Executive Compensation Regulation In The UK And US - Understanding The Interplay Of Incentives And Governance Risks
- IJLLR Journal
- 1 day ago
- 1 min read
Lakshmi Praharshitha Koduri, Asst. Professor of Law, Siddhartha Academy of Higher Education (Deemed to be University), Vijayawada
ABSTRACT
‘Executive compensation’ (EC) takes many forms from cash salary to stock options, and is often used to create desirable incentives for management to act in the interests of the firm and the shareholders. While EC mechanisms are effective in aligning the interests of the management and shareholders, they come with certain governance risks like self-dealing, short-termism, excessive risk taking behavior, and yet times even unethical conduct. Therefore, regulations on EC while continuing to focus on incentivizing performance, should also ideally address these moral hazards/governance risks involved.
However, current policies on EC regulation are proving to be inadequate in addressing various governance risks. The article argues that EC policies are failing to strike the chord since they are (1) excessively prioritizing managerial incentives, and (2) inefficiently addressing governance risks. While there are extensive regulations in place in both US and UK for executive remuneration disclosure, they essentially and excessively focus on increasing transparency, and accountability, while not adequately addressing the aforementioned governance risks involved.
As such, this article contends that there is substantial room for improving the effectiveness of EC regulation. Importantly, this challenge is not limited to legislative reform; it also requires companies to actively review and recalibrate their compensation strategies so as to ensure they are not only effective but also responsible tools of corporate governance.
Keywords: Executive compensation, corporate governance, managerial incentives, governance risks, regulatory framework, short-termism.
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