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Homework answers / question archive / The SEC report criticized the board of directors of Fannie Mae for not exercising proper oversight or monitoring over the activities of management
The SEC report criticized the board of directors of Fannie Mae for not exercising proper oversight or monitoring over the activities of management. Describe the effect of better monitoring of senior management on the proportion of their salaries in their total compensation. Indicate whether the proportion increases or decreases as a percentage of their total compensation. Note that their total compensation consists of bonuses plus fixed salaries.
Better monitoring of top management is needed to help promote ethical as well as sound business decision making for top management. As a result, one should see more compensation in the form of a salary, around 80% of overall compensation, and around 20% focused on bonuses. When bonuses get beyond 20%, it encourages more unethical behavior as a means to hit earning targets so top management is awarded bonuses.
When a firm is better able to manage the salary of top management, without weighing too heavy on bonuses they will create a work climate that is focused on results (as employees must perform to remain employed) opposed to attempted to hit targets for their own benefit, in order to get a bonus. This helps provide oversight, in a way in which the firm is working for results and interest of shareholders, the general public, and in a socially responsible manner, opposed to operating in a way to line the pockets of top management.
