Executive Compensation Arrangement: Case

Added on - 16 Sep 2019

  • Dissertation

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MemoTo:From:CC:Date:Re: Fennie Mae Case AssessmentThe current memo is concerned with the assessment of the Fannie Mae case. The exectuviecompensation arrangement has been analysed. The time period referred to in this case is from2000 to 2004. It was December 2004 when the CEO and CFO of one of the large financialcompanies Fannie Mae was asked to leave. Both left the company as retirees and theirdeparture led to the identification of various loopholes. The further investigation into thecompany’s financials and compensation structure led to the following findings:a) Perverse Incentives: The compensation arrangements of the company were such thatwhenever the report of high earnings for the company was presented; there was the provisionto give rich awards to the Executives. However, the reward structure had no provision thatcould push the executives to return the compensation if they reported wrong earning.b) Soft Landing: The executives who were found to be on the wrong side were gently let goinstead of any severe actions. They were let out by the board as retirees despite such losses.c) Pay Decoupled from Performance: The retirement pay-out for the executives were notdependent or associated to the performance of the company. Therefore, the poor performanceof the firm did not impact the compensation of that executives would receive.
d) Camouflage: The Company did not disclose the amount paid to the two executives at thetime of retirement.These four problems could be managed or prevented if right policies were in existence in thecompany regarding the compensation and benefit. The sections ahead providerecommendations on the ways that should be implemented by organizations to wards off suchchallenges.Perverse Incentives: The provision for giving the incentives to the executives was tied to theearnings of the company which was an appreciable aspect. However, the company’s policylacked and ground checking on the statements given by the executives. Moreover, there wasno provision that if the fault in earning is identified then the compensation will be taken back.This led to the wrong motivation as money was coming to executives but not leaving them.Here, the compensation structure should have included the return of compensation if wrongearnings were shown. Also, provision for strong action should be there that would preventexecutives from doing so. Sometimes heavy compensation is paid to retain top talents (Bryabt& Allen, 2013). But if it impacts the company’s reputation, then it becomes a challenge.The second challenge was about the soft landing. When it was identified that the executivesare on the wrong side, then instead of softly moving them out of the organization, they shouldhave been handed over to the law enforcement for engaging in malicious attempts. Thereason is that this action of the board would have left negative impact on future executivesand they might prefer to engage in same activity if they realize that doing wrong leads to nopunishment.The third challenge was associated with the decoupling of pay from the performance. If thecompensation to executives of an organization is directly related to their performance withinthe organization, then it is most likely that they would prefer to perform to gain their
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