A study of Executive Performance Measurements in Australian Public Companies
The report provides an in-depth coverage of three financial institutions cost and management accounting techniques with an explanation of the variance in the remuneration packages for the three financial firms. This aspect relates to a wide range of aspects from the firm’s type of employees, to the financial performance of the institutions as well as the work input. More detailed analysis provides the solution to the most common reason and the most casual aspect that directly relates to the remuneration.The firm with the best package link is identified as well as other comparative financial information is availed which is very important to any stakeholder for whatever purpose they may have with regard to company information.
The performance evaluation of CEOs is imperative to company development. Professional reports provide information that 91% of CEOs get their salaries reviewed every year /annually while the rest 9% get their pay slips reviewed even more frequently therefore illustrating how important it is for companies to get this done. (Nadler, 2012)This is usually undertaken through the compensation committee, theboard of various companies, the governance committee and lead directors in other companies. The process of job evaluation of top management is a technical process and may be faced with different challenges either before, during or after the performance evaluation based on the attitude of the CEO in question, which sometimes determines the feedback and responses that are given. It is therefore more fundamental to reduce or prevent potential problems to increase the chances for a positive process that achieves the desired outcome. A comparison of definitive objectives, goals and targets and the previous performance of the respective CEO being evaluated provide a yardstick with which the responsible committee or board uses to rank a prospective future leader. This also provides light on the areas the CEO needs to focus on for the benefit of the company in general. The process of CEO Job evaluation may be faced with a limitation if the time factor is limited to a very short period of evaluation usually based on short term one year (previous year)evaluations. The CEO in question may be inclined toward short term financial targets and the expectedbehavioralaspect. The board or committee may overlook the relevant long term objectives therefore offering inconclusive feedback expectations on company performance and even the behavioral aspects thus negatively affective the evaluation process. (Saylor, 2017)
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3 Dimensions of a CEO’s job evaluation include
- Bottom line impact: The CEO in this case is held responsible for the financial performance of a firm despite any other factors that may be involved.
- operational impact: The CEO here is held to account for the operational aspect of a company ,the product/service quality,differentiation,capacity level,consumer enhancement among other factors therefore being a more direct job evaluation base.
- Leadership effectiveness: The leadership of a company is evaluated based on the ability to form long term strategies, key management decisions and visionary aspects for the company.
A good practice is to align the job evaluation of CEOs with the company’s business calendar into the beginning of the year,mid year and end year expectations. This respectively relates to the objectives set, the comparison and mid year evaluation of the targets and end year analysis of the completed goals against the original set of objectives.
Fair, reasonable compensation is imperative to the value addition of any company. The last 20 years has been marked by increases in CEO remuneration packages globally. Executive compensation has been found to be increasing at a higher rate than the rate of company net earnings. Excess payouts to CEOs can negate the best interests for the company thus going against the shareholder wealth principle in financial management. Greater control by the boards of different companies has been emphasized by indexes such as Nasdaq and NYSE but there has been a spate of directors influencing their own renumeration.1994 was marked by Bill Clinton Tax Act in the US with the Act providing that non financial payouts that exceeded $1 million was eligible for taxation and was non deductible.
Causes of a push for higher pay may include:
The CEO and directors of a firm may decide by vote through a board to increase their remuneration in order to enable more stock acquisition by employees.
The Golden parachute occurs where the benefits to the directors and CEOs is increased substantially especially during a takeover bid. In one way this serves to benefit the shareholders overall through higher value acquisitions and in another way it denies the employees the right to increase their overall benefit through the intention to retain the majority of shareholding for personal interests such as to keep the jobs by management.
This committee is responsible for the determination of the CEO pay package based on the evaluation process. The aim is to reward high performance and encourage overall higher targets and also merge short term and long term goals of the firm.
- Strategic thinking
- Integrated succession and remuneration plans
- Reasonable benchmarking initiatives
- Considering executives’ perceptions
- Major shareholder considerations
- Properly selected peer review or advisors’ teams
CBA CEO s (Yeates, 2016)alary has been been slashed by 20% together with higher level executives with their short term incentives cut for 2017.This major slash was credited to the AUSTRAC scandal that manifested intensive breaching of the law by top bank management which led to a massive loss in fines faced by the bank. The CBA CEO has total package of about $12.3 M in 2016 inclusive of accruing long-term bonuses. (Janda, 2017) CBA is also reported to increase its STI and LTI incentives for the 2017 financial year to include the exemplar leadership and 25% extra weighting for the long term community development (culture and diversity)respectively. This effectively lowers the shareholder returns from 75% to 50%. (Boyd, 2016) (CBA, 2016) The CBA CEO 2014 total pay was recorded at $8.1 M inclusive of the base rate and all the incentives as well as shares. (Pash, 2014)
2014 to 2016 CEO pay
Financial performance CBA return on equity (ROE) changed from 18.05 in 2013 to 16.88 currently in 2017 indicating a lower return generated by the firm and its reduced ability to generate the number of returns to match the equity level. The firm’s CEO pay went up at a higher rate than the increase in earnings per share while the return on equity dropped.EPS increased from 4.62 in 2013 to 5.39 in 2017. (Morningstar Inc, 2017)
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2016 CEO(Brian Herter) salary was measured at $6.7 Million which is less than the 2013 CEO salary of about $9.2 M .Westpac’s net earnings stagnated at around $7.8Billion at the helm of rising debt. The bank report provides that the long term incentives set between 2013 and 2016 had been manifested /realized. (Westapac, 2016)The shareholders only got a return of 15.2% for the same period/duration which was below the 50th percentile .EPS growth was measured to below 4% within the same 3 year period. This illustrates a reduction in earnings by top management while the company made little growth in profits.
NAB’S shares have increased from $12 to $19 in the last 15 years. The CEO pay increased with no correlated increase in the company performance. (Kohler, 2013)NAB’s CEO pay in 2013 had reduced to $7.7M (smaller share number and a lower bonus) despite the increased cash profit amounting to $5.94 B in the same year. (News Limted , 2013).The 2016 CEO pay increased to $6.7m up from 2015 largely due to performance bonuses, and offloading of non profit making operations. This pay was however lower compared to 2013 CEO pay.EPS reduced from 3.274 in 2014 to 1.026 in 2017, the return on equity dropped from 15.32 to 11.78 during the same period illustrating a lower return generated in relation to the level of equity held by the firm. (Reuters, 2017) NAB’s overall outlook indicates a lower CEO salary commensurate with a lower EPS value and a lower return on equity.
Comparison & Summary Findings
CBA executives received a higher /excessive pay from 2013 /2014 to 2016/2017 than the profit made by the firm which was ineffective with regard to cost management and executive evaluation of the job. Westpac CEO and executive earnings reduced despite the small increase in profits and stagnation of operations during the same period which was an effective approach in cost management. NAB’s financials indicate a reduction in the CEO pay and a relatively moderate reduction in the earnings per share value which also illustrates an effective approach towards the executive evaluation.
CBA remuneration method was poor in forging a higher performance by the executive as the CEO makes more as the company is going down. Westpac’s approach was more appropriate as the reduced salaries would make the company management double their efforts to further increase the company performance. NAB’s approach was also ideal with almost a proportionate reduction in the top management salaries to the decline in company performance. This would encourage the company management to work extra harder /smarter to increase overall performance.
Company performance for all the companies should be measured using appropriate ratios and parameters .The top management salary committee should review salaries regularly to assess the appropriate compensation with regard to company performance through the variable allowances and bonuses. This shall act as an incentive for company employed to give their all and work harder/smarter for the benefit of all stakeholders.
The apparent fact is that some companies’ top management ride themselves to higher levels of income and remuneration despite the company performance with annual increases. This is costly to the firm and might be damaging to the future performance of the company. The most ideal remuneration system analyzed is the NAB bank with almost commensurate reduction in bonuses or salaries with the reduction in company performance indicated by the EPS and ROEvalues. This offers the stakeholders confidence in the entity and provides an overall incentive for the company top management to move forward.
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- CBA, 2016. Annual Report, s.l.: ASX.
- Janda, M., 2017. Commonwealth bank to cut executive bonuses,director fees after AUSTRAC scandal. [Online] Available at: abc.net.au/news/2017-0-08/commonwealth-bank-to-cut-executive-bonuses-director-fees/8784030?pfmredir=sm[Accessed 2017].
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- News Limted , 2013. NAB CEO takes pay cut to $7.7m. [Online] Available at: www.news.com/au/finance/business/nab-ceo-takes-pay-cut-to77m/news story/6fe848eb54ed54b1a97e699ae7bebd8c[Accessed 2017].
- Pash, C., 2014. 12 commonwealth bank executives shared $50 million in pay last year. Business Insider .
- Reuters, 2017. NAB. [Online] Available at: reuters.com/finance/stocks/overview/NAB.AX
- [Accessed 2017].
- Saylor, 2017. CEO perfomance evaluation and executive compensation. [Online]
- Available at: https://saylordotorg.github.io/text_corporate-governance/s10-ceo-perfomance-evaluation-and.html
- [Accessed 2017].
- Westapac, 2016. Annual Report , s.l.: ASX.
- Yeates, C., 2016. Westpac's Brian Hartzer paid $6.7 M,80 times the average Aussie wage. The Sydney morning herald, 9th November.