Determination Of Level Of Compensation †MyAssignmenthelp.com

Question: Discuss about the Determination Of Level Of Compensation. Answer: Introduction: The idea of linking high pay packages with the executives of various Companies for their exquisite skills and jobs have been the norm for a very long period of time. It is widely believed that the executives must be paid handsomely for their top notch services and cultural changes brought into the organization. There is a limited pool of the best executive talents and failing to pay their high end salaries may compel them to flock to better places. This notion has been the backbone of the high pays. This trend has continued despite the severe drop in the share prices of the various companies which have followed the culture of paying handsomely to their executives. In such a scenario, the shareholders are not very impressed and they want to withdraw their generous pay packets made to their company executives. This report aims to throw some light and analyze the executive compensation for the financial year 2016-17 for Commonwealth Bank of Australia. In addition to this, the report sha ll also look into the various accounting provisions regarding executive compensation in the Australian context. Literature Review: Determination of level of compensation: There have been a variety of factors which have been instrumental in influencing the level of pay packets provided to the executives. According to the report compiled by Shields and ODonnell risk, responsibility and organizational size are some of the primary factors on which the level of executive remuneration depends. Globalization and scarcity of quality executives also have impacted the executive remuneration of the companies. Theoretical explanation for High pay: There are various theoretical explanations behind this heavy pay; Adam Hartung of Forbes has said that a CEO and other executives earn so much because they can (Forbes Welcome, 2018) A CEO practically sets up his or her own salary and the board has the power to change it but they seldom do it, because the board generally comprises of Ex-CEOs and it doesnt do much good to the reputation of the former ones to alter the salaries of the present ones. The Companies hire external lawyers and consultants to review the pay packets and the performances of the executives, but they mostly hired by the CEOs themselves (Choe, 2014). These external reviewers generally give their nod to such exorbitant pay packets justifying the power, and the pressure of the high profile jobs of these CEOs. Executive compensation and firm performance: The influence of the remuneration of the CEO on the performance of the firms is profound. Generally it is seen, that a positive relationship exists between the two. It is because, when the firms performance increases, so does the companys profitability and the CEOs pay. A study conducted by Sigler in 2011 concluded that there is a strong and positive relationship between the two. In 2011, coverage on this report was done by BBC and it was concluded from the coverage that the high pay of the company executives has a corrosive impact on not only the economy as a whole but also affects the efficiency, performance and capabilities of the employees of the firm (Schultz et al., 2013). This is turn has serious implications on the firms performance. Another study performed by Leonard in 1995 suggests that a firm with long term incentive plans for its employees and executives have a direct link with greater Return on equity of the firm. Effect of internal corporate governance on CEO compensation and firm performance: The primaries purpose of the board of directors of any company is the incessant monitoring the performance of the management of the company. They advise the management about the day to day functioning. They set up executive compensation and also work round the corner to protect the interests of the company. Some of the studies present some alternative views, as is presented by Jensen (1993), who argues that often the board of directors fail to look into the working of the management of the company because of the differences of opinion between the two because of their different objectives. The management want to increase sales in order to increase their commission whereas the board wants better compensation for their job. The directors do not want to rock the boat, so they stop interfering with the lax performance of the management (Khan Vieito, 2013). This kind of a culture is present because of the presence of deep layers of cronyism which exist in the company as has been revealed by Jensen. In such a scenario, both the directors fail to protect the interests of the shareholders of the company. This showcases a negative relationship between firm performance and executive compensation. Callahan, Millar, and Schulman (2003) have concluded from their study that performance of a company is positively related with the involvement of management in the selection of members of the board but the association is negative when the CEO also is the Chairman of the Board of Directors. It has been revealed that when the CEO is in the chair and is at the helm of affairs, directors receive higher and better compensation (Kiatpongsan Norton 2014). This practice reflects a business environment which is characterized by weak and feeble governance suggesting cronyism. Discussion and Analysis: Ethical issues in 2016: The payment of salaries and bonuses to top executives in the Australian banking industry had called for an excessive attention of the financial world. Commonwealth bank, the island nations largest banking company had been in the limelight for all the wrong reasons, the companys CEO Ian Narev had earned a mammoth $ 8.6 million including the bonus and salaries in 2016. This has caused widespread discontent among the general public (The New Daily, 2018). It has caused significant amount of disparity in income between the average Australian and the executive incomes. The current Australian minimum wage rate is $17.29 per hour or approximately $ 34,000 per year. The full time average adult weekly total earnings is about $ 1500. This disparity of income has brought the case of Commonwealth Bank in the limelight. This had brought into the mainstream media about the pay parity ethical issues regarding the compensation packages in the year 2016. Social Criteria in CEOs compensation package: Benefits: It would lead help in stimulating the efforts on the part of the executives of the company to work towards their social responsibilities, as a result of which, the value of the company would improve and increase. The results of social projects are filled with risks and are ambiguous in nature. The linking of compensation pay with social criteria helps the executives of the company to put their efforts and time into the social arena (Ferri Maber, 2013). It would help to protect the executives from the uncertain results of social strategies of the company. Executive pay packages in exchange for undertaking social responsibilities makes the executives socially responsible to their as well the firms actions in the arena of social service. Drawbacks: The impact of social initiatives upon the economic performance and results of a company is not very clear as a result, executives are not very inclined to undertake these social tasks (Wilkins, 2018). In some cases, the interests of the various stakeholders of the company are at a continuous conflict with the social and other environmental policies and actions. This is a big turn off for the executives, which may compel them to stop pursuing social responsibilities. CBA executive remuneration comparison and changes: The complete remuneration details of all the board members of 2016-17 has been provided below: (2016 figures are in black and 2017 are normal) Executive members Base remuneration Short term benefits (incl. LTVR STVR) Others Long term benefits Loan to Value remuneration rights Total Statutory remuneration Ian Narev (CEO) 2,625,000 2,625,000 2,902,052 40,909 35,870 35,870 1,37,211 113,341 3,068,219 2,966,190 8,768,352 5,712,363 Adam Bennet (Group Exec.) 955,000 974,600 1,212,522 40,909 9385 (36,550) 51,361 24,113 283,329 145,640 2,630,713 1,672,373 David Cohen (Group Exec.) 875,000 1,175,000 1,099,240 49.909 60,308 44,169 35,088 100,122 964,254 988,620 3,033,890 3,033,890 Matt Comyn (Group Exec.) 1,030,750 10,30,750 1,345,232 39,599 6656 24,802 36,150 25,425 982,736 1,078,073 3,401,526 2,198,649 David Craig (Group Exec.) 1,355,000 1,360,384 1,644,140 19,616 57,196 51,519 60,057 69,661 1,478,428 3,935,949 4,615,541 5,453,038 Rob Jesudason (Group Exec.) 1,190,237 1,149,030 14,27,532 3073 627,302 972,349 24,014 41,466 853,286 987,414 4,122,371 3,153,322 Kelly Bayer Rosemarin (Group Exec.) 1025600 1,025,600 12,12,522 40,909 3760 18,037 68,867 (52,237) 555,203 833,943 3,076,278 1,936,835 Review and Analysis of Changes: The remuneration scheme and report for the fiscal year 2016 was viewed as complex, visionless and complete lack of transparency. The company had paid huge amount of unnecessary short term benefits in the form of cash Short term variable remuneration for overcoming financial hurdles in a single year, Deferred STVR and other short term benefits. No proper basis was presented in the report for the allowance of such expenses. In the subsequent year, the executives had received LTVR awards for undertaking various risky business propositions. The excessive monetary benefits were transformed into awards in the subsequent financial year. There was a lot of ambiguity in the financial reports too in relation to the share payments. This had made it difficult to fully comprehend and understand the details of of the remuneration framework adopted in 2016 by CBA. The Board has proposed a new approach to tackle such financial mishaps in the near future such as:- Usage of quantitative performance targets which are easily measureable while calculating STVR. Complete transparency of LTVR awards by use of face value methodology. A thorough and transparent approach to be applied while clarifying Key Management Personnel (KMP) remuneration procedure and outcomes. Increased quantitative measurement of the various non financial measures and procedures and the introduction of customer performance score cards for boosting customer and other stakeholders confidence. Direct linking of variable remuneration to both short term and long term performance goals. The company has addressed some of the key issues while revamping their pay structure. According to Adam Hartung, a CEO has the ability to manipulate and set his or her own remuneration and still this loophole exists with CBA. Now with the excessive media pressure, transparency has been brought in through the linkage of performance and risks, increased quantitative assessments. If the board fails to address this issue more stringently, a second voting strike may occur from the disgruntled shareholders (ABC News, 2018). Still, the threat of projecting a favorable report by the external agencies looms at large as these agencies are still hired by the internal management of CBA and the chances of cronyism and favoritism is still quite high. Recommendation: The company had received a fair amount of media backlash and loss of reputation due to its remuneration scandal back in 2016. In the banking industry it is one of the most reputed banks and is the largest company in the island nation and a huge image loss has been detrimental to the company. The company must take some stringent actions internally in order to address this issue at the grass root level. Large scale transparency is needed in the framing of remuneration scales, unnecessary expenses must be avoided, timely audit performance by a government backed independent agency must be done in order to ensure complete authenticity in the pay process in order to ensure an avoidance of similar incidents in the future. References: ABC News. (2018). CBA averts board spill, apologises for AUSTRAC scandal. [online] Available at: https://www.abc.net.au/news/2017-11-16/commonwealth-bank-avoids-board-spill-at-agm/9157870 [Accessed 31 Mar. 2018]. Asx.com.au. (2018). [online] Available at: https://www.asx.com.au/asxpdf/20170814/pdf/43lcmzmrg2sjnj.pdf [Accessed 31 Mar. 2018]. Choe, C., Dey, T., Mishra, V. (2014). Corporate diversification, executive compensation and firm value: Evidence from Australia.Australian Journal of Management,39(3), 395-414. Ferguson, A. (2018). Why CBA's Ian Narev had to 'retire'. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/banking-and-finance/why-cbas-ian-narev-had-to-retire-20170814-gxvt2z.html [Accessed 31 Mar. 2018]. Ferri, F., Maber, D. A. (2013). Say on pay votes and CEO compensation: Evidence from the UK.Review of Finance,17(2), 527-563 Forbes Welcome. (2018).Forbes.com. Retrieved 31 March 2018, from https://www.forbes.com/sites/adamhartung/2015/06/22/why-ceos-make-so-much-money/#1394112f4203 Khan, W. A., Vieito, J. P. (2013). CEO gender and firm performance.Journal of Economics and Business,67, 55-66. Kiatpongsan, S., Norton, M. I. (2014). How much (more) should CEOs make? A universal desire for more equal pay.Perspectives on Psychological Science,9(6), 587-593. Schultz, E., Tian, G. Y., Twite, G. (2013). Corporate governance and the CEO payperformance link: Australian evidence.International Review of Finance,13(4), 447-472. The New Daily. (2018). 'What are we paying bank CEOs for?' | The New Daily. [online] Available at: https://thenewdaily.com.au/money/finance-news/2016/09/27/bank-ceo-pay/ [Accessed 31 Mar. 2018]. Wilkins, G. (2018). 2016 a wake up call for company boards on executive pay. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/2016-a-wake-up-call-for-company-boards-on-executive-pay-20161208-gt6iwk.html [Accessed 31 Mar. 2018].