CEO pay must be based on long-term evaluation

Compensation for chief executives should be based on a three to five year evaluation of his performance, and not on an annual basis as is the case now, according to Abdul Aziz Al Ghurair, chief executive of Mashreqbank.

"The current practice is flawed as the chief executive is only concerned about the short term - on an annual or even a quarterly basis - results of his company. This could lead to tweaking the numbers to ensure that corporate results look good, which would ensure fat bonuses for him," said Al Ghurair.

"However, this is not good for the health of the organisation over the longer term. Executive compensation should be judged over a longer period - three, five or even seven years."

The issue has assumed highly emotive proportions over the last year especially after the fat compensation packages receiv-ed by senior Enron management even as the company was spiralling into bankruptcy. The same scenarios were played out at other leading U.S. companies during the same period, which has led to strident calls among shareholders for stricter monitoring of executive compensations.

On the plus side, many countries are putting together laws to ensure the scope for future disasters such as an Enron or WorldCom are limited.

Al Ghurair was delivering the keynote address at a seminar organised by Deloitte & Touche on 'Agenda for IAS 39' and 'Value at Risk'.

"Some chief executives are on an ego trip and start believing what they say. This often leads them to find ways to cut corners and get the results they seek," the Mashreqbank official added.

"There is pressure from the top management on the lower levels, which lead to them tweaking and fudging numbers and ensuring regulations are busted."

Some of the blame for the state of affairs should rest with the analysts tracking the companies. "CEOs are forced to take the short cuts to provide the numbers the analysts want."

So, what could be the solution? None may be at hand immediately, but "organisations should have a culture of self regulation, thus precluding any need for the regulators to come around. This would also do away with auditors. But we far away from reaching that state," said Al Ghurair.

Among the other speakers the event were Cormac Butler, an international expert and consultant on accounting standards and financial instruments, and Abbas Ali Mirza, partner at Deloitte & Touche's Dubai office, who spoke on the 'Globalisation of financial reporting'.