1. Directors’ Remuneration 1

2. Public Concerns O Board decides what to pay its members. O True shareholders approve, but they rarely turn down Board’s recommendation. O Distinction between greed and justifiable remuneration for services. O Relationship between effort and results. O Distinction between executive and NEDs 2

3. The Salary Only Approach O Does not provide enough motivation. O Promotes status quo mentality O Restricts initiative and entrepreneurship O Promotes mobility of directors 3

4. Performance Based Pay O Promotes incentive / motivation O Targets must be realistic O Measurement of achievement should be reliable and transparent O However, this loses sight of the difference between efforts and results. 4

5. Balance in Remuneration O Ideally, directors’ pay must have an assured pay plus a performance related element. O How to keep a balance between “assured” and “results-based” pay elements. O Results based element is an incentive – so a higher portion should be results based, but it may promote fudging of results O Too high an assured element may lead to complacence. 5

6. Balance in Remuneration O Known before the performance O Salary and benefits O Computed after the performance O Bonuses tied to results O Balance between short term and long term rewards. O Annual Component O Long Term Component 6

7. Long Term Remuneration O Free shares (stock awards) O Share options O For the year O Every year on an ascending scale 7

8. Determination of Bonus  What should be bonus based on? O Quantity or money value O Profits or volume (e.g. market share) O Defining the base figure  Measurement of the base figure O Short term impact O Long term impact of base figure change  Intent in setting the above two. 8

9. Case: Anite plc O Bonus of CEO and CFO was based on Earnings before depreciation and amortizations. O Company made a large number of acquisitions, so its EBITDA went up, but due to heavy amortization of acquisition goodwill, Net Income actually went down. O Yet CEO and CFO were paid heavy bonuses. 9

10. How much is enough? O Only good pay will get/retain good directors. O Too high a pay is negative: O Agency issue O Public image O Too low pay is also negative: O Promotes dishonesty O Fails to retain good directors 10

11. Various Base figures O Net Profit O EPS or Dividends O Total Shareholders Return O Balance Sheet size O Non-financial targets O Combination 11

12. Provisions of CC of CG O Bonus basis should be relevant, stretching and designed to enhance shareholders value. O Consideration should be given to long term incentive schemes. O All schemes should be approved by shareholders O All targets should coincide with company’s objectives. 12

13. Share Options O Its an option, not an obligation O Issue (Exercise) price is set when option is granted: O Generally, but not always present price O Its proposed that it should be above current price O Exercise Time: O Between two future dates O But generally no restriction on sale of option O Proposed to put such restriction 13

14. How to issue shares under option O Out of fresh issues O Articles should permit it. O Out of “Bought Back” shares O Cost element O Buy from the market: O Cost element 14

15. Impact of Option Exercise O If fresh issue at an exercise price: O No apparent cost to company, but there is real cost. O Dilution of shareholders voting power O Impact on EPS and share price O If out of “bought back” shares O Direct cost, reflects on Income Statement 15

16. Making Options work O Reasonableness of Exercise Price O Reasonableness of size of option O Ascending scale of award O Reasonableness of Exercise period O Restriction on: O Sale of options O Sale of shares after exercising the option 16

17. Problems with Options O Makes the EDs focus only on share price O Make share price movement unpredictable O Have no value when share prices go below exercise price due to no fault of directors. 17

18. Some Suggestions O Exercise price should be above current price. O Options should be awarded in small tranches, in an ascending order of target achievements, and over a long period. O Restriction on disposal of acquired shares under option plan. 18

19. Service Contracts O Directors can be given service contracts, defining their remuneration. O Executive Directors more commonly get service contracts. O NEDs generally do not get a service contract in Pakistan. O Service Contract may allow additional fees: O Questionable under CC of CG 19

20. NED’s Remuneration O USA, Europe and FE countries pay significantly to NEDs. O In Pakistan, NEDs generally get only meeting fees. O If it were to be assumed that NEDs are a potent way of getting good governance, they must be provided a “motive” to do well. Fear of persecution is negative. 20

21. Remuneration Committee O Comprises generally of INEDs. O Can get professional advice in setting suitable basis of directors’ remuneration. O Ensure directors’ conduct by: O Not allowing additional fees O Not allowing any other linkages with the company O Evaluate actual computation of bonuses O Must produce a report for shareholders 21

22. Remuneration Committee O Set remuneration policy O Covering all aspects like pay, bonus, severance, perks O Maintain its independence O Set performance targets and basis of measurement O Stay aware of what is happening in the corporate world – and its remunerations O Disclosure per law / practice 22

23. How much disclosure? O Remuneration policy O Names of members of remuneration committee O Details of all payments / options / benefits given to each director and how they were computed O Link between directors remuneration and company performance. 23

24. Role of Shareholders O Approve Remuneration Policy. O Get a report from Remuneration Committee O Approve remuneration package of each and all directors O Vodafone Case 24