The need to achieve some alignment between the interests of the Owners (Shareholders/Principals) and Management (Agents) has its basis in the Agency theory, which suggests the possibility of a conflict between the interests of both parties. Performance-based compensation is one way of resolving the conflict and achieving balance between Principals and Agents.
However, according to the Harvard Business Review – “Why Incentive Plans Cannot Work”, the biggest problem with rewards, is that while many people believe monetary compensation is a major driver of performance, research has found little evidence to support the assumption. In fact, bonuses and other financial incentives in some cases can do more harm than good. “When it comes to producing lasting change in attitudes and behavior,” writes Alfie Kohn, “rewards, like punishment, are strikingly ineffective. Once the rewards run out, people revert to their old behaviors.” Extrinsic motivators don’t change the attitudes that underlie behavior.
Be that as it may, given the significant responsibilities and performance expectations of Executive Management, a robust compensation plan ensures that the Company is able to attract and retain the right talent Research has further shown that companies that prioritize compensation plans outperform those who do not.
The controversy around executive compensation has its roots in accounting scandals which triggered compensation-related regulations and statutes such as the 2002 Sarbanes-Oxley Act which cracks down on corporate fraud. The Act bans company loans to executives and gives job protection to whistleblowers. It also strengthens the independence and financial literacy of corporate boards and holds CEOs personally responsible for errors in accounting audits.
According to Principle 16 of the Nigerian Code of Corporate Governance, 2018 (NCCG), “The Board ensures that the Company remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.” The NCCG provides detailed recommended practices to guide remuneration governance, including requiring the Board to set the direction for addressing remuneration on a Company-wide basis and approving policies that articulate and give effect to fair, responsible and transparent remuneration. Such policies are expected to be designed to attract, motivate, reward and retain high performing human capital.
The Code provides that the CEO and other Executive Directors should not receive sitting allowances and Director’s fees from the company, its holding company or subsidiaries for attending Board and Committee meetings as it is expected that time spent on the board, its committees and related work are included in their remuneration. The Company’s remuneration strategy and director’s remuneration are required to be reported in the Annual Reports.
Non-Executive Directors should not receive performance-based compensation as this can result in prejudice in decision-making and undermine their objectivity. The Code introduces the payment of compensation to directors for loss of office or retirement. It is not clear if this is with respect to all Directors. However, in the case of the MD/CEO, Executive directors (ED’s) and senior management, the compensation due for any loss of office or termination of appointment is required to be fair and in accordance with their contractual terms.
Yet another first is the requirement to emplace a Claw back policy to recover excess or undeserved rewards such as bonuses, benefits, profit sharing, stock awards or any other performance-based rewards from Directors and senior employees. A Claw Back may be defined as a contractual arrangement whereby money already accrued to an employee has to be returned to an employer, which sometimes comes with a penalty. The Claw back is triggered where the account or financial result on which the incentive was based is later found to be significantly inaccurate, misrepresented or deceptive, for example, instances of misdemeanor, fraud, material violation of company policy or material regulatory infractions.
The introduction of Claw back is expected to ensure that liability for “wrong-doing” is suffered by those responsible. It is expected that Claw back policies will include staggered incentive payment to ensure that the company actually has something to claw back.
Above all, executive compensation should be fair and the basis of determining what has been earned should be clear and transparent. Concerns about fairness should not arise when the criteria of rewards are standard, based on defined metrics and obvious to all–especially when individual contributors are the ones being rewarded. Opaque and “off radar” remuneration that cannot stand the test of scrutiny should not be paid to Directors and the Board should continue to strive to strike the right balance in linking reward to performance and ensure that appropriate disclosures are made in the interest of transparency and accountability.
Adeyemi is the Managing Director/CEO, DCSL Corporate Services Limited. Kindly forward comment(s) and reaction(s), if any to [email protected] or [email protected]
