Hridai's presentation on Executive Compensation. We hope it benefits you. Feedback is always appreciated.

1. 1
CHALLENGES IN EXECUTIVE
COMPENSATION!!!

2. 2
1. PREVIEW
THE DISCUSSION IS PRESENTED IN 2 PHASES –
THE UNDERSTANDING
&
THE CHALLENGES

3. 3
2. Phase -1 –
Understanding
a) Compensation - Define
PAYMENT RECEIVED FOR THE
SERVICES RENDERED TO, OR
WORK PERFORMED ON BEHALF OF
THE ORGANIZATION.

4. 4
b) Executives -
2 groups of employees who play a major role
in a company’s policy decision: Highly
compensated employees and key employees
both hold positions of substantial
responsibility. Generally having 5%
ownership or compensation greater than USD
130000/-

5. 5
c) Executive Compensation- Components
There are five basic tools to compensation:
• Base salary
• Short-term incentives
• Long-term incentives (LTIP)
• Employee benefits and perquisites
Perquisites ("perks")
• Generous retirement plans
• Health insurance
• Chauffered limousine
• Executive jet
• Interest free loans for the purchase of
housing, etc.

6. 6
d) Terms of reference in Executive
Compensation
• Golden handshake is a clause in an
executive employment contract that
provides the executive with a significant
severance package in the case that the
executive loses his or her job through
firing, restructuring, or even scheduled
retirement. This can be in the form of
cash, equity, and other benefits, and is
often accompanied by an accelerated
vesting of stock options.

7. 7
• Golden parachute is a clause (or several) in
an executive's employment contract
specifying that they will receive certain
large benefits if their employment is
terminated. Sometimes, but not always,
these clauses apply only in the case that
the company is acquired and the
executive's employment is terminated as a
result of that acquisition. These benefits
can be severance pay, cash bonuses, stock
options or a combination of the items. The
benefits are designed to reduce perverse
incentives.

8. 8
• Options backdating is the practice of
granting an employee stock option that is
dated prior to the date that the company
actually granted the option. This practice
raises a number of legal and accounting
issues; it may or may not be unlawful
depending on the circumstances.

9. 9
e) Who approves Executive Compensation
The Board of Directors give final approval of the
Compensation Committee’s recommendations.

10. 10
f) Board of Directors
comprises of members
including CEO and top
executives and they
represent shareholders
interests.

11. 11
g) Compensation Committee –
Board of Directors its members within
and outside the company make up a
company’s compensation committee.

12. 12
h) Compensation Committee
performs 3 duties –
a) Reviews recommendations for
compensation packages
b) Discuss the assets and liabilities of the
recommendations
c) Recommends the best proposal to the
board for their consideration.

13. 13
i) Why the ‘ Furore’? Global Context
Wall Street Crash of 1929
The East Asian Crisis of 1997
Collapse of two big corporations:
Enron and WorldCom
Former Enron chief accountant Richard Causey pled guilty to a single count of
securities fraud and agreed to a seven-year prison term after vigorously
defending himself from multiple charges of business crimes for over two years.
Had he elected to defend himself at trial against the charges and lost, he would
have faced an effective life sentence.
The Justice Department's indictment against eight former KPMG partners for
their involvement in advising and promoting allegedly illegal tax shelters for
clients of the firm.

14. 14
The fall of Enron and WorldCom in the
United States brought into public eye the
unholy nexus between the rogue
corporates, acquiescent auditors and the
capital market and raised fresh concerns
about corporate governance???

15. 15
India has had its own share of corporate
frauds. The vanishing non-banking
finance companies, sinking mutual funds,
teak plantation schemes are just a few
well known examples.
Indian Context

16. 16
j) The Controversy – Are Executives
paid too much?

17. 17
REFERENCE - Typical compensation
• During 2003, about half of CEO compensation
was in cash pay and bonuses, and the other half
in vested restricted stock, and gains from
exercised stock options.
• Forbes magazine counted the 500 CEOs
compensation to $3.3 billion during 2003 (which
makes $6.6 million a piece).
• The typical salary in the top of the list is $1
million - $3 million

18. 18
• The typical top cash bonus is $10
million - $15 million
• The highest stock bonus is $20 million
• The highest option exercise have been
in the range of $100 million - $200
million

19. 19
The Monkey Business
• CEO's pay is set by the board of
directors,
• CEO determining the selection
• Tenure
• Committee assignments of directors
• Most often selecting the compensation
consultants as well, an unhealthy conflict of
interest occurs and prevents effective price
competition.
• Harvard Business School documents the problem
of excessive CEO compensation, showing that the
return on investment from these pay packages is
very poor compared to other outlays of corporate
resources.

20. 20
3. Phase -2 – Challenges
The challenge to both directors and
management is how to have:
a) a relationship of trust and support without
being adversarial
b) at the same time ensuring that directors raise
tough questions with management and
critically assess the worthiness of business
plans.
c) Corporate accountability is of paramount
importance as companies raise capital from the
public.

21. 21
a) Strategic – is Executive pay for
Performance?
• Performance-based remuneration is designed to relate
some proportion of salary to individual performance. It
may be in the form of cash or non-cash payments such
as shares and share options, superannuation or other
benefits.
b) Ethical – is Executive Compensation Fair?
• Remuneration of the Executive should be fair and
transparent as well as disclosed.
Remuneration: Should Be Sufficient to
Attract, Retain & Motivate Directors
Required by The Company.

22. 22
4. Conclusion –Where do we go:
• Key elements of good corporate governance
principles include:
• Honesty
• Trust
• Integrity
• Openness
• Performance orientation
• Responsibility and accountability
• Mutual respect
• Commitment to the organisation
A) The Corporate governance

23. 23
The persistent occurrence of scams
and scandals in the capitalist
structure bears testimony to the
pervasiveness of human greed and
human ingenuity in bypassing legal
limitations.
B) The Regulatory Controls

24. 24
Current corporate furor resulted in
the passing of Sarbanes-Oxley Act
that prescribes stringent reporting
standards for auditors and corporate
management and provides for hefty
penalties in case of defaults.

25. 25
• The Independent Audit Committee
• The self-regulatory organizations (NYSE and Nasdaq)
produced listing standards that ultimately required: (i)
an issuer to have a board comprised of a majority of
independent directors, and (ii) that two vital
committees - the nominating committee and the
compensation committee - be comprised solely of
independent directors (with limited exceptions).
• The new shareholder activism
• Shareholder access to company proxy materials for
the purpose of nominating director candidates;
• Executive compensation disclosure, which includes
what the Commission is doing on this front and what
shareholders are doing directly.

26. 26
SEBI set up a web based EDIFAR
through which listed companies
would be able to electronically file
their periodic disclosure reports.
EDIFAR is Electronic Data
Information Filing and Retrieval
system.

27. 27
FORMS TO BE FILED BY
THE COMPANIES
I.A Quarterly Financial Results Statements (First,
Second, Third and Fourth Quarter)
I.B Quarterly financial result statement for banking
companies (First, Second, Third and Fourth
Quarter)
II Shareholding pattern (Promoters holding)
III Corporate Governance Reports
IV Action taken against the company

28. 28
Code of Business Conduct - Sample
The basic principles discussed in
this Code are subject to any
Company policies covering the
same issues.
1. Compliance with Laws, Rules and
Regulations
2. Conflicts of Interest
3. Insider Trading
4. Corporate Opportunities
C) Code of Conduct

29. 29
5. Competition and Fair Dealing
6. Political Contributions
7. Discrimination and Harassment
8. Health and Safety
9. Environmental
10. Record-Keeping, Financial Controls and
Disclosures
11. Confidentiality
12. Protection and Proper Use of Company
Assets
13. Payments to Government Personnel
14. Trade Issues

30. 30
15. Waivers of the Code of Business Conduct
and Ethics
16. Reporting any Illegal or Unethical Behavior
17. Improper Influence on Conduct of
Auditors
18. Financial Reporting
19. Compliance Procedures
20. Annual Acknowledgement

31. 31
When a person invests money in a
company, he has the right to expect
the management to act as a trustee
and ensure the safety of the capital
invested and a fair return.
In the wake of the, the question at
the top of the mind of shareholders is
whether good corporate governance
is totally legally enforceable.
The regulators are doing a good job in
laying down the form of corporate
governance, but mere legislation may not
suffice to tame the rogue corporates.

32. 32
For corporate governance to take root,
the shareholders must know that their
activism and alertness is crucial. What
makes him a prey in the wild jungle of
share market is when unscrupulous
market players manipulate the system
and share prices, and go scot free while
regulators watch from the sidelines.
The point is to create a level playing field,
be it brokers, institutions or corporate
bigwigs. Trust & Market credibility is
imperative.

33. 33
Action in the spirit of service…

34. 34
EXECUTIVE DECISION
1. SHALYA THEORY- THE MOST DANGEROUS
2. YUDHISHTRA – THE MARTYR
3. KARAN – THE D-MERIT
4. SHAKUNI –THE PLOTTER
5. DURYODHAN - THE AMBITIOUS
6. DHRISHTRASHTRA- THE BLIND
7. BHISHMA – THE VITAL IMPOTENT
8. ABHIMANYU – THE VITAL EXPENDABLE
9. DRAUPADI – THE PROBLEM
10. EKLAVYA – THE PAYMENT
11. ARJUNA – THE FOLLOWER
12. KRISHNA – THE CHAMELION

35. 35
www.hridai.com
It is the heart of the matter which concerns us…
A-287 New Friends Colony, New Delhi – 110065
Ph: +91-11-46512033/44