Executive Director

Literatures Related to the Executive Director's Remuneration Report

Question:

Discuss about the Managerial Accounting of Commonwealth Bank.

In the financial annual reports of the business organizations, one of the major aspects is the Remuneration Report of the Executive Director’s. It is the responsibility of the executive directors of the business organizations to run the business in the proper way so that the business can earn significant revenues and profits. Regarding the executive director’s remuneration report, a major allegation is that the executive directors are being paid with higher amount of remuneration and this is a major concern to the shareholders of the organizations (Ben Shlomo, Eggert and Nguyen, 2013). For this reason, it is necessary to analyze and evaluate the remuneration report of the executive directors of the companies. With the help of executive director’s remuneration report, business organizations discloses all the strategies, methods and motives used in the remuneration structure of the directors (Weygandt, Kimmel and Kieso, 2015). Thus, it can be understood that there is a great significance of this report. This report starts with a brief introduction. After that, the literatures related to this topic are discussed. In the next steps, the remuneration structure and methods are discussed and compared. After that, based on the whole analysis, some recommendations are provided that is followed by suitable conclusion. The main aim of this report is to conduct an in-depth analysis on the executive remuneration report of two of the Australian banks. With the help of this report, one has the scope to know the various methods and strategies used to measure the performance of the executive directors of the business organizations.

The regular and purposeful evaluation of the performance of the executive directors is an important objective of the business organizations. The process of effective evaluation of the executive director’s performance is highly related to the corporate governance in the business organizations. Most of the companies measure the performance of the executive directors on the annual basis and this is a difficult process (Warren, Reeve and Duchac, 2013). This is called the Evaluation Cycle. The evaluation cycle is totally depends on the members of the board. The increasing expectations of the shareholders and the stakeholders force the companies to conduct a detailed scrutiny of the performance of the executive directors. In addition, it is the responsibility of the executive directors to assess their self-performance to achieve the ultimate objective of the organizations. The performance evaluation methodology of the organizations depends on the various requirements of that organization (2012books.lardbucket.org, 2017).

However, it can be seen that there is not any universal format for the evaluation of the performance of the executive directors. There are different outcomes of the performance evaluation of the executive directors. It leads to minor amendments in the functions of the board and it also leads to the replacement of the whole body of board of directors. These outcomes need to be transformed into the actionable plans (S?omka-Go??biowska and Urbanek, 2014). Two kinds of performance evaluation processes are there; they are internal evaluation and external evaluation. Most of the companies use to conduct the process of internal evaluation; but in some certain cases, companies opt for the adoption of external evaluation by some external independent parties. Most of the companies form a performance evaluation committee to measure the performance of the executive directors. Based on the performance evaluation, the amount of remuneration of the executive director’s are provided (deloitte.com, 2017).

Remuneration Structure and Methods

Commonwealth bank is one of the topmost banks of Australia. As per the director’s report of Commonwealth bank, the major objective of the remuneration framework of this bank is to create sustainable value for the people, customers, community and shareholders of the company. As per the remuneration framework of Commonwealth bank, there are three major elements of the executive remuneration structure of the bank; they are Fixed remuneration, Short-Term Incentive (STI) at risk and Long-Term Incentive (LTI) at risk. The ‘risk’ factor in the remuneration framework implies that the remuneration depends on the performance of the executive directors in the financial years against key performance metrics (Melis, Gaia and Carta, 2015). Fixed remuneration refers to base remuneration and superannuation that is cash salary. STI is equal to 100% of fixed remuneration but it is based on the performance of the executive directors. The rules of LTI is same as STI. It can be seen that the performance of the executive directors are measured based on the Balanced Scorecard method. Ian Narev, the Managing Director and CEO of Commonwealth Bank received $4,081,000 as overall remuneration in 2016 (commbank.com.au, 2017).

As per the 2016 annual report of Commonwealth Bank, there are two major components of the remuneration structure of the CEO and executive directors of the company; they are fixed remuneration and risk remuneration. Three major components of the executive remuneration structure of Commonwealth Bank are there; they are Fixed remuneration, Short-Term Incentive (STI) at risk and Long-Term Incentive (LTI) at risk. The equal portions of these three elements form the remuneration structure of the company. The main objective of the remuneration structure of Commonwealth Bank is to attract highly qualified and highly experienced executives (commbank.com.au 2017).

In the year of 2016, the remuneration committee of Commonwealth Bank reviewed the remuneration structure of the executive directors of the bank. The major focus of this review was to ensure that all the objectives of the remuneration structure have been achieved. At the time of the review, certain changes have been brought in the remuneration structure of the executive directors that will be applicable for the year 2017 (commbank.com.au 2017). The changes are discussed below:

• The method of balance scorecard for the determination of the short-term incentives of the executive directors will include an exemplary leadership assessment and exceptional personal demonstration of the vision and mission of the group (commbank.com.au 2017).
• There will be a new focus of 2016 GLRP on the people and community weighted at 25%. The main aim of this change is to measure the long-term progress and achievements in the areas of diversity, culture, customer’s satisfaction, performance components and others (commbank.com.au 2017).

There are three main components of the remuneration structure of Commonwealth Bank are Fixed remuneration, Short-Term Incentive (STI) at risk and Long-Term Incentive (LTI) at risk. They are discussed below:

  Fixed Remuneration: Two major parts of fixed remuneration are base remuneration and superannuation. Base remuneration refers to cash salary and any salary specific items. The board of directors of the company uses to review the fixed remuneration structure on the yearly basis. The remuneration committee has the responsibility to determine the fixed remuneration of the executive directors (commbank.com.au 2017).

Short-Term Incentive: The short-term incentive target for the executive directors of Commonwealth Bank is equal to 100% of their fixed remuneration. The short-term incentive of the executives is determined based on their measured performance against the process of balanced scorecard. The range of short-term incentive for the executives ranges from zero to 150% based on the performance of them. Out of the 100% short-term incentive, the executives get 50% of them in cash. The other 50% is deferred in the next year (commbank.com.au 2017).

Performance Evaluation Methodology

Long-Term Incentive: The long-term incentive target for the executive directors is 100%. The long-term incentive also depends on the performance of the executive directors at the end of the year. The vending period of long-term incentive is four years and the performance of the directors for the long-term incentive is measured against total shareholders return and the satisfaction of the customers. The main objectives behind the long-term incentive are to provide greater focus on the customers and to create long-term value of the shareholders. At the time  of investing the long-term incentive, Commonwealth Bank does not provide any dividends to the executive directors (commbank.com.au 2017).

The performance of the executives is measured based on short-term and long-term basis. Both the aspects are discussed below:

Short-term Performance: There is a 3% increase in the NPAT of the bank amounting to $9,450 million. It can be seen that the financial performance of the company was on target in the year of 2016. The performance in the aspect of customer’s satisfaction is above target in the year of 2016. In the market of retail banking, Commonwealth bank stood first as per the maximum number of Main Financial Institutions. The execution of the strategy was on target. Commonwealth bank has been a leader in the aspects of technological development in the banking operations. The performance in terms of people and productivity was on target (commbank.com.au 2017).

Long-term Performance:  In the year of 2016, The NPAT of the company is $9450 million as compared to $9137 million in the year 2015. In the year of 2016, there is a decrease in the cash earnings per share to 555.1 cents from 557.5 cents in the year 2015. Share prices also decreased in 2016 to $3.50 from $4.00 in the year 2015. Dividend per share remains the same in 2016 as compared to 2015 that is $4.20. Hence, it can be seen that the long term performance in the year 2016 is not as good as it needs to be (commbank.com.au 2017).

The above discussion sheds lights on the executive director’s remunerations structure of Commonwealth bank. For the purpose of comparison, ANX bank and Westpac bank are taken into consideration. In case of Commonwealth bank, the company has provided a solid performance as the net profit after tax increased by 3% amounted to $9,450 million. The company enhanced the Common Equity Tier1 capital ratio to 10.6%. In the sector of retail banking, the company achieved customer satisfaction above target. It indicates the effectiveness of executive director’s remuneration structure of the company.

In case of ANZ bank, the scenario is different. Total revenue of the bank in 2016 was 0.2% lower than the year 2015. In addition, the portion of economic profit was down by 56% amounting to $1,278 million. Return on equity was also down to 10.35 from 14% in 2016. Cash earnings per share were decreased to 202.6 cents in 2016 as compared to 260.3 cents in 2015.

In case of Westpac bank, the situation is same as ANZ bank. The economic profit was down by 10% in 2016 as compared to 2015. Return on equity was also decreased in the year of 2016 as compared to 2015. Earnings per share in the year 2016 decreased to 235.5 as compared to 248.2 in the year 2015. However, the dividend per share increased in the year 2016 to 188 cents from 187 cents in 2015. The prices of the Westpac shares decreased in the year 2016 as compared to 2015 (Braun, Tietz, and Harrison, 2013).

Remuneration Structure of Commonwealth Bank

Hence, from the above analysis, it can be seen that the executive director’s remuneration structure has paid dividends in case of Commonwealth Bank as the bank performed significantly wee in the year of 2016. However, in case of ANZ and Westpac banks, it can be seen that the performance of these two banks in the year 2016 was poor as compared to 2015. Hence, it can be understood that the executive director’s remuneration structure for these two banks are not so effective as Commonwealth bank.

Based on the above analysis, some recommendations are provide below:

• It is recommended to these banks to take into considerations all the necessary financial aspects at the time of preparing the remuneration structure for the executive directors.
• It is recommended that all these banks need to disclose all the details about the remuneration structure of the executive directors to the stakeholders of the company. This process helps to build a relationship of trust between the company and the stakeholders.
• It is recommended that the companies need to follow all the rules, regulations and guidelines at the time of developing the executive director’s remuneration structure. The inclusion of these aspects will increase the accuracy of the remuneration report.

Conclusion

The main objective of this report is to analyze and evaluate the various aspects of the executive director’s remuneration structure for Commonwealth bank, ANZ bank and Westpac bank. As per the above discussion, it can be seen both Commonwealth bank and Westpac bank have same remuneration components that are fixed remuneration, Short-Term Incentive (STI) at risk and Long-Term Incentive (LTI) at risk. However, ANZ bank has different structure that are Fixed Remuneration, Variable Remuneration and Other Remuneration Elements. All the three banks use the technique of balanced scorecard to measure the performance of the executive directors. Based on the whole discussion, it can be said that among these three banks, Commonwealth bank is the most efficient as the company has performed well in the year of 2016. Hence, it can be said that the remuneration strategy of the executive directors is effective. On the other hand, both ANZ bank and Westpac bank have performed poorly in the year of 2016 as compared to 2015. It indicates the ineffectiveness of the remuneration strategy of these two banks in the year 2016

References

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Ben Shlomo, J., Eggert, W. and Nguyen, T., 2013. Regulation of remuneration policy in the financial sector: Evaluation of recent reforms in Europe. Qualitative Research in Financial Markets, 5(3), pp.256-269.

Braun, K.W., Tietz, W.M. and Harrison, W.T., 2013. Managerial accounting. Pearson.

Guinea, F.A., 2016. The Need For Managerial Accounting Systems. SEA-Practical Application of Science, (12), pp.465-470.

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Melis, A., Gaia, S. and Carta, S., 2015. Directors' remuneration: A comparison of Italian and UK non-financial listed firms' disclosure. The British Accounting Review, 47(1), pp.66-84.

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S?omka-Go??biowska, A. and Urbanek, P., 2014. Executive Remuneration Policy at Banks in Poland After the Financial Crisis-Evolution or Revolution?. Comparative Economic Research, 17(2), pp.25-44.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

www.commbank.com.au, 2017. ANNUAL REPORT 2016. [online] commbank.com.au. Available at: <https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2016_Annual_Report_to_Shareholders_15_August_2016.pdf> [Accessed 9 May 2017].

www.westpac.com.au, 2017. Cite a Website - Cite This For Me. [online] Westpac.com.au. Available at: <https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report> [Accessed 9 May 2017].

www2.deloitte.com. 2017, 2017. Performance Evaluation of Boards and Directors. [online] deloitte.com. Available at: <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/risk/Corporate%20Governance/in-cg-performance-evaluation-of-boards-and-directors-noexp.pdf> [Accessed 9 May 2017].