GROUP MEMBERS

01 Faizan Ahmad 02 Arooba Hanif

SP19-BAF-020 SP19-BAF-015

03 Aneeba Hamid 04 Areej Kanwal

SP19-BAF-012 SP19-BAF-014

Muhammad Ahmed
05 Minhas
SP19-BAF-046
DIVISION OF WORK
Group Member Contribution

Faizan Ahmad Choice of case study, Introduction

and preparation of presentation

Arooba Hanif Question 1 and report formatting

Aneeba Hamid Question 2 and Internet research

Areej Kanwal Question 3 and Tables

Muhammad Ahmed Minhas Question 4 and quotations

Introduction
SCOPE OF CASE STUDY
As the core purpose of corporate governance is to deal
with agency problems through either Compensation or
Monitoring, this case study deals in detail with the issues
lying around executive compensation packages

AGENCY PROBLEMS

Compensation Monitoring
INTRODUCTORY FACTS OF
CASE STUDY
❖ Declining Advertising Revenue of Yahoo

❖ Yahoo’s Competition with Google and Facebook

❖ Appointment of Henrique De Castro as COO

❖ Poor Performance of De Castro

❖ Issue of Compensation of De Castro

OBJECTIVE OF THIS CASE
STUDY
The objective of this case is to
allow a discussion of issues such
as the roles of the nominating
and remuneration committees
in the hiring and remuneration of
senior executives; design and
risks of executive remuneration
packages; and the use of golden
parachutes.
01
Discuss the role that a
company’s shareholders
should play in determining
executive remuneration
packages.
 ANSWER
● Shareholders should play a
transparent and democratic role
in the matter of executive
compensation.

● The primary role of shareholders

is to elect board of directors,
those board of directors will make
decisions on executive
compensation through
committee.
 ANSWER
● If shareholders are
unsatisfied with the given
executive compensation,
they should question the
decision of board of
directors in a transparent
and democratic manner
rather than trying to
influence the decision of
Board of Directors
indirectly.
 ANSWER
● For example, 'Say-on-Pay'
votes permit shareholders
to express their views on
executive compensation,
but they do not dictate how
much executives will be
paid. Boards of directors,
their Compensation
Committees, and
compensation consultants
design, structure, and
approve compensation
plans.
 02
What factors may have
contributed to Mayer’s decision
to nominate De Castro as the
COO? .
 ANSWER
● The main factors that may have led Mayer’s
Decision to nominate De Castro as the COO are
De Castro’s Experience, his networking, his know-
how of Yahoo’s competitors i.e., Google and his
industry wide experience in Advertising
Departments of different organizations.
● De Castro’s main experience lied around
Internet advertising and his proven success in
structuring and scaling global organizations.
 ANSWER
● Second is the fact that Marissa Mayer was also relatively new on
the job, when Yahoo’s advertisement revenue was declining and
Google’s revenue was advancing, Marissa Mayer was of the view
that she could just hire any person out of Google’s advertisement
department and plug him into Yahoo directly as a COO.
● This strategy obviously didn’t work for her, after mere 15 months as
COO, De Castro was fired by Mayer after the board decided to
oust him.
 ANSWER
● One surprising fact is that, in those 15
months, COO Henrique De Castro made
more money than CEO Marissa Mayer
herself. Which tells us a lot about the
compensation structure decisions by
Yahoo’s committee.
 03
What are the roles of the
Nominating and Remuneration
Committees in the hiring and
remuneration of senior
executives such as De Castro?
 ANSWER
● The role of the remuneration committee
is to have an appropriate reward policy
that attracts and motivates executives
to achieve the long-term interests of
shareholders. In order to be effective, the
committee needs both to determine the
organization’s general policy on the
remuneration of key management
personnel (executives and directors)
and specific remuneration packages for
each executive director..
 RESPONSIBILITIES
● Review the framework for the remuneration and terms and
conditions of employment of the chairman of the board and of
executive directors.
● Monitor the level and structure of the remuneration of senior
managers.
● Set detailed remuneration of the executive directors and chairman
including payments on termination of the employment.
● Ensure that executive directors are fairly rewarded for their
contribution to the performance of the company
● Ensure transparency to shareholders that remuneration of the
executive directors is set by individuals with no personal interest in the
outcome of the committee decisions
 COMPONENTS
● Fixed remuneration comprises basic salary and usually fringe
benefits, and is not related to the performance of the company.
Generally, fixed remuneration is related to market practices for similar
peer companies.
● Bonus – executive directors may be paid by cash bonus for excellent
performance (a portion of this may be provided in the form of
deferred shares)
● Share options – an option is a right to purchase shares at a specific
exercise price at a specified date in the future. Share options give
directors the incentive to manage the company to benefit from a
share price increase. Share options are believed to align the executive
director’s goals with shareholders, thus overcoming agency problems
since the directors of the company become owners.
04
Was the remuneration package
awarded to De Castro when he left
Yahoo reasonable? Why do
companies often make what appear
to be excessive termination
payments? Suggest some potential
best practices in determining
severance pay.
 40%
Of the executives fail in their first 18 months

Source: Cornerstone International Group (One of the top five

retained executive search organizations in the world)
 SEVERANCE PACKAGE
● The remuneration package awarded to De
Castro on his termination of employment
was not reasonable. Termination payment
was excessive.
● De Castro received $58 Million as
severance pay (payment given on the end
of employment) but this severance was
initially set at $17 Million. The 300% increase
in severance pay is obliged to the increase
in Yahoo’s all-time high stock price. This
stock price was high due to Yahoo’s 24%
ownership stake in Alibaba and its IPO
and had no contribution of advertisement
revenues by De Castro, in fact,
advertisement revenues went down by 7%
in his tenure.
 SEVERANCE PACKAGE
● Around $31 Million of the $58 Million was in the form of make-whole
RSUs, meaning thereby, this payment was in the compensation of the
benefits and options that De Castro left at his previous job at Google.
● To avoid criticism of shareholders and media, the remuneration
committees try to give stock and equity benefits rather than cash
benefits.

● On the positive side, $56 of the $58 Million severance pay was in the
form of equity and not cash.
● Best Practice: When determining severance pay, not all equity
compensation should be in the form of company growth but rather,
some of that should be in the form of respective department growth.
05
What are the key features of De
Castro’s compensation package?
Also Discuss the use of remuneration
components, such as sign-on
bonuses, make whole bonuses and
golden parachutes, to attract and
retain senior executives
 SEVERANCE PACKAGE
● One of the main issues with the structure of De Castro’s
remuneration package was that his compensation was correlated
with the whole company as a whole rather than performance of his
advertisement department.
● Golden parachutes are a good mechanism for retaining employees
but they also provide safety cushion to executives in case they do not
perform well. Golden parachutes should be structured in a way that
they attract executives from other companies but they shouldn’t be
so large in size that they leave no motivation for an executive to
perform well in his department.
● Sign-on bonuses have been handled well by the Yahoo Committee
in a way that they paid very little cash bonus and most of the bonus
was in the form of equity, thereby incurring less loss to the company
strategically.
SEVERANCE PACKAGE
Component Amount

Basic Salary and Bonus $600,000 and $540,000 (Bonus

is conditional)

Long Term Incentive Equity ❖ RSUs worth $18 Million

awards ❖ PSOs worth $18 Million
❖ RSU (Make-whole) $20 Million

One-time compensation for $ 1 Million

leaving Google
 CONCLUSION
“TOO OFTEN, EXECUTIVE COMPENSATION IN THE
U.S IS RIDICULOUSLY OUT OF LINE WITH
PERFORMANCE. THAT WON’T CHANGE BECAUSE
THE DECK IS STACKED AGAINST INVESTORS
WHEN IT COMES TO THE CEO’S PAY”
 ANY
QUESTIONS?
● “ALL PRAISE BE TO ALLAH”

THANK YOU !