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Monday, August 26, 2019

Redistribution of income and wealth

From Wikipedia, the free encyclopedia

German progressive tax rates for different incomes. Progressive tax systems require the rich to pay taxes at higher rates, to make it possible to raise larger total sums to pay for governmental functions. Some argue such systems are primarily for wealth redistribution.
 
Redistribution of income and redistribution of wealth are respectively the transfer of income and of wealth (including physical property) from some individuals to others by means of a social mechanism such as taxation, charity, welfare, public services, land reform, monetary policies, confiscation, divorce or tort law. The term typically refers to redistribution on an economy-wide basis rather than between selected individuals. 

Interpretations of the phrase vary, depending on personal perspectives, political ideologies and the selective use of statistics. It is frequently heard in politics, usually referring to perceived redistributions from those who have more to those who have less. Occasionally, however, it is used to describe laws or policies that cause opposite redistributions that shift monetary burdens from wealthy to low-income individuals.

The phrase can be emotionally charged and used to exaggerate or misconstrue the motivations of opponents during political debates. For example, if an individual politician calls for increased taxes on higher income individuals, their sole focus may be to raise funds for specific government programs, tapping the largest available sources while realizing that low-wage workers have little or no excess income to draw tax revenues from. Political opponents might argue that this politician's prime motivation is to redistribute wealth, when redistribution is not their goal.

The phrase is often coupled with the term "class warfare," with high income earners and the wealthy portrayed as victims of unfairness and discrimination.

Redistribution tax policy should not be confused with predistribution policies. "Predistribution" is the idea that the state should try to prevent inequalities occurring in the first place rather than through the tax and benefits system once they have occurred. For example, a government predistribution policy might require employers to pay all employees a living wage, not just a minimum wage, as a "bottom-up" response to widespread income inequalities or high poverty rates.

Many alternate taxation proposals have been floated without the political will to alter the status quo. One example is the proposed "Buffett Rule", which is a hybrid taxation model composed of opposing systems, intended to minimize the favoritism of the special interest tax design. 

The effects of a redistribution system are actively debated on ethical and economic grounds. The subject includes analysis of its rationales, objectives, means, and policy effectiveness.

History

In ancient times, redistribution operated as a palace economy. These economies were centrally based around the administration, so the dictator or pharaoh had both the ability and the right to say who was taxed and who got special treatment.

Another early form of wealth redistribution occurred in Plymouth Colony under the leadership of William Bradford. Bradford records in his diary that this "common course" bred confusion, discontent, distrust, and the colonists looked upon it as a form of slavery.

A closely related term, distributism (also known as distributionism or distributivism), is an economic ideology that developed in Europe in the late 19th and early 20th century based upon the principles of Catholic social teaching, especially the teachings of Pope Leo XIII in his encyclical Rerum novarum and Pope Pius XI in Quadragesimo anno. More recently, Pope Francis in his Evangelii Gaudium, echoed the earlier Papal statements.

Role in economic systems

Different types of economic systems feature varying degrees of interventionism aimed at redistributing income, depending on how unequal their initial distributions of income are. Free-market capitalist economies tend to feature high degrees of income redistribution. However, Japan's government engages in much less redistribution because its initial wage distribution is much more equal than Western economies. Likewise, the socialist planned economies of the former Soviet Union and Eastern bloc featured very little income redistribution because private capital and land income – the major drivers of income inequality in capitalist systems – was virtually nonexistent; and because the wage rates were set by the government in these economies.

Modern forms of Redistribution

It is inevitable, the redistribution of wealth and its practical application, taxation, are bound to change with the continuous evolution of social norms, politics, and culture. Within developed countries income inequality has become a widely popular issue that has dominated the debate stage for the past few years. The importance of a nation’s ability to redistribute wealth in order to implement social welfare programs, maintain public goods, and drive economic development has brought various conversations to the political arena. A country’s means of redistributing wealth comes from the implementation of a carefully thought out well described system of taxation. The implementation of such a system would aid in achieving the desired social and economic objective of diminishing social inequality and maximizing social welfare. There are various ways to impose a tax system that will help create a more efficient allocation of resources, in particular, many democratic, even socialist governments utilize a progressive system of taxation to achieve a certain level of income redistribution. In addition to the creation and implementation of these tax systems, “globalization of the world economy [has] provided incentives for reforming the tax systems” across the globe. Along with utilizing a system of taxation to achieve the redistribution of wealth, the same socio-economic benefit could be achieved if there are appropriate policies enacted within current political infrastructure that addresses these issues. Modern thinking towards the topic of the redistribution of wealth, focuses on the concept that economic development increases the standard of living across an entire society. 

Today, income redistribution occurs in some form in most democratic countries through economic policies. Some redistributive policies attempt to take wealth, income, and other resources from the “haves” and give them to the “have-nots,” but many redistributions go elsewhere. 

In his article Redistribution, Dwight R. Lee states: 

“…most government transfers are not from the rich to the poor. Instead, government takes from the relatively unorganized (e.g., consumers and general taxpayers) and gives to the relatively organized (groups politically organized around common interests, such as the elderly, sugar farmers, and steel producers). The most important factor in determining the pattern of redistribution appears to be political influence, not poverty. “

“The direct transfer of cash and services is only one way that government transfers income. Another way is by restricting competition among producers. The inevitable consequence—indeed, the intended consequence—of these restrictions is to enrich organized groups of producers at the expense of consumers. Here, the transfers are more perverse than with Medicare and Social Security. They help relatively wealthy producers at the expense of relatively poor (and, in some cases, absolutely poor) consumers. Many government restrictions on agricultural production, for example, allow farmers to capture billions of consumer dollars through higher food prices (see agricultural subsidy programs). Most of these dollars go to relatively few large farms, whose owners are far wealthier than the average taxpayer and consumer (or the average farmer). Also, wealthy farmers receive most of the government’s direct agricultural subsidies."

Some consider the U.S. government’s progressive-rate income tax policy as redistributive, because some of the tax revenue goes to social programs such as welfare and Medicare.

In a progressive income tax system, a high income earner will pay a higher tax rate (a larger percentage of their income) than a low income earner; and therefore, will pay more total dollars per person.

Other taxation-based methods of redistributing income are the negative income tax for very low income earners and tax loopholes (tax avoidance) for the better-off. 

Two other common types of governmental redistribution of income are subsidies and vouchers (such as food stamps). These transfer payment programs are funded through general taxation, but benefit the poor or influential special interest groups and corporations. While the persons receiving transfers from such programs may prefer to be directly given cash, these programs may be more palatable to society than cash assistance, as they give society some measure of control over how the funds are spent.

It has been argued that the U.S. Social Security program redistributes income from the rich to the poor, but the majority of those receiving Social Security earned their benefits through tax withholding from their paychecks or quarterly income statements, and most benefits are indexed to the actual earning levels of individual workers. Only the highest- and lowest-income workers fall outside normal rates. In addition, Social Security deductions are only taken from the first $200,000 in income, with nothing further taken from higher incomes over that amount. In other words, a person who earns $100 million a year pays the same Social Security tax as another worker who earns $200,000 a year. 

Contrary to popular belief, a recent study found that, overall, the Social Security System was slightly regressive against the poor and not redistributive, once important factors were taken into account (for example, the longer life expectancy of the wealthy when compared to the poor gives them more years to collect benefits). 

Governmental redistribution of income may include a direct benefit program involving either cash transfers or the purchase of specific services for an individual. Medicare is one example. Medicare is a government-run health insurance program that covers people age 65 or older, certain younger people with disabilities, and people with end-stage renal disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD). This is a direct benefit program because the government is directly providing health insurance for those who qualify.

The difference between the Gini index for the income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.

Wealth redistribution can be implemented through land reform that transfers ownership of land from one category of people to another, or through inheritance taxes or direct wealth taxes. Before-and-after Gini coefficients for the distribution of wealth can be compared.

Objectives

The objectives of income redistribution are to increase economic stability and opportunity for the less wealthy members of society and thus usually include the funding of public services.

One basis for redistribution is the concept of distributive justice, whose premise is that money and resources ought to be distributed in such a way as to lead to a socially just, and possibly more financially egalitarian, society. Another argument is that a larger middle class benefits an economy by enabling more people to be consumers, while providing equal opportunities for individuals to reach a better standard of living. Seen for example in the work of John Rawls, another argument is that a truly fair society would be organized in a manner benefiting the least advantaged, and any inequality would be permissible only to the extent that it benefits the least advantaged. 

Some proponents of redistribution argue that capitalism results in an externality that creates unequal wealth distribution.

Some argue that wealth and income inequality are a cause of economic crises, and that reducing these inequalities is one way to prevent or ameliorate economic crises, with redistribution thus benefiting the economy overall. This view was associated with the underconsumptionism school in the 19th century, now considered an aspect of some schools of Keynesian economics; it has also been advanced, for different reasons, by Marxian economics. It was particularly advanced in the US in the 1920s by Waddill Catchings and William Trufant Foster. There is currently a great debate concerning the extent to which the world's extremely rich have become richer over recent decades. Thomas Piketty's Capital in the Twenty-First Century is at the forefront, critiqued in certain publications such as The Economist.

Moral obligation

Peter Singer's argument contrasts to Thomas Pogge's in that he states we have an individual moral obligation to help the poor.

Economic effects of inequality

Number of high-net-worth individuals in the world in 2011
 
Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett show a correlation between income inequality and higher rates of health and social problems (obesity, mental illness, homicides, teenage births, incarceration, child conflict, drug use), and lower rates of social goods (life expectancy, educational performance, trust among strangers, women's status, social mobility, even numbers of patents issued per capita), on the other. The authors argue inequality leads to the social ills through the psychosocial stress, status anxiety it creates.

A 2011 report by the International Monetary Fund by Andrew G. Berg and Jonathan D. Ostry found a strong association between lower levels of inequality and sustained periods of economic growth. Developing countries (such as Brazil, Cameroon, Jordan) with high inequality have "succeeded in initiating growth at high rates for a few years" but "longer growth spells are robustly associated with more equality in the income distribution."

Criticism

Public choice theory states that redistribution tends to benefit those with political clout to set spending priorities more than those in need, who lack real influence on government.

The socialist economists John Roemer and Pranab Bardhan criticize redistribution via taxation in the context of Nordic-style social democracy, reportedly highlighting its limited success at promoting relative egalitarianism and its lack of sustainability. They point out that social democracy requires a strong labor movement to sustain its heavy redistribution, and that it is unrealistic to expect such redistribution to be feasible in countries with weaker labor movements. They point out that, even in the Scandinavian countries, social democracy has been in decline since the labor movement weakened. Instead, Roemer and Bardhan argue that changing the patterns of enterprise ownership and market socialism, obviating the need for redistribution, would be more sustainable and effective at promoting egalitarianism.

Marxian economists argue that social democratic reforms – including policies to redistribute income – such as unemployment benefits and high taxes on profits and the wealthy create more contradictions in capitalism by further limiting the efficiency of the capitalist system via reducing incentives for capitalists to invest in further production. In the Marxist view, redistribution cannot resolve the fundamental issues of capitalism – only a transition to a communist economy can.

Executive compensation

From Wikipedia, the free encyclopedia

Executive compensation or executive pay is composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization. It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.

The three decades starting with the 1980s saw a dramatic rise in executive pay relative to that of an average worker's wage in the United States, and to a lesser extent in a number of other countries. Observers differ as to whether this rise is a natural and beneficial result of competition for scarce business talent that can add greatly to stockholder value in large companies, or a socially harmful phenomenon brought about by social and political changes that have given executives greater control over their own pay. Recent studies have indicated that executive compensation should be better aligned with social goals (e.g. public health goals). Executive pay is an important part of corporate governance, and is often determined by a company's board of directors.

Types

There are six basic tools of compensation or remuneration:
In a modern corporation, the CEO and other top executives are often paid salary plus short-term incentives or bonuses. This combination is referred to as Total Cash Compensation (TCC). Short-term incentives usually are formula-driven and have some performance criteria attached depending on the role of the executive. For example, the Sales Director's performance related bonus may be based on incremental revenue growth turnover; a CEO's could be based on incremental profitability and revenue growth. Bonuses are after-the-fact (not formula driven) and often discretionary. Executives may also be compensated with a mixture of cash and shares of the company which are almost always subject to vesting restrictions (a long-term incentive). To be considered a long-term incentive the measurement period must be in excess of one year (3–5 years is common). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example, a CEO might get 1 million in cash, and 1 million in company shares (and share buy options used). Vesting can occur in two ways: "cliff vesting" (vesting occurring on one date), and "graded vesting" (which occurs over a period of time) and which maybe "uniform" (e.g., 20% of the options vest each year for 5 years) or "non-uniform" (e.g., 20%, 30% and 50% of the options vest each year for the next three years). Other components of an executive compensation package may include such perks as generous retirement plans, health insurance, a chauffeured limousine, an executive jet, and interest-free loans for the purchase of housing.

Stock options

Executive stock option pay rose dramatically in the United States after scholarly support from University of Chicago educated Professors Michael C. Jensen and Kevin J. Murphy. Due to their publications in the Harvard Business Review 1990 and support from Wall Street and institutional investors, Congress passed a law making it cost effective to pay executives in equity. 

Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. Critics of stock options charge that they are granted without justification as there is little reason to align the interests of CEOs with those of shareholders. Empirical evidence shows since the wide use of stock options, executive pay relative to workers has dramatically risen. Moreover, executive stock options contributed to the accounting manipulation scandals of the late 1990s and abuses such as the options backdating of such grants. Finally, researchers have shown that relationships between executive stock options and stock buybacks, implying that executives use corporate resources to inflate stock prices before they exercise their options. 

Stock options also incentivize executives to engage in risk-seeking behavior. This is because the value of a call option increases with increased volatility. Stock options also present a potential up-side gain (if the stock price goes up) for the executive, but no downside risk (if the stock price goes down, the option simply isn't exercised). Stock options therefore can incentivize excessive risk seeking behavior that can lead to catastrophic corporate failure.

Restricted stock

Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. As the size of stock option grants have been reduced, the number of companies granting restricted stock either with stock options or instead of, has increased. Restricted stock has its detractors, too, as it has value even when the stock price falls. As an alternative to straight time vested restricted stock, companies have been adding performance type features to their grants. These grants, which could be called performance shares, do not vest or are not granted until these conditions are met. These performance conditions could be earnings per share or internal financial targets.

Levels

The levels of compensation in all countries has been rising dramatically over the past decades. Not only is it rising in absolute terms, but also in relative terms. In 2007, the world's highest paid chief executive officers and chief financial officers were American. They made 400 times more than average workers—a gap 20 times bigger than it was in 1965. In 2010 the highest paid CEO was Viacom's Philippe P. Dauman at $84.5 million The U.S. has the world's highest CEO's compensation relative to manufacturing production workers. According to one 2005 estimate the U.S. ratio of CEO's to production worker pay is 39:1 compared to 31.8:1 in UK; 25.9:1 in Italy; 24.9:1 in New Zealand.

Controversy

The explosion in executive pay has become controversial, criticized by not only leftists, but conservative establishmentarians such as Peter Drucker, John Bogle, Warren Buffett.

The idea that stock options and other alleged pay-for-performance are driven by economics has also been questioned. According to economist Paul Krugman,
"Today the idea that huge paychecks are part of a beneficial system in which executives are given an incentive to perform well has become something of a sick joke. A 2001 article in Fortune, "The Great CEO Pay Heist" encapsulated the cynicism: You might have expected it to go like this: The stock isn't moving, so the CEO shouldn't be rewarded. But it was actually the opposite: The stock isn't moving, so we've got to find some other basis for rewarding the CEO.` And the article quoted a somewhat repentant Michael Jensen [a theorist for stock option compensation]: `I've generally worried these guys weren't getting paid enough. But now even I'm troubled.'"
Recently, empirical evidence showed that compensation consultants only further exacerbated the controversy. A study of more than 1,000 US companies over six years finds “strong empirical evidence” that executive compensation consultants have been hired as a “justification device” for higher CEO pay.

Defenders of high executive pay say that the global war for talent and the rise of private equity firms can explain much of the increase in executive pay. For example, while in conservative Japan a senior executive has few alternatives to his current employer, in the United States it is acceptable and even admirable for a senior executive to jump to a competitor, to a private equity firm, or to a private equity portfolio company. Portfolio company executives take a pay cut but are routinely granted stock options for ownership of ten percent of the portfolio company, contingent on a successful tenure. Rather than signaling a conspiracy, defenders argue, the increase in executive pay is a mere byproduct of supply and demand for executive talent. However, U.S. executives make substantially more than their European and Asian counterparts.

United States

Source: Economic Policy Institute. 2011.
 
The U.S. Securities and Exchange Commission (SEC) has asked publicly traded companies to disclose more information explaining how their executives' compensation amounts are determined. The SEC has also posted compensation amounts on its website to make it easier for investors to compare compensation amounts paid by different companies. It is interesting to juxtapose SEC regulations related to executive compensation with Congressional efforts to address such compensation.

Since the 1990s, CEO compensation in the US has outpaced corporate profits, economic growth and the average compensation of all workers. Between 1980 and 2004, Mutual Fund founder John Bogle estimates total CEO compensation grew 8.5% year, compared to corporate profit growth of 2.9%/year and per capita income growth of 3.1%. By 2006 CEOs made 400 times more than average workers—a gap 20 times bigger than it was in 1965. As a general rule, the larger the corporation the larger the CEO compensation package.

The share of corporate income devoted to compensating the five highest paid executives of (each) public firms more than doubled from 4.8% in 1993-1995 to 10.3% in 2001-2003. The pay for the five top-earning executives at each of the largest 1500 American companies for the ten years from 1994 to 2004 is estimated at approximately $500 billion in 2005 dollars.

As of late March 2012 USA Today's tally showed the median CEO pay of the S&P 500 for 2011 was $9.6 million.

Lower level executives also have fared well. About 40% of the top 0.1% income earners in the United States are executives, managers, or supervisors (and this doesn't include the finance industry) — far out of proportion to less than 5% of the working population that management occupations make up.

A study by University of Florida researchers found that highly paid CEOs improve company profitability as opposed to executives making less for similar jobs. However, a review of the experimental and quasi-experimental research relevant to executive compensation, by Philippe Jacquart and J. Scott Armstrong, found opposing results. In particular, the authors conclude that "the notion that higher pay leads to the selection of better executives is undermined by the prevalence of poor recruiting methods. Moreover, higher pay fails to promote better performance. Instead, it undermines the intrinsic motivation of executives, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their decisions on stakeholders" Another study by Professors Lynne M. Andersson and Thomas S. Batemann published in the Journal of Organizational Behavior found that highly paid executives are more likely to behave cynically and therefore show tendencies of unethical performance.

Australia

In Australia, shareholders can vote against the pay rises of board members, but the vote is non-binding. Instead the shareholders can sack some or all of the board members. Australia's corporate watchdog, the Australian Securities and Investments Commission has called on companies to improve the disclosure of their remuneration arrangements for directors and executives.

Canada

A 2012 report by the Canadian Centre for Policy Alternatives demonstrated that the top 100 Canadian CEOs were paid an average of C$8.4 million in 2010, a 27% increase over 2009, this compared to C$44,366 earned by the average Canadian that year, 1.1% more than in 2009. The top three earners were automotive supplier Magna International Inc. founder Frank Stronach at C$61.8 million, co-CEO Donald Walker at C$16.7 million and former co-CEO Siegfried Wolf at C$16.5 million.

Europe

In 2008, Jean-Claude Juncker, president of the European Commission's “Eurogroup” of finance ministers, called excessive pay a “social scourge” and demanded action.

United Kingdom

Although executive compensation in the UK is said to be "dwarfed" by that of corporate America, it has caused public upset. In response to criticism of high levels of executive pay, the Compass organisation set up the High Pay Commission. Its 2011 report described the pay of executives as "corrosive".

In December 2011/January 2012 two of the country’s biggest investors, Fidelity Worldwide Investment, and the Association of British Insurers, called for greater shareholder control over executive pay packages. Dominic Rossi of Fidelity Worldwide Investment stated, “Inappropriate levels of executive reward have destroyed public trust and led to a situation where all directors are perceived to be overpaid. The simple truth is that remuneration schemes have become too complex and, in some cases, too generous and out of line with the interests of investors.” Two sources of public anger were Barclays, where senior executives were promised million-pound pay packages despite a 30% drop in share price; and Royal Bank of Scotland where the head of investment banking was set to earn a "large sum" after thousands of employees were made redundant.

Asia

Since the early 2000s, companies in Asia are following the U.S. model in compensating top executives, with bigger paychecks plus bonuses and stock options. However, with a great diversity in stages of development in listing rules, disclosure requirements and quality of talent, the level and structure of executive pay is still very different across Asia countries. Disclosures on top executive pay is less transparent compared to that in the United Kingdom. Singapore and Hong Kong stock exchange rules are the most comprehensive, closely followed by Japan's, which has stepped up its requirements since 2010.

China

Executive compensation in China still differs from compensation in Europe and the U.S. but the situation is changing rapidly. Based on a research paper by Conyon, executive compensation in China is mostly composed of salaries and bonuses, as stock options and equity incentives are relatively rare elements of a Chinese senior manager's compensation package. Since 2016 Chinese-listed companies were required to report total compensation of their top managers and board members. However, transparency and what information companies choose to release to the public varies greatly. Chinese private companies usually implement a performance-based compensation model, whereas State-owned enterprises apply a uniform salary-management system. Executive compensation for Chinese executives reached USD 150 000 on average and increased by 9.1% in 2017.

Regulation

There are a number of strategies that could be employed as a response to the growth of executive compensation.
  • Extend the vesting period of executives' stock and options. Current vesting periods can be as short as three years, which encourages managers to inflate short-term stock price at the expense of long-run value, since they can sell their holdings before a decline occurs.
  • As passed in the Swiss referendum "against corporate Rip-offs" of 2013, investors gain total control over executive compensation, and the executives of a board of directors. Institutional intermediaries must all vote in the interests of their beneficiaries and banks are prohibited from voting on behalf of investors.
  • Disclosure of salaries is the first step, so that company stakeholders can know and decide whether or not they think remuneration is fair. In the UK, the Directors' Remuneration Report Regulations 2002 introduced a requirement into the old Companies Act 1985, the requirement to release all details of pay in the annual accounts. This is now codified in the Companies Act 2006. Similar requirements exist in most countries, including the U.S., Germany, and Canada.
  • A say on pay - a non-binding vote of the general meeting to approve director pay packages, is practised in a growing number of countries. Some commentators have advocated a mandatory binding vote for large amounts (e.g. over $5 million). The aim is that the vote will be a highly influential signal to a board to not raise salaries beyond reasonable levels. The general meeting means shareholders in most countries. In most European countries though, with two-tier board structures, a supervisory board will represent employees and shareholders alike. It is this supervisory board which votes on executive compensation.
  • Another proposed reform is the bonus-malus system, where executives carry down-side risk in addition to potential up-side reward.
  • Progressive taxation is a more general strategy that affects executive compensation, as well as other highly paid people. There has been a recent trend to cutting the highest bracket tax payers, a notable example being the tax cuts in the U.S. For example, the Baltic States have a flat tax system for incomes. Executive compensation could be checked by taxing more heavily the highest earners, for instance by taking a greater percentage of income over $200,000.
  • Maximum wage is an idea which has been enacted in early 2009 in the United States, where they capped executive pay at $500,000 per year for companies receiving extraordinary financial assistance from the U.S. taxpayers. The argument is to place a cap on the amount that any person may legally make, in the same way as there is a floor of a minimum wage so that people can not earn too little.
  • Debt Like Compensation - If an executive is compensated exclusively with equity, he will take risks to benefit shareholders at the expense of debtholders. Thus, there are several proposals to compensate executives with debt as well as equity, to mitigate their risk-shifting tendencies.
  • Indexing Operating Performance is a way to make bonus targets business cycle independent. Indexed bonus targets move with the business cycle and are therefore fairer and valid for a longer period of time.
  • Two strikes - In Australia an amendment to the Corporations Amendment(Improving Accountability on Director and Executive Remuneration) Bill 2011 puts in place processes to trigger a re-election of a Board where a 25% "no" vote by shareholders to the company's remuneration report has been recorded in two consecutive annual general meetings. When the second "no" vote is recorded at an AGM, the meeting will be suspended and shareholders will be asked to vote on whether a spill meeting is to be held. This vote must be upheld by at least a 50% majority for the spill (or re-election process) to be run. At a spill meeting all directors current at the time the remuneration report was considered are required to stand for re-election.
  • Independent non-executive director setting of compensation is widely practised. An independent remuneration committee is an attempt to have pay packages set at arms' length from the directors who are getting paid.
  • On March 2016, the Israeli Parliament set a unique law that effectively sets an upper bound to executive compensation in financial firms. According to the Law, an annual executive compensation greater than 2.5 million New Israeli Shekel (approximately US$650,000) cannot be granted by a financial corporation if it is more than 35 times the lowest salary paid by the corporation.

Accelerating change

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