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If there is one thing that
annoys private shareholders, it is the inflated remuneration packages paid
to directors of many public companies in recent years. Total pay of
directors has grown much
more rapidly than that of employees in general, and often much faster than
the growth in profits or dividends of the companies concerned. In the bad
times, they do not fall, and in the good times, they increase faster than
other costs, much to the disadvantage of shareholders. In addition, more
methods of remuneration are added, inflating the total cost to the company
of the board of directors. So in addition to basic salary, we now have short
term bonus packages, LTIPs (long term incentive plans), share grants, share
options, and escalating pension packages. The provision of more detailed
information in the Annual Report, and the voting on the Remuneration Report
section has helped to bring this subject into sharper focus, but much yet
needs to be done to base pay more soundly, and align it more closely with
shareholders interests.
For the submissions by
UKSA to various bodies on the general subject of director's pay over the
last few years (and it will no doubt a perennial topic of concern to UKSA members), read the following files:
Directors_Pay_2002
Directors_Pay_1999
Directors_Pay_1999_Appendix
Directors_Pay_Ceiling_1999
Directors_Remuneration_Greenbury_1995
Directors_Pay_1994
Note that one of UKSA's
key proposals is to set a limit in total annual boardroom remuneration. The
ceiling can be raised or lowered at any time by a vote of the
shareholders. It is our main recommendation for returning control of
directors' pay to the owners of the company.
Share
Options. There is much debate on
the merits of share options, how many should be granted and on what terms,
and how to account for them, if at all. For example go to
Share Options Letter for a letter published in the Financial Times
in November 2003 on the accounting issue, to
Share Options for letters
published in November 2002 or to
Directors_Share_Options_2000
for more information. However in April 2004 the Accounting Standards Board (ASB)
issued FRS20 which requires share options to be expensed in the accounts of
listed companies from the beginning of 2005. This should help to discourage
the over generous granting of options to directors and management that
currently takes place in some companies.
A common problem with
share options is the need to adjust them after various company actions such
as the issue of new shares, consolidation of shares, or share buy-backs.
This was highlighted in 2004 at Mitchells & Butlers - the full story can be
seen at Adjusting_Share_Options
where the views of two UKSA members on how it should be done are given.
An edited version of
the following letter was published in the Financial Times in August 2005,
following comments from the QCA on the difficulty in valuing share options
in smaller companies and the demand for a better methodology:
Share_Option_Cost_Estimation.
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