implicit incentives, 21 261 Incentive-compatible remuneration system prerequisites, 215À216 Incentive pay, 21À22 Incomplete remuneration contracts, bounded rationality, 10 complete contract, nexus of contracts, 10À11 See also Directors’ remuneration Independent director compensation, 87 Independent non-executive directors (INEDs), 97 Individual bonus decisions, 65 Individual directors remuneration of, 234À235 Industrial companies, 59 accounting regulation, 67À68 CEO compensation system, 59, 60 directors’ remuneration board’s role in, 67 design, 65À66 factors, 66À67 policy, 64À65 research design, 62 results, 62À64 See also Financial companies INEDs See Independent nonexecutive directors (INEDs) Initial public offering of shares (IPOs), 187 Interactive control systems, 18 International Financial Reporting Standards (IFRS), 67, 68 International Monetary Fund (IMF), 213n1 Intrinsic motivation, 23 IPOs See Initial public offering of shares (IPOs) ISVAP Regulation, 141 Italian compensation discipline, 135 Italian economic system, 134 Italian listed companies, 135À139 262 INDEX Law 2/2011, 165À166 Ley de Sociedades de Capital (LSC), 158 Royal Legislative Decree 1564/ 1989, 159 Spanish legislation, 157À158 Listing Rules (2004), 96n2, 98 London Stock Exchange (LSE), 98n4, 206 Long-term compensation, 66 Long-term incentive plans (LTIPs), 97, 105, 114, 127, 128, 248 CEO compensation in UK listed companies, 108, 109 executive average compensation in UK listed companies, 109 executive compensation, 110 executive directors’ remuneration, 106À108 FTSE All-Share Index factsheet, 109À110 percentage of using LTIPs in FTSE 100 companies, 106 share grants, 105 Long-term performance measurement, 65 LSC See Ley de Sociedades de Capital (LSC) LSE See London Stock Exchange (LSE) LTIPs See Long-term incentive plans (LTIPs) pension awards, 123À124 pre-defined objectives, 122À123 range of board remuneration of companies, 125À126 share-based compensation, 123, 126 Management-by-objectives plans (MBO), 248 Market dichotomy, 8À9 Market for corporate control, 30 MBO See Management-byobjectives plans (MBO) MDAX, 123, 125 MediumÀlong-term oriented variable remuneration, 248À249 Meeting fees, 79 Microeconomics, Mid-term incentive plan (MTI plan), 127, 128 Ministry of Commerce and Industry, 192 Mixed remuneration design, 193À194 Monetary compensation components, 124 Moral hazard, 14À15 Motivation, 23 theories, 215À216 MTI plan See Mid-term incentive plan (MTI plan) Multi-annual variable remuneration, 172 limits, conditions, and constraints, 173 LSC, 174 Multitasking, 27 Management, 16À18 compensation plans, 37 Management board remuneration, 122 financial crisis effects, 124À125 GCCG, 122, 124 monetary compensation components, 124 NACD See National Association of Corporate Directors (NACD) NASDAQ, 112n16 National Association of Corporate Directors (NACD), 74 National Bank of Ethiopia (NBE), 185 Italian ownership structure, 134 Italian Stock Exchange See Borsa Italiana Italian unlisted companies, 142 www.ebook3000.com Index NBE See National Bank of Ethiopia (NBE) Neo-classical contracts, 8, Neo-classical economics, Net present value (NPV), 52 New Regulations, 139À140 New York Stock Exchange (NYSE), 59, 62, 63, 64, 112n16 Nexus of contracts, 10À11 Nib International Bank (NIB), 199 NPV See Net present value (NPV) NYSE See New York Stock Exchange (NYSE) Opportunism, 23 Organization for Economic Cooperation and Development (OECD), 206n63 Ownership, 67, 105 “Pay for performance” culture, 145 Pay-performance link, 37À38 Pay-performance sensitivity, 28 Pension awards, 123À124 plans, 174 rights, 103n9 Performance evaluation in age of sustainability, 38 CSR, 39 hypotheses, 40 Puma innovative accounting system for, 40 Performance measures, 65 Performance share grants, 105 Phantom stock, 37 Policy report, 112 Post-crisis remuneration governance, 50 PPESA See Privatization and Public Enterprises Supervising Agency (PPESA) Pre-crisis remuneration governance, 50 Principal-agent model, 23 263 theory models, Privatization and Public Enterprises Supervising Agency (PPESA), 187 Production costs, Proportionality principle, 140 Puma innovative accounting system for sustainability, 40 Quasi-hyperbolic discounting, 54, 55 Quoted companies, 112n16 Recommendation 2004/913/EC, 232À233 Recommendation 2005/162/EC, 235 individual remuneration, 237 remuneration committee, 236 Regulation for financial institutions in Spain, 163, 164 Circular 4/2011, 166 European and international recommendations, 164À165 Royal Decree 771/2011, 165À166 Sustainable Economy Act, 165À166 Regulative remuneration standards of EU, 216 Directive 2013/36/EU, 218 functions and prerequisites of remuneration systems, 217 long-term oriented risk management strategies, 219 remuneration policies, 217 Relational contracts, 8, Rem HLP See High-level Principles for Remuneration Policies (Rem HLP) Remuneration, 3, 7, 51, 229 alternative discounting functions, 53 264 INDEX of directors, 138 discounting, 52À53 evaluation, 55 exponential discounting, 53À54 hyperbolic discounting, 54 policy, 110À111, 233À234 challenges for, 115 practices, 51 quasi-hyperbolic discounting, 54, 55 structuring variable bonuses over time, 52 systems, 133, 216 Remuneration challenges in Ethiopia, 195 bank directors remuneration, 203À206 body corporate directors, 199À203 executive and non-executive directors, 198À199 lack of legal requirement for Remuneration Committee, 206À207 privileges, 195À198 in Germany, 128À130 in Spain, 180À181 in United Kingdom challenges for remuneration policy, 115 problems in UK executive remuneration, 113À115 in United States, 91À92 Remuneration committee, 110 lack of legal requirement for, 206À207 Remuneration design, 103 in Ethiopian share companies, 192À194 in Germany management board remuneration, 122À126 supervisory board remuneration, 126 in Italy, 142À146 in Spain average remuneration per director, 175 practice, 175À176 profit sharing, 173 remuneration policy for directors, 166À169 remuneration systems elements in, 169À175 systems of remuneration to directors, 170 in United Kingdom annual bonus plan, 103À104 base salary, 103 ESOs, 104À105 LTIPs, 105À110 in United States, 78 Conference Board survey, 80 equity compensation, 79À80 meeting fees, 79 perquisites, 80, 81 survey of firms, 78 Remuneration Disclosure Requirements (2010), 96n1 Remuneration regulation, 95À96 in Ethiopian share companies, 190À192 in Germany German two-tier system, 119À120 management board and supervisory board, 120À122 in Italy, 134À135 bank and banking holdings, 139À141 government-owned unlisted companies, 141À142 Italian compensation discipline, 135 listed companies, 135À139 unlisted companies, 142 in Spain, 157 Codes of Good Governance, 159À160 for companies, 157 www.ebook3000.com Index LSC, 157À159 regulations, 163 Securities Market Act, 162À163 Sustainable Economy Act, 161À162 in United Kingdom, 98À99 Combined Code on Corporate Governance (1998) Greenbury Report (1995), 96À97 UK Corporate Governance Code (2010 Code), 99À101 UK Corporate Governance Code (2012 Code), 101À103 in United States, 75 CD&A, 76 compensation committees, 77 NYSE and NASDAQ, 75 SEC, 75À6 Remuneration reporting in Ethiopian share companies, 194 in Germany, 127À128 in Italy, 146À147 2013 Enel Remuneration System, 149À152 Telecom Italia 2012 Remuneration Scheme, 147À149 in Spain, 176À180 in United Kingdom, 111À113 2012 Directors’ Remuneration Reporting Reform Directors’ Remuneration Report Regulations (2002), 110À111 in United States, 75 CD&A, 76 NYSE and NASDAQ, 75 SEC, 75À6 Responses to shirking, 17 Return on Assets (ROA), 123 Return on Net Assets (RONA), 123 265 Royal Assent, 115 Royal Decree 1362/2007, 163 Royal Decree 771/2011, 165À166 Samuelson’s model, 53 Sarbanes-Oxley Act (2002), 77 “Say on pay” remuneration, 111 system, 161 tool, 135 votes, 25 SDAX, 124À125 SEBI See Securities and Exchange Board of India (SEBI) SEC See Securities and Exchange Commission (SEC) § One-third Participation Act, 120 § 29 Co-Determination Act, 120 § 107 GSCA, 120 Securities and Exchange Board of India (SEBI), 207 Securities and Exchange Commission (SEC), 25, 75 Securities Market Act, 162À163 Sensitivity of pay, 21 Share-based compensation, 123, 126 Share-based remuneration, 235 Share-option-based pay, 230 Share option plans (ESOs), 104À105 Shareholder(s), 22 lawsuits, 89À90 shareholder-manager agency relationship, 14 vote, 111 Shirking, 16, 17 Short-term remuneration schemes, 145 Short-term-oriented variable remuneration, 248À249 Short-termism, 25 Smith Report, 99 “Soft landing” mechanisms, 230 Stakeholder(s), 15À16, 205 266 INDEX impact of director remuneration, 90À91 groups, 49 model, 16, 208 Stakeholders’ Interests, 49 theory, 40 Standardization, 105 Statutory dividend, 208À209 Stewardship Code (2010), 99n6 Stock market’s reaction, 85À86 Stock options, 27, 79À80 equity-based compensation and pay-performance sensitivity, 28 multitasking, 27 packages, 146 senior management pay at public companies, 29 Stock-appreciation rights, 79 Strengthening shareholders’ voting rights, 24 Strike price, 80 Structuring variable bonuses over time, 52 Supervisory board remuneration, 126 Sustainable Economy Act, 161À162, 165À166 Takeover threats, 30À31 Target-based bonuses, 26, 27 TecDAX, 124À125 Telecom Italia 2012 Remuneration Scheme, 147À149 TFM See Trattamento di fine mandato (TFM) Theory of firm, 4À6 Coase Theorem, production costs, situations in market transactions, Theory of property rights, Theory of team production, 17 Theory of transaction costs, Third Capital Requirement Directive (CRD3), 96n1, 139 Toronto Stock Exchange (TSX), 59, 62, 63, 64 Transaction-cost economics, Trattamento di fine mandato (TFM), 249 TSX See Toronto Stock Exchange (TSX) 2008 Code, 99n6 2010 Code See UK Corporate Governance Code (2010 Code) UK Corporate Governance Code (2010 Code), 99À101 UK Corporate Governance Code (2012), 101À103 UK executive remuneration, problems in, 113À115 Variable annual remuneration, 171À172 VorstAG See Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG) Vorstandsvergütungs— Offenlegungs-gesetz (VorstOG), 121 VorstKoG See Gesetz zur Verbesserung der Kontrolle der Vorstandsvergütung und Änderung weiterer aktienrechtlicher Vorschriften (VorstKoG) Walker Review (2009), 100n7 Well-balanced packages, 31 “Windfalls” in equity-based plans, 230 Worldwide Total Remuneration Report, 143 Year-on-year performance, 109n13 Zero transaction costs, 30 www.ebook3000.com .. .The Theory and Practice of Directors Remuneration New Challenges and Opportunities This page intentionally left blank www.ebook3000.com The Theory and Practice of Directors Remuneration New. .. The Theory and Practice of Directors Remuneration: New Challenges and Opportunities has been written The book examines the current theories, practices, and regulations and explains them in detail... Governance and Remuneration Udo C Braendle and Amir Hossein Rahdari Introduction The Theory of the Firm À The Theory of Transaction Costs? Beyond the Firm and Market Dichotomy Incomplete Remuneration