In the light of the global financial crisis, discuss how the Essay - 2

In the light of the global financial crisis, discuss how the remuneration of chief executives of banks should be determined - Essay Example It was observed by several economists that for banks, one of the major reasons of not been able to survive during the financial crisis is the remuneration policies for the bank CEOs. Mcgarvey (2012) illustrates the fact that even in the era of financial instability of the world economy, salaries of CEOs is just climbing up without any adequate justification of such high salaries. This in-turn also exposes banks and other firms to higher risks without promising that the high paid CEO will turn away those risks coming in their way. Hence in the banking sector especially, it is important to devise polices, which ensures that CEOs are paid in the interest of the bank and not more than their potential and skills (Mcgarvey, 2012). Determining the Remuneration of Chief Executives 1. Maintaining Equilibrium between the bank’s profit and remunerations. The prime objective of any bank is to attract investors and get more capability to land money to others. Therefore, the shareholders ha ve to make sure that the remuneration of the CEO is aligned with the bank’s profit. In the period of the financial crisis, if the bank is making a good profit, then paying high salary to the CEO is justified. However, in case the bank is losing its clients and the profit is shrinking, the salary of the CEO should also be reduced proportionally, to maintain equilibrium between the bank’s profits and expenditures (NCNB, 2006). 2. ... In this scenario, paying a CEO who is less talented and skilful can reduce the morale and passion of other employees of the bank. Therefore, it is a very important factor, especially during the financial crisis, to pay CEOs as per their skill, talent and ability to benefit the bank. In addition to this, it is also important to measure the contribution of each employee when the bank is progressing. If the salary of a CEO is increased, then salaries of other employees who have contributed in the bank’s progress should also be increased with a defined proportion (Gertler et al., 2011). 3. Market Research Directors of the bank have to be aware of the current market position and the maximum salary given by banks to their CEOs. In addition to this, owners of the bank should analyze the past records of the bank to find a relation between banks’ progress and CEO’s salaries. On the base of all rationales, directors and owners of the bank should come up with a remuneration plan, which is neither very low as compared to the market value of CEOs nor too high to expose banks to higher financial and employees’ dissatisfaction risks. The main step is in the recruiting of the CEO; if the salary is offered very high first up, then lowering it down if the bank’s profit decreases then it can further disappoint the CEO. This will ultimately be a drawback for the bank as if the CEO is not passionate with the job the entire bank structure will fall to desolation (Marshall, 2009). 4. Bonuses Incentives and bonuses are also an important part of the total remuneration given to the CEOs. It was observed by Calabria (2009) that many banks have a short term benefit approach and