The Laws and Regulations Related to Remuneration Practices: a comparative and analytical investigation into legal aspects Thesis submitted in accordance with the requirements of the University of Liverpool for the degree of Doctor in Philosophy by Abdullah Abdulaziz Almhmoud March 2015 Table of contents Table of contents ......................................................................................................................... i Abstract ..................................................................................................................................... ix Acknowledgments...................................................................................................................... x Chapter 1 Introduction ............................................................................................................ 1 1.1 Introduction ................................................................................................................ 1 1.2 Remuneration Practices in Saudi Arabia .................................................................... 3 1.3 Research aim and questions ....................................................................................... 4 1.4 Methodology .............................................................................................................. 5 1.5 Research Plan and Thesis Overview .......................................................................... 5 Chapter 2 Understanding remuneration and its role in the financial crisis ............................ 8 2.1 The components of remuneration .............................................................................. 8 2.1.1 Salary ..................................................................................................................... 8 2.1.2 Short-term incentives (STIs) or Bonuses ............................................................. 10 2.1.3 Long-term incentives (LTIs) ................................................................................ 13 2.1.3.1 Cash-based incentives (performance unit plans or long-term bonuses) ..... 13 2.1.3.2 Equity-based incentives .............................................................................. 14 2.1.3.2.1 Stock options .......................................................................................... 15 2.1.3.2.2 Restricted stocks ..................................................................................... 19 2.1.4 Other benefits ....................................................................................................... 20 2.2 Economic Theories Surrounding Remuneration ...................................................... 22 2.2.1 Optimal contracting theory v. managerial power theory ..................................... 23 2.2.2 Sub-theories of market driven or optimal contracting theory .............................. 27 2.2.2.1 Marginal Revenue Product Theory ............................................................. 27 i 2.2.2.2 Tournament Theory .................................................................................... 27 2.2.2.3 Opportunity Cost Theory ............................................................................ 27 2.2.2.4 Bargaining Power Theory ........................................................................... 28 2.2.2.5 Risk Adjustment Theory ............................................................................. 28 2.3 Remuneration during the Financial Crisis 2007-09 ................................................. 28 2.3.1 The Crisis in brief ................................................................................................ 29 2.3.2 The political views of remuneration practices ..................................................... 31 2.3.3 The FSB’s role in delivering the Principles and Standards on remuneration ...... 34 2.3.3.1 The scope of application ............................................................................. 35 2.3.3.2 The governance of remuneration ................................................................ 37 2.3.3.3 The structure of remuneration .................................................................... 37 2.3.3.4 The disclosure of remuneration .................................................................. 40 2.3.3.5 The oversight and supervision of remuneration practices .......................... 41 2.3.3.6 The assessment of the FSB principles by Ferrarini and Ungureanu........... 42 2.4 Conclusion ............................................................................................................... 43 Chapter 3 Laws and Regulations Related to Remuneration Practices in the UK: Part One: Corporate Law and Corporate Governance Perspectives ........................................................ 45 3.1 Introduction .............................................................................................................. 45 3.2 Common Law and Remuneration Setting and Practices .......................................... 46 3.3 The general approach to regulating remuneration practices .................................... 51 3.3.1 Before Structuring and negotiation ...................................................................... 52 3.3.1.1 Splitting ...................................................................................................... 52 3.3.1.2 Reducing ..................................................................................................... 54 3.3.1.3 Establishing ................................................................................................ 58 3.3.1.3.1 The role of the committee ...................................................................... 58 3.3.1.3.2 The composition of the committee ......................................................... 60 ii 3.3.1.3.2.1 The purpose of non-executive directors .......................................... 61 3.3.1.3.3 The operation of the committee ............................................................. 63 3.3.1.3.4 Assessment of the reform on establishing .............................................. 66 3.3.2 Instructions and guidelines for structuring and negotiation ................................. 71 3.3.3 The final steps after structuring and negotiation .................................................. 75 3.3.3.1 Disclosure ................................................................................................... 75 3.3.3.2 Shareholder engagement and vote .............................................................. 80 3.3.3.2.1 Engagement ............................................................................................ 80 3.3.3.2.1.1 Dialogue .......................................................................................... 85 3.3.3.2.1.2 Shareholder resolutions ................................................................... 85 3.3.3.2.1.3 Re-election ...................................................................................... 86 3.3.3.2.1.4 Other useful tools ............................................................................ 86 3.3.3.2.1.5 Assessment of Engagement ............................................................. 86 3.3.3.2.2 Voting ..................................................................................................... 87 3.3.3.2.2.1 Voting in general ............................................................................. 87 3.3.3.2.2.2 Voting on the Remuneration Report ................................................ 88 3.3.3.2.2.3 Assessment of the Voting on the Remuneration Report .................. 90 3.4 Conclusion ............................................................................................................... 92 Chapter 4 Laws and Regulations Related to Remuneration Practices in the UK: Part Two: Incentive-Based Remuneration in the Banking Sector ............................................................ 93 4.1 Introduction .............................................................................................................. 93 4.2 Various Reports examining Remuneration since the crisis ...................................... 94 4.2.1 Remuneration in the Turner Report ..................................................................... 94 4.2.2 The Treasury Committee Report on reforming corporate governance and pay in the City ............................................................................................................................. 95 4.2.3 Remuneration in the Walker Review ................................................................... 96 4.2.4 Remuneration in the FSA report on the failure of the RBS ................................. 99 iii 4.2.5 Remuneration in the Parliamentary Commission on Banking Standards (PCBS) report ............................................................................................................................ 100 4.3 Introduction and updating of the Remuneration Code by the FSA ....................... 103 4.3.1 Introducing the code .......................................................................................... 104 4.3.1.1 FSA’s powers to control remuneration practices before the crisis ............ 104 4.3.1.2 “Dear CEO” letter ..................................................................................... 105 4.3.1.3 Findings of the FSA review (2008) .......................................................... 106 4.3.1.4 The need for the Code