Long-term forms of cash consideration
For companies implementing the concept of cost management, the links established between long-term decision-making and the reward system are important. One of the popular decision mechanisms is the transfer of shares into the ownership of top managers or various optional programs. More complicated, but also more effective, is the bank system of bonuses with deferred payments, which are tied to the dynamics of stock prices or calculated values that diagnose the change in shareholder value. The principal options for constructing a long-term remuneration system are shown in Fig. 7.17.
Shares with conditions receive managers and directors in specified cases related to the change in the status of the company or the ownership structure. Similar programs exist in the form of conditional bonuses. For example, the chairman of the board of directors, A. Dunham, as a result of the merger of the two companies in 2002, received $ 16.2 million under the terms of the merger. Likewise, the managers of the United Machine-Building Plant (OMZ) by results
Fig. 7.17. Variety of long-term cash reward forms
merger in 2004 with the concern "Power Machines despite the incompleteness of option plans, they should have received shares previously on option programs. 15 such cases, the sale of shares is provided with a significant discount to the strike price, which corresponds to the world practice. Conditional shares and bonuses, as is clear from the examples given, play not so much a stimulating role (leverage), as they compensate for the costs of possible personnel reshuffles and realize the principle of retention.
A lot of research, along with consideration of various options for reducing agency costs, contains an analysis of the influence of the ownership of managers on the value of the company. According to empirical research, the optimal level of ownership in the hands of managers is in two ranges: 0-5%, or more than 25%. With the increase in the ownership of managers from 0 to 5%, there is an increase in the company's market valuation. In the range of 5-25%, the effects observed in the literature are characteristic of the "digging out" managers. With a share of ownership above 25%, the interests of shareholders-outsiders and insiders are converging. For companies with a high share of intellectual capital (for example, the IT sector of the economy), as well as for developing countries with traditionally concentrated property, the optimal range of ownership in equity is shifted by managers.
The path of convergence of interests of managers, employees and owners through the division of property has a number of limitations.
The first constraint is due to the turnover of staff and top managers. The turnover of staff in the upper echelons of American and European corporations and, as a result, the weakening of the incentive of top managers for the long-term evaluation of the work of personnel is a trend of recent years. According to DBM1 (HR consulting), by the end of 2001 the average term of one person as general director was reduced to 2.75 years (in 1999 he was 3-4 years old). The wave of mergers and acquisitions in the United States oil market also generated significant personnel reshuffles. The prevalence of demand over the supply of labor in the labor market of managers has led to a shortening of the tenure of an average level of management in oil and gas companies in the United States to two years (according to the author and based on data obtained from the study of career growth factors in the Oil & Gas Business Academy of the National Economy Academy under the US Government for the period 2000-2004). This process was also promoted by the efforts of headhunters of the United States market.
In part, the problem of manager turnover can be mitigated by imposing restrictions on actions with shares or extending the duration of the option, as well as using virtual option programs.
The second restriction of the participation programs is related to the insecurity of the position of the minority shareholder of the United States company (weak contractual environment). Many managers and top managers are weakly motivated by ownership of shares due to the potential for dilution of the share on the initiative of the controlling owner or possible loss of ownership in the sale of the company. When making decisions in this case, the personal aspects (the word of the main owner) prevail.
The third constraint is related to a potential violation of the principle of risk sharing. Bonuses as a variable part of the reward, tied with "efforts" and demonstrated performance of the company (performance-based compensation), allow "to share risks". The principle of risk sharing requires that risks not controlled by managers be eliminated. The remuneration should be as much as possible connected with the agent's efforts (risks), and not with positive trends in the market or with the efforts of others. When building remuneration based on the dynamics of the share price, the principle of risk sharing is often violated. One solution to the problem is the contracts of "relative participation" relative performance contract. Such a contract determines the remuneration of the manager based on the performance of firms that compete or the market (if it is a matter of increasing capitalization). In long-term schemes, these contracts are matched with index options (with a floating strike price). Thus, the contract of "relative participation" eliminates the risks that affect the companies of the industry or the market as a whole. The lack of such contracts, economists consider generating incentives for aggressive competition in the market, which can lead to a decrease in the profitability of the industry. Another conclusion resulting from the principle of risk sharing is that long-term long-term reward programs are more adequate to the level of top managers and board members. For other levels, special adjustments and limitations will be required reflecting the degree of effort, which may not always be transparent and understandable to participants.
The fourth constraint is due to the low liquidity of the stock market in the United States and the ability of insiders or large market players to manipulate prices.
The Fifth Restriction is caused by barriers to capital flow between countries. Prior to August 2001, there were certain restrictions on the availability of equity participation programs United States managers and staff working in United States branches and divisions of foreign firms (the restrictions were due to currency regulation of investments in foreign companies). Since the second half of 2001, after the amendments to the currency legislation were introduced, EEER programs became available to United States participants, and since 2004 the investment limit in the capital of foreign companies has been increased (potentially the share of participation in the program has increased).
In the ownership ownership for the owners of the company should take into account three points:
1) not always the transfer of property in the form of a gift is appropriate, a large motivation is created by the programs "redemption of shares" or option contracts (transfer of ownership transfer rights);
2) the right to take advantage of the stock option option intelligently stretch in time (that is, implement step-by-step). Successful companies often implement the following algorithm: 20% of the option block can be converted into shares in the first year from the beginning of the 12-year program, then 6% over 10 years and the remaining 20% only in the 12th year. Thus, the manager is not only motivated to create an investment attractiveness of the company, but also "is held" in it;
3) a number of positions in the top management of companies should be rewarded (in terms of bonuses and option contracts) not by the general director, but by the board of directors (remuneration committee). This is due to certain conflicts of interest between the general director and the owners. Among these favorites often falls into the CFO.
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