News Corp reduces agency problems through executive

remuneration plans

News Corp has been heavily criticised by investors and fund managers for both large bonuses paid to exec$-$ utives, and its focus on short$-$term performance. The company recently restructured its executive remuner$-$ ation scheme to tie executive remuneration more closely to News Corp's share price performance.

The scheme gives Rupert Murdoch, $$the$.$chairman, chief executive and largest shareholder, the chance to earn an annual cash bonus of up to US$$25$ million. James Murdoch's potential bonus range is US$$6$ million to US$$12$ million. Chase Carey, deputy chairman and chief operating officer, could earn a bonus of between US$$10$ million and US$$20$ million a year if the company meets a range of perfor$-$ mance targets.

While News Corp's previous bonus scheme awarded cash based on earning per share $($EPS$)$ growth, now two$-$thirds of the annual bonuses awarded to the top executives is based on three measures: EPS growth, which accounts for $40\%$ of the performance target, free cash flow growth $(40\%)$ and total shareholder return $(20\%).$ The final third is based on qualitative factors, which include meeting both financial and non$-$financial objectives.

Using a range of performance measures has been seen as a good move by financial analysts, bringing the company in line with other companies.

Source: Adapted from Neil Shoebridge, 'News resets top executive pay', The Australian Financial Review$\mathrm{.}14$

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QUESTIONS

$1.$ Boththehorizonproblemandriskaversionareagencyproblemsthatrelatespecificallytotherelationshp

between owners and managers and which contracting can assist in overcoming. Explain these two

problems.

$2.$ NewsCorpLtdhasrecentlyintroducedanewpayschemetolinkexecutivepaytoarangeofperfomianca

measures, including share performance through 'total shareholder return' $.$ How does linking bonusss to

share performance reduce the horizon problem and risk aversion?

$3.$ Why is it important to link executive bonuses to a range of entity performance measures rather thanone,

as was previously the case with News Corp?

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