Simple Agency Theory

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1) Remuneration is both the compensation received for the services provided by the directors to the company and reward for entrepreneurial contribution and includes basic salary, bonuses and share options as a result of the employment contract. The decision by Megatron directors to revise the executive pay structure into a more performance based, relates to the adoption of a form of remuneration called performance related pay (PRP).
When a remuneration package contains an incentive element, the potential rewards for the executive should be linked to company performance so that executives are rewarded for achieving or exceeding agreed targets. In principle, this gives an incentive to the executive to ensure that the targets are achieved. If
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Agency theory suggests that the interest of the business should come before self-interest. This may imply maximisation of profit, growth and shareholder return. Some writers such as Herbert Simon have argued that directors are more likely to act as ‘satisfiers’ than maximisers since corporations as organisations don’t act to achieve the best possible results but merely to achieve satisfactory results across several objectives.
Simple agency theory aims to explore the corporate governance issues involved in the shareholder and director relationship as principal and agent. Whereas shareholders represent the owners of the business, the executive directors/directors look after the running of the business for them. The board of directors is responsible to the shareholders as a body. Shareholders as a body equates to the company as a
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The recent attempts to align executive interests with that of the shareholders have been important stepping stones in the ultimate goal of assuring ethical behaviour. A survey by KPMG in 2005 found that bonus payments to executives had risen faster, but were hardly ever linked to long term strategy of the company and shareholder value. There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration, albeit remuneration committee as formed by Megatron directors. Businesses today need to be ethical in the way they operate. Remuneration, being a corporate governance issue, should be dealt with wisely since directors in the modern business world are expected to act as good corporate citizens. According to some research, high packages are justified as they do reflect the performance of those directors. Levels of remuneration should be adequate to attract, retain and motivate directors of the quality required to run the company successfully. However, directors should not be paid in excess of the adequate levels necessary for this purpose. Executive directors’ remuneration should be established such that a major portion of the remuneration should be directly proportional to corporate and individual
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