Nigeria: Current Developments On Executive Compensation

Last Updated: 13 November 2012
Article by Adewale Ajayi, Boluwaji Apanpa and Eniye Alile

Introduction

Excessive risk taking was one of the major factors that led to the financial crisis of 2007/08. Prior to this period, executives operated nearly without proper supervision by the Boards of Directors (BoDs). They were mainly driven by greed and the unhealthy desire to significantly increase their incentive pay. Most of the incentive schemes did not comply with the basic design principles of defining threshold, target and superior performance and specifying the appropriate pay for those levels of performance. Where the design principles are complied with, the BoDs (through the Remuneration Committee) completely abdicated their responsibilities of setting key performance objectives for executive performance and measuring results against those objectives.

To curb the perceived excessive compensation of executives, various governments have introduced Legislation and Regulations. The United Kingdom Government introduced the super tax on Executive bonuses. The United States has since implemented the claw back provision, which is meant to deter the executives from excessive risk taking. In other jurisdictions, shareholders are demanding a say on executive compensation. This article examines some of the key developments on Executive compensation and the way forward.

Some Key Developments

  1. Risk and Executive Compensation

    It has become critical for every company to conduct a periodic assessment of whether its executive compensation plan creates a significant risk. Companies will need to integrate their risk review into the audit cycle. Consequently, both the Board Audit and Remuneration Committees should be involved in this process. It may also be a leading-edge practice if companies seek independent review of the risk process and its findings as part of the annual board appraisal exercise.

    The assessment should determine potential risks that can materially affect the business of the company and its ability to survive in a very competitive environment. Focus should be on how the current compensation plan can be manipulated by unscrupulous executives to serve their interest. It may therefore be necessary to review the key metrics and design features of the incentive scheme and assess the controls in place to mitigate risk.
  2. Claw Back Policy

    Some compensation professionals are of the opinion that companies should develop and implement a claw back policy. Under such policy, companies can recover any incentive compensation, which was erroneously awarded, as a result of account restatement due to non-compliance with any financial, accounting and regulatory requirements.

    Companies implementing such policy will need to resolve two potential thorny issues: which executives (all the executives or the CEO and CFO?) should be subject claw back, and the time period to be covered. One possible consequence of implementing a claw back policy is for newly hired executives to demand more guaranteed-based compensation rather than accept incentive compensation; especially where there are concerns about the 'accuracy' of the company's published financial statements.
  3. Severance Pay

    Globally, executives are compensated at the point of disengaging from their companies for "good" reasons. The justification for severance pay is to encourage the executives to take longer-term value increasing yet risky investment on behalf of the company. In recent times, shareholders have seen this as a reward for failure and are increasingly questioning the rationale and size of such payout. In the United States, some shareholders have instituted various court cases to challenge the quantum of the discretionary payout to executives that were sacked before the expiration of their contracts.

    One way of managing potential disputes is to define and incorporate the size and conditions for receiving separation pay into the employment contracts or the compensation policy, which would have been approved by the shareholders. It is also important that the size of such awards reflect global best practices.
  4. Shareholders' say on Executive Compensation

    Debate has been ongoing in some jurisdictions as to what role shareholders should play with respect to Executive compensation. Those in favour of shareholders' say on executive compensation have argued that such an arrangement will encourage the Remuneration committee to properly review pay packages, promote board accountability and improve the design of Compensation plans. Those against such an arrangement are of the opinion that it may undermine the ability of the Board to exercise sound judgement and may potentially be disruptive. There are merits in both arguments. It therefore seems that some sort of compromise may be necessary to resolve this issue.

Conclusion

Executive compensation will continue to attract close scrutiny of both regulators and shareholders. Companies will continue to feel the pressure to change the design and structure of executive compensation plans. Possible changes may include:

  • Implementing a pay mix that focuses less on incentive compensation,
  • Modifying performance measures to reflect more of operational rather than financial performance,
  • Introducing a deferred bonus arrangement which will enable companies hold back compensation that could be subject to a claw back. For this to be attractive to executives, companies may need to provide a matching contribution.
  • Reducing the incentive values while increasing the performance period.

One thing is clear: the era of excessive risk taking is over. While companies may not have the free hand to fix executive pay as before,it is important that they are able to attract, motivate and retain executives that can help them compete in an increasingly challenging business environment. BoDs need to ensure that they discharge their responsibilities effectively and should consider engaging the services of tested remuneration professionals to manage any potential risk from executive compensation plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.