The Rights and Obligations of Policyholders, Board of Directors, and Management
Role of Management
The role of corporate management is to accomplish the objectives set by the board of directors through efficient and effective utilization of all available company resources. Management must daily exercise its discretion to direct and control money, equipment and personnel in a manner that results in profitable enterprise, and that maximizes policyholder value. Management's active role in daily operations is directly related to the success of the company.
The importance of retaining talented management cannot be overemphasized. The ability to attract and retain management talent with stock-based compensation is one reason a mutual insurer may decide to restructure. If this is one of the reasons for restructuring, the company should develop a compensation program to support its strategy and competitive position. The following are some of the reasons companies could consider for developing a management compensation plan:
Compensation programs exist to attract, motivate and retain personnel to execute corporate strategy. An important objective of a publicly held company is to increase shareholder value. A compensation program, therefore, should adequately communicate the performance measures that drive value and share a portion of the increase in value with employees.
Competitive pay levels
In the case of a new public company, compensation information for top executives will be available, probably for the first time, through reports filed with the Securities Exchange Commission (SEC) to shareholders and the general public. Registration statements and annual proxy disclosures require detailed reporting of base salaries, annual cash bonuses, perquisites and benefits, stock option grants, and any other long-term incentive grants. Specific data is required for the CEO and the four other most highly paid officers, as determined by salary and annual bonus. It is critical that compensation be reasonable, relative to industry practices and to the company's strategy and performance. Unreasonably low pay will attract recruiters, while high pay will attract unwanted criticism by investors and analysts.
Investors in public companies generally want management and directors to have an ownership interest to help ensure that management attends to increasing shareholder value. It also provides retention incentives for key executives, particularly if grants vest over time. The ownership interest may be actual shares, or more commonly, options to purchase shares in the future.
Accountability for executive pay
The board of directors of a public company has the ultimate fiduciary responsibility for establishing executive pay levels and programs. Almost all public companies, and many mutual and closely held stock property and casualty insurers, have independent compensation committees to oversee executive pay decisions.
Increased investor and media scrutiny
At times, investors and other interested groups at shareholders' meetings of public companies are armed with executive pay data and questions may arise. Thus, a restructuring mutual insurer should be prepared to justify pay strategy and practices. National and local media regularly publish pay data for public companies, particularly pay that is higher than normal levels.
Posted: Thursday, March 25, 2010 10:38:32 AM. Modified: Friday, April 26, 2013 9:32:15 AM.
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