Bao5522 | Managerial Accounting | Assessment Answers

Examine and analyse the practices in place for one major publicly listed Australian corporation.

You should thoroughly READ the Remuneration Report within the selected Companies’ Annual Report to find the details required to understand their executive pay structure and measures. The company allocated for the assignment was Reliance worldwide and name of CEO is Health Sharp.

Once you form an opinion and understand the method of the allocated company, you are to select another Australian company of your own choosing and compare their remuneration methodology. Please note that this second company MUST be in the same industry as your allocated company. (e.g. Health Services with Health Services) .

Introduction

The ability of organisations to reward and evaluate the performance of executives in the public sector is of the upmost importance. This is especially important if the performance measurement systems can promote a positive implementation of the strategic goals and objectives of a company. In his report we provide variety of methods that can be used to evaluate the administrative performance in public sector undertakings(Kerzner,2017). These methods allows the managers to concentrate on what is most vital to their company and customers. This makes their performance assessments not only to the organisation’ objectives but also but also gives the leaders an explicit linkage between performance attributes to the individual and organisation objectives (Buchanan, 2016).  We evaluate the various methods of measuring executive performance and how their effectiveness we also give detail about what these methods provide to aid in the evaluation process and examine in detail about the implications of these systems on performance management. we take two companies and compare their remuneration reports and based on that we analyse the performance of executive employees(Van Dooren, Bouckaert and Halligan, 2015)

Review of topic and of literature

There has been a significant growth of performance based management system . This  has been  rising both in terms of their norm and importance. Performance management is the methodical way  by which a company involves its employees in improving organisational effectiveness (Mone and London, 2018). It can be applied to organisations, departments , processes ,programs or products to internal or executive customers in both private and public sector organisations. This helps in pushing executives to measure and examine results. Executive evaluation should be directed in such a way that it should help the organisation in achieving the desired outcome (Arnaboldi,  Lapsley and Steccolini, 2015).

Executive performance management needs to be effective in maintaining the effectiveness of organisations. The system must have the backing or support of stakeholder executives. Executives must understand its purpose and how it works. They must see how the system and how it will benefit them personally (Kamierczyk,  Kamierczyk and Aptacy, 2016). According to a study sponsored by the us department of veteran affairs, it revealed a number of essentials for effective executive performance management that includes: 1) strategic alignment 2) result based organisation culture 3) executive buy in 4) unambiguous performance evaluations

A major finding from this study  suggested that performance evaluations directly relate to executives job levels and roles. Executives must have the ability to influence outcomes that they will be assessed against. Only then they will be motivated enough to pursue t recognition and rewards that come from achieving performance targets. In the absence of a direct link between performance evaluating criteria and executive responsibilities, performance measurement is reduced from a powerful behaviour change tool to a potentially frustrating and demotivating administrative task.

Management by objectives(MBO)  is a concept that  makes all managers of a firm  participate in the strategic planning process. This is a process that improves execution of a particular planning process. Further  the MBO  process  requires the management to use a range of performance measurement systems.  This would help the organisation to achieve its organisational goals. MBO principles have helped in creating  a performance measurement system for evaluating the performance of employees in public sector organisations. The principles of MBO include cascading organisational goals and objectives  and also defines the specific roles of each member of an organisation. This includes in involving managers in providing an evaluation and feedback on performance(Kamierczyk,  Kamierczyk and Aptacy, 2016).

A balanced scorecard is also a method to evaluate  effective executive performance. Senior executives comprehend that the measurement system of the organisation affects the behaviour of managers. Executives also comprehend that old-fashioned financial practices like return on investment and earning per share give misguided signals for incessant improvement and innovation. These are the type of activities that the competitive environment demands (Akkermans and Van Oorschot, 2018). The traditional financial measures might have worked well in , but they are out of their depth in the context of today’s environment. Nowadays the managers chose to focus on operational measures as well as financial measures.  They believe that operational measures will automatically improve financial measures. The balanced scorecard allows managers to view  the business from four important angles  namely financial perspective, customer perspective  , internal business practice and innovation and learning practice. The balanced scorecard link performance measures  with that of  four perspectives that raises important questions. These questions relate to how do customers see the organisation( customer perspective), how do they look to shareholders( financial perspective),what must the company excel at (internal practice) and what the company can do to prove and crate value(innovation and learning perspective).this helps in minimising information overload by limiting the number of measures used. It makes the manager in focusing on the handful of measures that are the most critical (Hansen and Schaltegger, 2016).

There is also another approach called a results based leadership. It focuses on attributes and results. Leaders must strive for excellence not only in terms of  results and objectives , but by demonstrating attributes of success. This approach offers four criteria for judging whether managers are focused on achieving results. Those four criteria includes the executives balance concerns of employees, the results linking strongly to the strategy of the firm’s strategy and competitive position , whether results meet both short term and long term goals and finally whether results support the whole enterprise and transcend the  personal gain of managers.  This approach moves management away from thinking about inputs of leaders and instead focuses the management to take steps about the outcomes of their leadership. It thus provides an effective framework that measures the effectiveness of the leader(Donate and de Pablo,  2015).

Company review

This section deals with comparing the remuneration practices of two companies in Australia belonging to the same industry. The first company that is already included in the assignment, is  Reliance Worldwide. Reliance worldwide belongs to the industrial sector and is the world’s largest manufacturer of plumbing fittings.  It also specialises in the manufacture of specialist water control valves. Another company that has been chosen for this comparison purpose is  ALS limited. It is a global leader in providing laboratory testing, inspection, certification and verification solutions. It provides high quality , innovative and professional testing services to clients .it also belongs to the industrial sector.

Reliance worldwide

The first part of this remuneration analysis illustrates the remuneration policy of reliance worldwide.

Details for remuneration committee and its membership.

The procedure  for selecting directors for appointment  purposes is ovesseen by the nomination and remuneration committee. It also does  the performance evaluation of individual directors(Rwc.com, 2018). This committee is headed  by an independent director. Other members include two  non executive directors (Tan and Liu, 2016.) .The nomination and remuneration committee consists of members that are Jonathan Munz, Ross Dobinson and Stuart Crosby.

Some of its responsibilities include mentioning to the Board about the remuneration arrangements to the CEO. It also includes reviewing  and facilitating  shareholder and other stakeholder engagement

Allocation of executive remuneration

According to the remuneration report, it has set out remuneration arrangements for the key management personnel.KMP includes both non executive and executive directors(Rwc.com, 2018).

The board, through the remuneration committee is accountable for designing and revising remuneration policies . These help in aligning the remuneration of executives with the long term interests of shareholders (Sauaia,  2014).  The remuneration policy for senior executives are set to correctly reflect a senior executive’s duties and responsibilities(Lazonick, 2016) .The executive remuneration package is comprised of fixed remuneration that consists of a base salary and contributions to superannuation pension funds. It also includes cash bonuses  that are awarded at the discretion of the company (Kolev, Wiseman and Gomez,  2017).

The remuneration percentages to executive members have been  illustrated as follows:

Senior executive	Fixed remuneration	STI (%)	LTI(%)
Heath sharp	36.3	55.1	8.6
Gary bollman	55.9	11.7	32.5
Terry scott	82	18.0	-

Figure 1- remuneration percentages

Source- (Rwc.com, 2018)

Mix of performances used

The remuneration structure of reliance worldwide were as follows:

Fixed remuneration- according to this the terms of this remuneration structure containthr following;

• A fixed annual remuneration component encompassing a base salary and appropriate superannuation funds
• Other accepted benefits include items such as free transport, vehicles, mobile phone etc

Senior executives have obtained a  competitive fixed remuneration. This is in  accordance with the terms as set in the senior executive’s remuneration service agreement(Cecchetti and Kharroubi,2015).some key performance indiactors that impact remuneration pay of executives include:

Figure 2- key performance indicators

Source- (Rwc.com, 2018)

The company’s share price increased of 8.1 % during financial year 2017 . the public offering had an issue price of $2.50 per share so that the closing price of 30^th june 2017 represented a 33.6 percent premium to that issue price. Senior executives were rewarded I recognition of this strong performance and delivering quality returns to shareholders.

Short term incentive

Under the company’s  bonus plan, bonus are awarded to senior executive at the option of the board . The overall performance of the group needs to be considered in determining whether a cash bonus will be awarded in deliberation to attainment of  key performance objectives(Rwc.com, 2018).

The STI  bonuses is awarded to the senior executives. It  recognise their performance in leading the company during its successful first full year since listing in the ASX. . the company also experienced positive financial  results in the financial year 2017 , as evidenced by the positive shareholder returns. (Bussin and Modau, 2015).

Long term incentive

The company established the Equity incentive Plan . This plan was established  to assist the motivation, retention and reward of eligible employees. The plan  is  designed to align the interests of employees with the interests of shareholders . This can be done by providing an opportunity for eligible employees. This helps in receiving an equity interest  in the company(Ghazvini et al.,2015). There were an award that included being provided to the senior executives that include the LTI award that was delivered in the form of 1,307, 190  share options(Rwc.com, 2018).  Each option enables the chairman to obtain an ordinary share in the company. It is however  subjected to meet specific conditions.

Options that were granted to senior executives during FY2017

Figure3-optons to senior executives

Source- (Rwc.com, 2018)

Movements in options held by senior executives

name	Balance at 1st July 2018	Granted during the year number	Granted during the year  $ value	Balance at 30th June 2017
Heath sharp	4,000,000	-	-	4,000,000
Gary Bollman	-	1307190	967321	1,307, 190
Terry scott	-	-	-

Figure4- movements in options of executives

Source- (Rwc.com, 2018)

Executive remuneration

The details for the remuneration for executive personnel are as follows.it is determined as per the relevant provisions of the Australian accounting standards.

Figure 5-remuneration details

Source- (Rwc.com, 2018)

ALS limited

The next part of this remuneration policy deals with the company ALS limited.

Details of remuneration committee and its membership

A new committee, now called the people committee , formerly known as the remuneration committee was established by the board to create a wider scope for the existing remuneration committee. The committee consist of the three independent non executive directors. The committee considers to consider all aspects of remuneration strategy , policy and process for executive key management personnel. It  also has an oversight of the key remuneration programs for the company globally(Alsglobal.com,2018).

The people committee consisted of the following people:

• John mulcahy – chairman of people committee
• Bruce phillips- non executive director
• Tonianne Dwyer- non executive director

Allocation of executive remuneration

The financial performance has increased overall compared to the last year. The short term incentives payments provide a fair outcome based on good financial performance and align better with the results off shareholders. The executives long term plan award was achieved  at the overall rate of 37.5 % of the maximum potential as two of the four performance hurdles were not met and done hurdle was achieved only in part. Therefore the executive pay  outcomes for 2016-17 demonstrate an alignment with shareholders outcomes(Shaw and Gupta, 2015) . This confirms that the current remuneration policies are working properly to ensure that there is a correlation to company performance. The LTI plan rules will continue to include the current  four performance hurdles of TSR, EPS, EBITDA and ROCE.  As these measures increase, the remuneration plans for the executives will increase.

The company has a strategic plan in place. This plan will help in assisting the company in achieving its financial and other business goals. The remuneration strategy is put in place incorporates the following

Fixed remuneration	Short term incenives-cash based	Long term incentives- equity based
46%	27%	27%
60%	20%	20%

Figure 6- remuneration structure

Source- (Alsglobal.com,2018).

The fixed remuneration part is set to align executive reward to  growth in shareholder value. The short term incentives record financial growth against last year’s performance. It improved financial and health and safety outcomes of the employees(Bennett, 2018). 60 percent of the reward is set against financial KPI’s while 5% of the reward is set against health, safety and environmental KPI’s. While the next 35 % of the reward is reserved for achieving  business plan milestones(Alsglobal.com,2018). The non financial measures include achieving health and safety measures and setting business milestones. However if threshold performance is not met there is no STI payment. A portion of the non financial KPIs has the executives performance viewed against the performance of peer companies. The KPI was set against the positive performance indicator scorecard of health, safety and environmental level indicators . A minimum score of 90 percent is required to achieve the HSE KPI. Other non financial KPIs are set using each divisional annual business plan(Alissa, 2015). The annual business plan provides for a balanced scorecard of improvements, initiatives and cost management practices.  The long term incentives plan is 3 year based and includes four hurdles. The four hurdles include EPS growth, TSR, EBITDA and ROCE. These are all financial measures(Barros and Carvalhal, 2015).  The equity settled performance right vests and if exercised convers to an ordinary share in the company at nil exercise price.

The actual remuneration of executive employees for the year 2017 include:

Figure 7-actual remuneration details

Source-(Alsglobal.com,2018).

The performance hurdles include:

EPS- the growth in EPS is calculated by comparing the diluted underlying EPS from continuing operations achieved by the company in the base year(eg march 2016) and the final year of the performance period( eg year to March 2017)

Particulars	2016	2017
Basic EPS	23.7	22.4
Diluted EPS	23.6	22.3

Figure 8- EPS details

Source--(Alsglobal.com,2018).

EBITDA- the EBITDA margin measurement is contingent up performance of the company against a group of peer companies that are comprised of key global competitors . It can be illustrated with the help of a table:

Figure 9-EBITDA details

Source-(Alsglobal.com,2018).

Total shareholder return

The total shareholder return measures the growth over the performance period in the price of shares plus dividends notionally reinvested in shares . the TSR hurdle needs to be higher than the 50^th percentile or higher against the TSR s of the nominated groups of comparative  companies for the same period(Schlechter, Thompson,  and Bussin, 2015). A diagram that illustrates the following:

FIGURE 10- TSR

Source- (Alsglobal.com,2018).

Company performance related  and equity related remuneration

Incorporating all the financial and non financial measures details of each of the named executives performance related and equity based  remuneration as apportion of their total remuneration is given below:

Figure 11- proportion of LTI and STI of total remuneration

Source-(Alsglobal.com,2018).

Analysis and comparison of remuneration methods used

In terms of the remuneration policy of the company reliance worldwide, both companies followed a short term and long term incentive structure  that measured employees pay based on financial and non financial measures of the executive employees. The principla goal  behind these incentive plans is to focus the executives on long term outcomes, ensuring the retention of top employees and encouraging teamwork and motivation through company performance hurdles(Barros and Carvalhal, 2015). In the case of ALS global, the NPAT target was fully met as were all the non financial KPI’s. The second NPAT hurdle was however only partially met while an STI  payment is due at 71 percent of the total potential. In the case of Reliance worldwide, the financial targets were fully met in terms of  NPAT and  positive shareholder returns. The company recognises the performance of the senior executives and hence awarded the bonus during its first successful year since listing in the ASX.

Conclusion

As per the discussion above it is clear that both financial and non financial measures form a key component of the remuneration structure of the executives who work in the two companies , reliance worldwide an ALS global. However financial measures are more significant of the two. It is clear that financial measures that relates to EBITDA, EPS have a more greater impact in expanding remuneration pay since large scale companies like these are judged by the shareholder value or their market capitalisation rate. Both these companies provide share options to executives. This makes them feel more involved in the company and its operational activities. They feel like that they are part of the company itself. A further remuneration report analysis off the two companies shows their incentive plans which is designed to improve organisational performance as well as improve the motivational levels of employees. Some of the measures are attached to achieving health and safety standards and achieving milestones in business process. A variety of financial measures enable a more encompassing view of how the remuneration policy is structured in terms of meeting specific targets in EPS, shareholder value and total shareholder return.

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