In many countries, salaries and perks of ' top executives' of corporations are tied to their performances. In some countries, including the US, their incentives are structured in such a way that the higher a company's share price goes up the more financial facilities they enjoy.
Stock options for top executives are meant precisely for that purpose. The top executives in a position to enjoy stock options will always see that stock prices of the companies which they are heading as the chief executive officers or CEOs should go up. The stock prices will go up only if the companies which they are running as the chief executives perform well economically. The stock options are exercised by the executives normally at a time when they think the offered stock prices already had hit the sky. Many executives in the US get much more financial benefits from the stock options than from the yearly cash salary.
In some countries, executives' pay and incentives are tailored to incentive bonuses which depend on the companies' financial performances. In some other countries, executives' salaries and other financial benefits are tied to the earnings per share of the company. The higher the earnings per share the higher are the salaries and other payments the top executives receive. This incentive is offered to the executives so that they care more about of the shareholders' interest.
The Board and top executives of a company are supposed to work with one end in view: maximising the shareholders' value. By shareholders' value, it is meant what price of the shares held by the investors will bring to them. And the expected price or value of the shares depends on the company's economic performance. The dynamic and well-qualified executives with the help of the members of the Board of Directors can take a company to such a height that the competitors will be envying it.
Normally the functions of the Board - the apex body for policy making and that of executives - are put in a separate domain by orders and regulations of the regulator or the concerned oversight body. The top executive or the CEO enjoys freedom in carrying out his day-to-day functions. The chief executive is to set the items on the notice containing agenda for the Board or matters to be discussed in the Board's meetings. The Board in many cases delegates some of its functions to the chief executive. The chief executive is a hired person and is normally employed on a contract basis for a period against the payment of cash salaries and other perks which may include cash bonuses, free transport, paid holidays and payments for his children's education.
As the functions are separate, the top executive's performance can be measured by what he does for the company he leads. However, the Board's contribution is also important. If the Board is filled with ignorant and incapable persons, it cannot set appropriate tasks for the company's CEO, nor can it take correct decisions when needed. Under a weak Board, the CEO does not feel obligated. He does not lead the company, rather holds on the position just to enjoy salaries and perks being offered by the company.
In a market like Bangladesh, there are many instances where many do not have the required qualifications to be members of the Boards, but they are on the Board because either they are sponsors of the company or are nominated by some other major shareholders, or in case of a state-owned company, by the government. Such a Board does not contribute to the growth of a company. Rather at times, the Board turns out to be a liability on the company.
In Bangladesh, though major portion of a company's equity capital is held by the ordinary investors, unfortunately they do not have any say in the appointment of the CEO. Sometimes the company notifies the change in the position of CEO but never says what a newly-appointed CEO is all up to. The CEO's salary and other perks are never put on the agenda for approval by the general shareholders.
Since the jobs of CEOs are very important as far as the shareholders' interests are concerned, their appointment and job descriptions should be regulated by the regulator, the Bangladesh Securities Exchange Commission (BSEC). In the case of banking and non-banking financial companies, the Bangladesh Bank is already having its say in the appointment and removal of the CEOs. The appointment of CEOs in other companies listed with the bourses should also be consented to by the BSEC. The consent of the BSEC should be made compulsory also in the case of removal of the CEOs.
The writer is Professor of Economics at the University
of Dhaka.
abuahmedecon@yahoo.com
