Critics of the excessive packages are of the opinion that such high packages reflect ‘pay for failure’ and do not take in to account the financial performance of the company (Solomon, 2007 p. 40). Additionally, most of the directors are geared at self-interests, thus undermining the ability of the shareholders to receive a fair return for their investments (Barty and Jones, 2012 p.14).
According to a recent report by the High Pay Commission, there has been a drastic growth in directors’ packages over the last thirty years. According to the report, directors’ packages have risen by about 5,000 percent in the last thirty years while the average income worker has increased by only 300 percent. The report recommended that firms should tackle the growing inequality in compensation in order to prevent future reputational harm and arrest the shareholder’s plummeting trust in the management. From an economic point of view, the overall UK economy can not expand when few people receive disproportionate compensation when the middle class keeps on stagnating. The excessive compensation will lead to social unrest and undue power influence by the executives who have the ability to influence the policies of the companies. According to Gadiesh et al, (2003), directors’ packages should be guided by their performance and that compensation systems should be transparent. Accordingly, directors’ packages are high since the executives yield a lot of power in the control of the boards of directors.
Additionally, the compensation boards see the interests of the executives as a primary concern and those of shareholders as a secondary concern. In this case, directors’ incentives are never linked with the performance thus leading to much controversy about the ever-increasing packages for the executives. According to the critics of excessive directors’ packages, the large component of the compensation should be based on performance that is risk-adjustable and evaluated over a certain period of time (Barty and Jones, 2012 p.16). The compensation plans should focus on the corporate strategy and directors should strive to align their interests with those of shareholders. Companies should also have appropriate limits on the benefits, pensions and other entitlements to the directors (Bebchuk & Fried, 2006 p. 1