Methods And Policies For Calculating Executive Compensation In Public Companies

Factors influencing executive compensation calculation

In this assignment the overall methods by which a company can decide what is the remuneration by which they need to be paid off is discussed. Every public listed company needs to have a remuneration committee and that decides the overall remuneration structure that needs to be paid off. Remuneration forms one of the major part of the financials of the company and the shareholders depends on that to determine whether they should invest in the company or not. Payment of remuneration is also important for the shareholders and the executives that are working for the company. On scrutiny we can see that are various factors based on which the companies and their remuneration committee decides what would the remuneration be. There are many research articles that can help in throwing light on the matter more.

There are several methods by which firms can calculate the overall payment that they are planning to make to their top management and these can range from companies to companies. Some of these methods are stated below.

As per Hamid Mehran, the executive compensation is one of the major factors that motivates managers to increase their firm performance. Most of these compensations are calculated based on the overall percentage of equity and in most company’s equity based compensation is used as one of the most driving factors than all other means. In case any firm has more outside directors they resort to this way, firms in which the higher percentage of shares are held by insiders they aim to use this method. Basically, the aim of any organization is to resort to methods that would help in increase in the shareholders wealth. These are the people who are investing in the company. The overall net profit that is attributable to the shareholders of the company is divided with the percentage of the shares held and based on that the compensation is calculated. Thus, companies that have more outside directors they resort to this method because their aim is to increase their overall payable in terms of return to shareholders, because that would motivate investors to keep investing in the company.

The same has been stated by Timothy Hinkin, that executives that are working in externally controlled firms receives more for the performance and less for the overall scale of operation than in firms that do not have any dominant shareholders. This means that they have the right to align the performance of the firm with the compensation that the CEO receives. The data of 71 very large manufacturers have been taken to make a recommendation to this (mejia, et al., 2017).

Methods for calculating executive compensation

As per Antle and Smith, there are various issues that measurement of executive compensation addresses. First is the overall effect that the compensation have on the measurement of the various accounting alternatives that the company is having and how changes in the accounting regulation can affect their overall actual selection of the accounting techniques for the company. Secondly whether the compensation would affect the managers to make a change in their overall investment and production decisions. The third is the impact that the decision has on the terms of executive contracts on their decisions. Thus, we see that the main effect is how the managers would change their contribution to the firm if their contribution by the firm in terms of compensation changes. So we can say a lot is dependent on the company and its policies that might be the driving force based on which they can calculate the relevant compensation they are paying off (Antle & Smith, 1985).

As per Coughlan and Schmidt, the internal control measures that are relevant in the internal department of the company can also be a driving force that can help them in calculation of the executive compensation and can play a major role in this. It has been stated that both the compensation changes and management changes are the methods that can be used to control the top management of the company. The change in these methods are related to the change in the overall stock performance of the company and the board of the firm will create managerial incentives that would be consistent with the overall performance of the board (Coughlan & Schmidt, 1985). This can be done by setting the compensation and making changes to the overall management policies that can help in benefiting the shareholders of the company. Thus, based on the overall research it can be said that the executive compensation is linked with the performance of the firm directly or indirectly and there are several factors that needs to be taken into consideration while calculating the payables for the company (Arnott, et al., 2017). It is a driving force for the shareholders for which they are contributing to the company and thus the aim should be to link their contribution with the overall remuneration that they are paid off. In case they do not get satisfactory compensation, they won’t invest in the company and this would hamper the growth and expansion of the company.

Case studies of Dominos and Yum Brands compensation policies

To understand the topic better two companies from the same industry have been taken and their overall compensation structure has been studied below.

The two companies that have been selected are Dominos and the Yum brand that operates companies like Pizza Hut, Taco Bell and KFC. These are top quick serving restaurants in the country and have millions of revenues.

Domino’s is one of the largest chain of fast food. The company specializes in Pizza and there are a variety of other items that it sells through its franchise modeled business. The overall corporate goals of the company as per their annual report is to develop strong corporate values and follow the aims of corporate governance. The company also aims to develop a strong understanding in taste of people and carter to it. They want to be number one pizza company in the world and promote strong ethical values in their code of conduct (Belton, 2017). The company also aims to provide better return to their shareholders in the coming years and are also planning to expand their operations more. The overall aim is to promote women participation in the trade and they promote woman equality in their stores also. The Company is a multinational company and thus have a Group CEO who heads the operation and there are many shareholders who have invested their funds in the company (Choy, 2018).

The second company is the Yum Brand. It is an American Fast Food company that has its operation in almost every company of the world. The company operates brand like KFC, Pizza Hut, Taco Bells etc. It is the largest fast food company in terms of system units. It started independent operations 20 years back. As per the annual report of the company, the CEO aims to improve in four key growth responsibilities and that includes, distinctive easy and relevant brand (Das, 2017). The overall franchise capacity should improve. There should be a bold restaurant development for the company and the culture of the company should be leveraged and that would help in fueling the performance of the brands and success of the franchise. The company gives utmost importance to the overall brand value that they have built over the year and that is promoted by the company.

The remuneration policy of the two companies have been reviewed now. In case of dominos brand, a remuneration committee has been set up and the aim of this committee is to select, appoint and remuneration practices of the company. The remuneration Committee will make recommendation in relation to the framework of the remuneration for the directors and it was approved by the security holders allocated to the directors, the remuneration package needs to be awarded to the senior executive and other employee. For the senior executive and other employees, the equity-based plans need to be followed. For the top management the overall superannuation arrangement is done. It is also made sure that there is no gender biasness with respect to the overall remuneration that is paid off by the company (Werner, 2017). The company is a geographically diverse company and the total remuneration that is paid off are divided into three parts that includes fixed compensation that is dependent on various factors like the overall market rate and the accountability of the person, the geographical location and overall experience (Jefferson, 2017). The other parts include short term incentives that are paid by the company which includes financial and individual performance targets relevant to the specific position. The long-term incentives are linked to EPS growth, growth of the EBITDA and depends whether the role is having group or segment responsibility for the company. Remuneration shall be paid off in various methods which includes base remuneration, equity in options, all equity is held subject to service and performance for a minimum of 3 years from grant date. The cash payment is paid based on the review of the audited financial statements of the company. The strategic intent for the payment of the remuneration is also taken into considered for the company. An extract from the annual report of the company has been attached below: 

In case of Yum, the compensation payment includes the base salary, the annual performance-based cash bonuses and long-term equity performance-based incentives. The compensation highlights include the target compensation that has been setup by the CEO of the company. It will include an equity mix of long term incentive awards at 50% of the SAR and 50% of the PSU (Grenier, 2017). The Committee certified that our 2014 PSU awards under our Performance Share Plan paid out at 71% of target in 2017 based on the Company’s Total Shareholder Return (“TSR”) for the 2014-2016. The overall remuneration that is paid off is paid based on the overall performance of the company and approximately 90% of the CEO target compensation is “at-risk” that would be based on the overall company results. Thus, we see that the performance is a major factor in determining the overall payment that would be paid off by the company. The target mix of the CEO has been included below: 

The compensation that is paid off to the CEO is related to the performance of the company. There has been target set off based on which the performance of the company has been set off. In 2015, CEO’s actual total direct compensation was below the target and CEO’s actual total direct compensation for 2016 and 2017 which will show that the company is performing better (Kim, et al., 2017). 

The various elements of the components of the executive compensation programs are: base salary, the objective with this is to retain the high caliber talent based on their experience. The second would include annual-performance based cash bonuses, long term equity based performance incentives and retirement and additional benefits are also paid off by the company. The performance based bonus depends on many things like that target bonus percentage, team performance and individual performance of the company (Jefferson, 2017). The overall performance of the team is very important; thus, it seems that the performance of the company is very important and that forms a very important part for determining the overall remuneration that needs to be paid off by the remuneration committee of the company. An extract from the annual report of the company is stated below that highlights the remuneration that is paid off: 

Growth Profitability and Financial Ratios for Domino’s Pizza Inc
Financials
	2014-12	2015-12	2016-12	2017-12
Revenue USD Mil	1,994	2,217	2,473	2,788
Gross Margin %	29.8	30.8	31	31.1
Operating Income USD Mil	345	405	454	521
Operating Margin %	17.3	18.3	18.4	18.7
Net Income USD Mil	163	193	215	278
Earnings Per Share USD	2.86	3.47	4.3	5.83
Dividends USD	1	1.24	1.52	1.84
Payout Ratio % *	34.1	37.5	36.3	33.6
Shares Mil	57	56	50	48
Book Value Per Share * USD	-23.07	-22.98	-40.17	-64.46

Based on the above diagram we can see that the overall pricing policies of the company has grew over the year and we show that from last three years the share prices of the company and the overall investment has been consistent and it can also be seen that based on that the dividend that is paid off by the company has increased. But what we see is that the overall pay-out ratio for the company has reduced from 2016 to 2017, which shows that the company is not paying off as much they were doing from the prior years and thus that in turns is affecting the performance of the company and the payment that is made to the shareholders of the company (Erik & Jan, 2017). So compensation is linked to the performance of the company and thus we see that compensation is linked a lot based on external factors that affects the overall prices of the shares in the market. When we study the remuneration policy of the company we see that there are both cash components and fixed remuneration and also long term and short-term incentives that are based on the performance of the shares of the company in the market (Farmer, 2018). The overall revenue of the company has also increased since prior years and this shows that the company is performing well and thus shareholders of the company are getting good returns for that which is evident from the dividend that are given.

The above chart shows the movement of the prices of the shares of the company and thus it can be seen that it has always been increasing from prior years and thus that shows that company is doing well and thus the fair amount of compensation that is paid off to the top executives who are working for the company and their compensation is also a reflection of the share performance of the company (Sithole, et al., 2017).

In case of Yum, the following analysis has been made based on the overall movement of the shares and the market price of the stocks and the payment of dividend.

Based on the above figure the overall movement of the share prices has been consistent since the prior years, however there have a great rise in last one two years and that is reflected from the steepness of the slope. It also shows that the company has been doing incredibly well from the view point of the market and the increased revenue is also an indication about the same. It also reflects the position that more and more shareholders are benefiting from the increment in the share price and are awarded with great compensation for the overall contributions that they are making (Trieu, 2017). 

From the view point of the dividend pay-out previously the company is paying more dividend in comparison to the industry in which it is operating and thus more and more shareholders are investing in the company. The five-year average of the overall dividend that is paid by the company is also huge but the pay-out ratio is less in comparison to the industry and this signifies that even if the company is paying off more dividend the payout is less because the overall revenue of the company is more and that reflects their optimum remuneration policy. The share based incentives are also a part of the executive compensation that is paid off (Alexander, 2016).

Based on the overall analysis of the share movemement and the prices and the payment of dividends it can be said that both the companies have been doing incredibly well , and it makes it very clear that compensation is related to the performance of the company in the market. If the company is perofrming well, the share prices will increase and the shareholders will in return get good return for their shareholders. In terms of revenue Yum brand has more revenue given that it is a brand that operates so many other companies but Dominos with its stand alone valuation is one of the largest food selling business in the world and there is no comparison between the two, both are top players of the industry. The only point that can be compared is the basis on which they are paying of their variable component which depends a lot on the top management and the remuneration committee that has been set up for this purpose (Grenier, 2017). It can also be seen that the dividend pay out for the company is better in case of Yum in comparison to dominoes and this may be due to external factors like growth and overall future expansion plans that the company is having. In terms of share prices , both the companies have seen great amount of success and that is evident from their development on part of the companies and the share prices and their movement indicates precisely whether and thus the investor needs to study that when they want to invest in the company or not.

Conclusion

Based on the overall analysis it can be seen that the companies need to have proper remuneration structure based on which they need to define how much they would pay off their shareholders who are highly dependant on them. There are various components of the remuneration that is paid of by the company and many factors are responsible for that, a lot depends on the performance of the company and that is reflected from the share price of the company that is evident from the analysis of the company stocks. Compensation is the most motivating factor that motivates executives with regards to the contribution to the firm that they are making. We see that better the firm performs the more compensation is being paid off. There are many factors apart from the fixed compensation that is paid off, as there are variable factors also on which the short and long term incentives of the company depends. These variable payouts forms a major portion of the entire remuneration that is paid off to the executives and that in turn is related to the performance of the company. Thus based on the overall analysis it can be seen that , the best method for payment of shareholder remuneration is the equity method which is dependant on the percentage of the shares that the company is having. The short term and long term best methods for calculation of the remuneration of the company is to see how well the company is performing and what are the overall trends in the market with respect to the possible conditions that are exsisiting and also how the compensation is derived based on these factors. So we see that compensation calculation requires a lot of analysis and the shareholders should study that before investing in the shares of the compensation.

References

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