Question

Question 5.
What are the challenges in determining the compensation arrangements of directors
and executives? In your discussion, evaluate whether regulatory action is necessary
to fix “excessive” compensation or whether a better designed compensation contract
do the job?

Answer 1

There are various challenges while determining the compensation arrangement of directors and executives. They are as follows-

A) Difference in objectives of employees and organisations lead to differences in expectation of executive compensation by various employees.

B) Employee stock option incentive are not acceptable by various employees in place of their salaries.

C) Employees often work in their own benefit and not in benefit of shareholders leading to the conflict of interest and agency problems.

D) Board of directors of company approve higher salaries for themselves leading to squeeze of profits and thus, impacting shareholders value on the downside.

There are no legal actions which are necessary to fix employee compensation as it can be fixed with better designed compensation contract as such contract should be designed which fulfill the interest of both management as well as shareholders, so that they both work in mutual interest of the company and maximize the overall value and maximize the gain.