Scribd
Upload
38 views

SBL BPP Kit-2019 Copy 457

Directors at 2Tel may be paid performance bonuses and given share options and benefits to align their interests with shareholders. However, shareholders may want more details on bonuses to ensure they are actually based on performance measures and not short-term manipulation. Pension contributions for directors are usually based on salary rather than performance, which could concern shareholders. When setting director pay, the remuneration committee must consider the costs of pensions and ensure benefits are not excessive compared to other pay elements.

Uploaded by

Reever River
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
38 views

SBL BPP Kit-2019 Copy 457

Directors at 2Tel may be paid performance bonuses and given share options and benefits to align their interests with shareholders. However, shareholders may want more details on bonuses to ensure they are actually based on performance measures and not short-term manipulation. Pension contributions for directors are usually based on salary rather than performance, which could concern shareholders. When setting director pay, the remuneration committee must consider the costs of pensions and ensure benefits are not excessive compared to other pay elements.

Uploaded by

Reever River
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

Mock exam 4: answers

Performance related bonus


Directors may be paid a cash bonus for good performance. Vincent Spark has
commented that all 2Tel directors deserve a good bonus, but more details may be
required by shareholders in support of this. Performance measures need to be
determined carefully so that they are aligned with the interest of 2Tel shareholders, and
are not subject, for example, to manipulation of profits. They should not focus
excessively on short-term results, and must reward individual contributions
appropriately. Given that Mr Finn is a sales director, rewards based on revenues or
profits would play an important part in recognising his performance.
Shares and share options
Share options give directors the right to purchase shares at a specified exercise price
over a specified time period in the future. If the price of 2Tel shares rises due to strong
performance, so that it exceeds the exercise price, then directors will be able to
purchase shares at less than their market value. Share options can be used in this way
to align Mr Finn's and other directors’ interests with maximisation of shareholder
wealth. Options can also be used to reward long-term performance by specifying that
they may not be exercised for some years (for example, the UK Corporate Governance
Code recommends not less than three years).

ox
Benefits in kind

lB
Benefits in kind could include a car, healthcare and life assurance. It may be difficult to
relate these elements to directors' performance and it may lead to the perception that
directors are being rewarded with excessive 'perks'. There is also the issue that these
ba
measures may be unpopular with employees who are not enjoying the same benefits.
Thus the remuneration committee should ensure that the value of any benefits in kind is
not excessive compared with other elements of the remuneration package.
lo

Pensions
G

2Tel pays pension contributions for its directors. As pension contributions tend to be
linked to basic salary, they are not usually connected with performance, and again
there is likely to be shareholder concern about directors receiving preferential treatment,
A

with Mr Finn and others' pension contributions now being paid at a higher rate.
C

Therefore, when agreeing directors’ pay, the remuneration committee needs to consider
the pension consequences and associated costs to the company of basic salary
AC

increases and changes in pensionable remuneration.


(b) The position of Hanoi House
The issues that need to be considered here are how best to deal with any conflict of
interest that the directors may have, and also whether it is fair for the two directors to
suffer detriment and what the effect of their resignations could have on 2Tel.
Arguments in favour of resignation
Integrity
Resignation of both directors would arguably demonstrate that they are acting with
integrity and are putting the companies' interests before their own. It would also
demonstrate 2Tel's adherence to the principles of good corporate governance.
Removal of threat to independence
Given that corporate governance reports suggest that cross-directorships are a threat to
independence, resignation is the simplest way to remove that threat.

429

facebook.com/dinhkhoannhunao

You might also like