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Topic and Literature Review

Discuss about the Relation B/W Remuneration And Financial Performance.

The term remuneration is identified as the payment received for the services or the compensation for the employment. These are seen to be based on the different types of the present market indicators which are seen to be associated to the present market standings. The primary objective of the study has been considered with developing the literature review for addressing the main elements of the research topics related to the remuneration report of Virgin Australia. The main discourse of the literature of the study has been able to depict the various areas of the study which are seen to be associated to the financial and the non-financial indicators, goal congruence and use of balanced scorecard. The company review has been considered with the discussion on the different types of the important aspects of the raptor which are seen to be related to the details of the remuneration committee members, allocation of the executive remuneration and the analysis of the performance measures of the STI and LTI. The section of the study has also evaluated the performance of the company in terms of the executive pay. This section is seen to be followed by the summary of the finds. Some of the latter part of the discussions has focused on the analysis of the remuneration method are considered as per the previously reviewed topic of financial and non-financial indicators, goal congruence and preparation of a balanced scorecard. The final part of the discussions has suggested the improvement which can be made by the company based on the evaluation in the various topics (Bussin and Lee 2016).

This section of the study has been considered with the various types of the evaluations which has been taken into account with the number of the factors determining the financial and non-financial measures as per the annual report of the company. It needs to be discerned that the various type the depictions of the information on the financial interpretations has been revealed with the declaration on the “Market price per share, Earnings per shares, Net Income/Loss, Shareholder's Equity and Net Operating Expenditure”. The declaration of these financial information has bee used to depict the “Price Earnings ratio, return on equity and return on investment”, which has been duly included under the financial measures valuation of the report (Dawid, Harting and Van Der Hoog 2018).

Financial and Non-Financial Indicator

The financial indicators have clearly shown that the company discloses the necessary information on the “Market price per share, Earnings per shares, Net Income/Loss, Shareholder's Equity and Net Operating Expenditure”. Based on the depictions of the financial indicators in the last three years the Virgin Group is discerned with a declining performance in terms of the loss incurred amounting to $ 185.8 in 2017, $ 224.7 in 2016 and $ 93.8 in 2015. The increasing amount of the loss has been further able to comment on the decreasing performance of the company in terms of the price earnings ratio, ROE and ROI (Doran et al. 2014). The stock market interpretations along with the graphical representation of the declining trend has been shown below as follows:

Stock Market Performance Ratio

Virgin Australia

2017

2016

2015

Market price per share (A)

$0.16

$0.21

$0.43

Earnings per shares (B)

-0.028

-0.074

-0.032

Net Income (C )

-185.8

-224.7

-93.8

Shareholder's Equity (D)

1573.8

898.8

1020.8

Net Operating Expenditure (E)

5171.2

5278.7

4802.7

Price Earnings Ratio (A/B)

-5.71

-2.84

-13.44

Earning Price Per Share

-0.03

-0.07

-0.03

Return on Equity

-12%

-25%

-9%

Return on Investment

-3.59%

-4.26%

-1.95%

The non-financial approach of the remuneration method is seen to be evident in case of the application of the short-term incentive method. In this consideration the non-financial measure has been included with the use of the balances score card. The use of the balanced score card has been seen to be conducive with the evaluation of both financial and non-financial perspectives of the company (Goh and Gupta  2016).

The Goal congruence of the company has taken into consideration with the financial outcomes which are measured with the various types of the performance against the short-term incentives and the outcomes. It needs to be discerned that the aspects seen with the goal congruence measurement the company has been able to show the performance in terms of the balanced scorecard weightings and 2017 scorecard outcomes. The depictions of the group’s STI is seen with the key outcomes has been considered with the capital structure review of the free cash flow and capital position of the group (Kanapathippillai, Johl and Wines 2016). This has further resulted in various types of the interpretation for the group score measures for the STI in terms of the free cash flow, better business, underlying profit for the group, safety of the group, guest satisfaction, safety, people culture and individual ratings. As per the outcome for the 2017 scorecard, the total outcome of the score weighting for the free cash flow has been seen to be exceeded. In addition to this, the better business aspect has been seen to be exceeded. However, in terms of the underlying group profit before tax the company was not able to meet the scorecard weighting set with 15%. Some of the performance goals of the company such as safety and guest satisfaction aspect are seen to be categorised as met. It needs to be further depicted the different types of the interpretation of the information pertaining to the individual aspect is inferred with varying nature (Jaafar and James 2014). The goal objectives along the outcome for the 2017 is shown below as follows:

Financial Indicators

Figure: STI incentive goal and outcome

(Source: Virginaustralia.com. 2018)

The remuneration performance as per the balanced score has been able to reveal that the CEO and the executive performance is seen to be considered with the financial categorization in terms of the group free cash flow, capital and operational efficiencies. The financial perspective of the information has been also seen to be evident with the depiction of the underlying profit/loss before tax. The information on the non-financial performance measure has been further seen to be included with the categorisation of the various information which has been stated with the customer likelihood to recommend and loss time of the injury per million hours worked. This has also included the weighting of the people and cultural objectives (Khalid and Rehman 2014). The category under the individual perspective of the information has been able include the various perspective which has been seen to be based on the inclusion of the financial and strategic objectives.

Figure: Use of Balanced Scorecard to measure the STI

(Source: Virginaustralia.com. 2018)

The focus of the remuneration committee has been identified with the various types of the factor which are seen to be associated with the remuneration structures which ensures that the work of the executives is seen to be aligned with the best interest of the shareholders. The remuneration is seen to be structured in such a way that the performance of the executive members such as CEO is delivered in terms of the strategy as it has been stated with the achievement of the business objectives. In addition to the disclosure on the remuneration has been prepared as per the consideration of the guidelines prescribed in “section 300A of the Corporations Act 2001” (Kirsten and Du Toit 2018).  The group of directors for the year ended 30 June 2017 are listed as follows:

Figure: CEO term in remuneration committee membership

(Source: Virginaustralia.com. 2018)

The summary of the remuneration report has been able to exhibit that the consideration of the various type the remuneration details has been addressed with “Fixed remuneration, Short Term Incentive (STI) and Long-Term Incentive (LTI)”. The various types of the interpretation on the fixed remuneration has been able to reveal that the company has been included with the depiction of the superannuation and base salary. The board of the fixed remuneration has further depicted that the various type of the information as per the STI has been analysed with the STI performance over a period of one period. In this method of remuneration, the company has been seen to be using the balanced score card approach. Any form of the payment under non-financial and financial measures has been linked with the financial year which is subject to the achievement of the annual; free cash flow target. A portion of the award is further seen to be depicted as per the cash following in the end of the performance period. The remaining portion is depicted in the deferred cash over a year (Lee and Isa 2015).  The depiction as per the LTI of the company is able to discern that the financial performance over period of three-year period has been considered in terms of the evaluation of the various type of the information which are seen to be related to the small free float and limited stock liquidity. In addition to this, the LTI is considered as the cash-based plan upon the significant delivery of financial performance such as ROIC.

Non-Financial Indicators

The three important performance measures for the executive remuneration of the company have been seen to be depicted with the valuation of the fixed remuneration, short term incentives, long-term incentives and non-executive directors remunerating.  

The fixed remuneration is seen to comprise of the base salary and the superannuation. The takes the initiative to set the fixed remuneration to ensure the CEO and executives who are fairly remunerated in terms of the ASX listed companies.

The different types of the depiction of the short-term incentives of eh company has been depicted with the various type of measure of linking the STI performance over a period of one year. The balanced score card interpretation related to the measurement of the incentives as per the one-year period are depicted with the adoption of the financial and non-financial measures such as balanced scorecard. Henceforth, any payment under the STI in 2017 financial year is subject to the achieving of free cash flow target. A portion of the award of the STI is allocated to the ward which paid in cash following at the end of the performance period (Leong et al. 2015).

The LTI of the company has been depicted to be linked with the financial performance over period of three months. The LTI structure of the company takes into consideration the nature of the capital structure of the group which is linked with the free float and limited to the stock liquidity. The LTI issues by the company is further considered to be paid on the delivery of the significant improvement which is seen to be depicted in terms of the invested capital. The ROIC is seen to be selected with the various types of the factors which has been seen to be based on the different types of the discourse which has been seen to be considered as per the sustainability and profitability of the airline. These are further considered with the several financial metrices such as invested capital and earnings (Lepper and Greene 2015).

Virgin Australia has been significantly able to increase the segmental EBIT, from 2014 to 2016. However, in the recent times the segmental EBIT has reduced to $ 164.1 million. In addition to this the performance of the is declining in nature which has been seen to be evident with the   underlying loss of 3.7 million. In addition to this, the net loss of the company has been seen to be depicted to be $ 220.3 million. The ROIC is another indicator of the declining performance for the company. Despite of the degrading financial performance of the company the total executive remuneration is seen to be increasing in nature. It can be clearly seen that the managing director and CEO of the John Borghetti’s total remuneration in 2016 was $ 2857747 despite of better financial position in compare to 2017. In 2017, the remuneration of John Borghetti increased to $ 5567821. Similar trend is depicted in terms of the other executive member of the remunerations committee.

Goal Congruence

Based on the findings of the review of the company, some of the important members of the remuneration has been depicted with J Borghetti AO, G Smith, M McArthur and K Schuster. The analysis of the various types of the executive remuneration mix has been further seen to be depicted in terms of the fixed remunerating, STI and LTI. It has been further seen that the various types of the  results of the executive remuneration has been able to state the various types of the depictions of the executive remuneration has been seen with a negative trend, This is particulate trend is evident with the company in terms of the increasing remuneration of the executive members despite of the declining performance of the company.

The interpretation on the financial interpretation is revealed with the declining performance in the category of Price Earnings Ratio, Earning Price Per Share and Return on investment. It is further evident from graphical representation that the deterioration of the financial performance is seen to be evident across 2017, 2016 and 2015.

The important form of the non-financial indicators has been able to reveal that the board has utilised a balanced score card approach effectively for establishing the measurement performance of the remuneration outcomes for the CEO and other senior executive members.

Based on the depiction of the remuneration ix of the company it has been identified that the total proportion of the mix of the remuneration has stayed same in 2017 and 2016. This has been evident with the CEO remuneration mix of 20% towards fixed remuneration in both 2016 and 2017, 10% STI deferred in 2017 and 2016, 20% STI cash in 2017 and 2016. On the other hand, the composition of the remuneration in the 2015 has been depicted with the fixed remuneration 27% towards fixed remuneration, 21% towards STI cash, 8%Q towards STI deferred and   44 % towards LTI.

The executive remuneration mix model for 2017, 2016 and 2015 has been depicted below as follows:

Figure: Executive Remuneration Mix in 2017

(Source: Virginaustralia.com. 2018)

The various types of the interpretation on the goal congruence has been able to reveal that the group has been able to perform well in terms of the improvement of the free cash flow and at the same time recording a positive financial outcome with $ 34.3 million which has well exceeded the goal of the 25%. The group has been able to achieve the free cash flow performance as per the gateway set by the board and the review of the capital structure. The aim of the board has been seen with the meeting the STI performance as per the goal congruence aspect. The significant nature of the indications has been further able to reveal that the various types of the interpretation of the balance sheet of the report has been stated with the positive momentum in the cash. Despite of the good performance in the free cash flow, the company was not able to meet the target of the “underlying profit before tax”. Some of the other performance measures were seen to be lagging in terms of the people and culture and induvial consideration has been seen to be variable (Maas and Rosendaal 2016).

Balanced Score Card

The balanced scorecard has been able to set the weighting for financial and nonfinancial measurements. The interpretations of the balanced score card has been able to reveal that the company has placed the highest weighting to financial category such as the group’s free cash flow and underlying profit. This is evident with total weighting of 25% for both the performance measures. It is also discerned that the total weighting for the underlying profit of the company has been depicted with 15%.  The lowest priority from the balanced score card has been evident with the safety category which is seen with a total 5% weighting to the lost time injury per million hours worked. Similarly, the people culture category has been evident with a total weighting of 5%.

The recommendation to the company has been depicted with following a more ethical approach of remunerating the executives of the company. It is seen unethical on the part of the company to provide more remuneration to the executive’s despite of the decreasing ROIC, EPS and increasing loss. In addition to this the various types of the depiction on the financial and non-financial measures from the balanced scorecard has been able to state that despite of the increases in the financial performance measures the company has not been able to achieve the relevant measures which are seen with providing improved service to the customer. Henceforth, Virgin Australia needs to give an augmented focus towards increasing the “underlying profit before tax”. In addition to this, management strategy needs to be focused on increasing the people culture and the overall performance of the individual.

Conclusion

The various types of the depictions of the repost has been able to show that Virgin Group is discerned with a declining performance in terms of the loss incurred amounting to $ 185.8 in 2017, $ 224.7 in 2016 and $ 93.8 in 2015. The increasing amount of the loss has been further able to comment on the decreasing performance of the company in terms of the price earnings ratio, ROE and ROI. The various depiction on the non-financial approach of the remuneration method is seen to be evident in case of the application of the short-term incentive method. In this consideration the non-financial measure has been included with the use of the balances score card which has been conducive with the evaluation of both financial and non-financial perspectives of the company. The various types of the aspects of the goal congruence has been seen to eb considered with the depictions of the group’s STI with the key outcomes has been considered with the capital structure review of the free cash flow and capital position of the group. Some of the performance goals of the company such as safety and guest satisfaction aspect are seen to be categorised as met. It needs to be further depicted the different types of the interpretation of the information pertaining to the individual aspect is inferred with varying nature. The main results of the goal congruence has revealed that the group has been able to perform well in terms of the improvement of the free cash flow and at the same time recording a positive financial outcome with $ 34.3 million which has well exceeded the goal of the 25%. However, the company was not able to meet the target of the “underlying profit before tax”. Some of the other performance measures were seen to be lagging in terms of the people and culture and induvial consideration has been seen to be variable.

Reference List

Bussin, M. and Lee, J., 2016. Remuneration policy and strategy guide: asset-based HR-hot button. HR Future, 2(Feb 2016), pp.16-18.

Dawid, H., Harting, P. and Van Der Hoog, S., 2018. Data for the Paper: Manager Remuneration, Share Buybacks and Firm Performance.

Doran, T., Kontopantelis, E., Reeves, D., Sutton, M. and Ryan, A.M., 2014. Setting performance targets in pay for performance programmes: what can we learn from QOF?. BMJ: British Medical Journal, 348.

Goh, L. and Gupta, A., 2016. Remuneration of non-executive directors: Evidence from the UK. The British Accounting Review, 48(3), pp.379-399.

Jaafar, S.B. and James, K., 2014. Director remuneration pay: Trends during and after the financial crisis of 2007 to 2009. Australasian Accounting Business and Finance Journal, 8(3), p.56.

Kanapathippillai, S., Johl, S.K. and Wines, G., 2016. Remuneration committee effectiveness and narrative remuneration disclosure. Pacific-Basin finance journal, 40, pp.384-402.

Khalid, S. and Rehman, M.U., 2014. Impact of Directors' Remuneration on Financial Performance of a Firm. International Journal of Information, Business and Management, 6(1), p.180.

Kirsten, E. and Du Toit, E., 2018. The relationship between remuneration and financial performance for companies listed on the Johannesburg Stock Exchange. South African Journal of Economic and Management Sciences, 21(1), p.10.

Lee, S.P. and Isa, M., 2015. Directors’ remuneration, governance and performance: the case of Malaysian banks. Managerial Finance, 41(1), pp.26-44.

Leong, M.S.W., Paramasivam, A., Sundarasen, S. and Rajagopalan, U., 2015. Board Composition and Companies’ Performance: Does Political Affiliation Moderate the Relationship?. International Journal of Business and Management, 10(10), p.216.

Lepper, M.R. and Greene, D. eds., 2015. The hidden costs of reward: New perspectives on the psychology of human motivation. Psychology Press.

Maas, K. and Rosendaal, S., 2016. Sustainability targets in executive remuneration: Targets, time frame, country and sector specification. Business Strategy and the Environment, 25(6), pp.390-401.

Virginaustralia.com. (2018). [online] Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf [Accessed 15 May 2018].

Virginaustralia.com. (2018). [online] Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2016-asx-financial-report.pdf [Accessed 15 May 2018].

Virginaustralia.com. (2018). [online] Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/annual-financial-report-2015.pdf [Accessed 15 May 2018].

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