Executive Compensation Packages at Goodman Group Limited - Example

Business Rероrt to СFО and Меdiа Rеlеаsе Name Institution Date Table of Contents Introduction 4 Executive Compensation Packages at Goodman Group Limited 5 Analysis 6 Recommendations 9 Media Release 10 References 12 Executive Summary Executive remuneration is an issue that has received an increased media as well as public attention. CEOs in organizations are receiving higher levels of compensation that they should get. Executive compensation has been too excessive when looking at the managerial reward and their performance. The managers of a company have the responsibility of acting as agents of the shareholders of the business. Their failure to do so increases the conflict of interest between the CEO and the security holders. This report aimed at researching the compensation packages paid to the company’s most senior executive, and the Chief Executive Officer the Goodman Group Limited. The report will explains whether the design of the compensation package for the company encourages the CEO to act in the best interests of shareholders. The second part of the assignment presents a media release to the public and the shareholders of the current remuneration package of Goodman and the potential changes for implementation. The findings of the report show that Goodman has three compensation packages for the CEO including the fixed remuneration, STI, and LTI. The remuneration indicates that the board partially sets it to align the interests of the CEO to that of the shareholders. The fixed remuneration requires an amendment to cater for a higher initial pay of a new CEO with the appropriate skills and qualifications. The LTI also requires amendment to reduce the additional LTI for the CEO. The media release sets out the changes that the company will be making to ensure the promotion of shareholder value in the pay setting. Report to CFO Introduction According to the IASB (IAS 24:17), all companies registered in the securities exchange should disclose key compensation categories of the management personnel including the short-term employee benefits, other long-term benefits, post-employee benefits, termination benefits and share-based payment benefits (IFRSs, 2010). Executive remuneration is one the issues highly regulated in the corporate arena. However, there has been an increased media as well as public attention to the levels and types of compensation given to Australian Executives. A report presented by the MGN Ltd (2015) noted that executive compensation has been too excessive and that there is the disconnect between managerial compensation and their performance. The level of bonuses that should have a link to the fulfillment of the corporate leaders remains high and unchanged. The consistency in these bonus payouts for the executives has raised questions regarding the efficiency of the variable pay living up to its name. According to Rankin (2010), the link between the reimbursement of executives and the performance of the firm as well as the managerial payment level are in question. The reason is that the remuneration packages for the corporate directors of companies do not correlate with the performance of the enterprise. It is clear that the compensation packages do not aim at reducing the self-interested behaviors of the corporate executives. The alarm has made shareholders take the step of beginning to scrutinize the performance hurdles and ways in which the board of directors or committee makes performance assessments against these interferences. This report aims at researching the compensation packages paid to the company’s Chief Executive Officer for the Goodman Group Limited. The report will explain whether the design of the compensation package for the executive encourages the CEO to act in the best interests of shareholders. The second part of the assignment presents a media release to the public and the shareholders of the current remuneration package of Goodman and the potential changes for implementation. Executive Compensation Packages at Goodman Group Limited The Good Man Group Company has three types of executive remuneration packages including the fixed payment, short-term incentive and the long-term incentive. The fixed salary is for attracting adequately skilled and qualified managers. The current level of the fixed remuneration is below the median against a particular comparator group. The compensation mix weighs against the basis of at-risk incentive elements. The reward approach usually maintains fixed costs in the business at a level that is easily adjustable when a downturn occurs. It remains fixed at $1.4 million not unless there is the occurrence of role change (Goodman Group Annual Report, 2015). The short-term incentive aims at rewarding particular achievement against performance objectives within a specified period. It is set against the financial targets of the fiscal year 2015 such as the management margin, return on equity, and return on assets, operating EPS and gearing across the consolidated entity. It is also set against the non-financial objectives including further development of funds management platform, and business process improvement initiative implementation among others. The STI pool is paid after the achievement of the EPS targets. It is set at 200% of the fixed remuneration, $2.2 million (2014: $2.4 million) (Goodman Group Annual Report, 2015). The long-term incentives are aimed at creating significant retention incentive as well as strongly aligning interests between the Group CEO and the security holders. The LTI promotes the making of decisions that focus on generating long-term sustainable returns of 6% growth in operating EPS. It also encourages the making of decisions focusing on performance hurdles based on 75% of operating EPS and the relative TSR against the 25% required by the ASX 100. A number of performance rights awarded under the Goodman’s LTIP capped at 5% of the issued capital of the company controls the LTI. Additionally, executive director’s offers are always subjected to particular security holder approval before the making of any award. The CEO remuneration is also subject to positive as well as negative movements of the security price over the five years of service. Analysis The compensation package of the CEO partly helps in resolving the agency conflicts between the CEO and shareholders. One can observe this based on the different packages that the company uses in remunerating its executives. The first step that the directors did to resolve the agency conflict is the voluntary disclosure of the compensation package for the executives. Sharma (2013) denotes that many theories associate with corporate accounting and disclosure. The agency theory of voluntary disclosure requires company managers to act as the agents of shareholders (Barako, Hancock & Izan, 2006). Voluntary disclosure helps in eliminating the agency problem with the executives disclosing company information voluntarily hence reducing the agency costs. The signaling theory of voluntary disclosure also denotes that businesses have the responsibility of signaling particular information to the shareholders. The information is to reveal to the investors that the firm is doing better than other corporations in the market. It helps in attracting more investments and enhancement of reputation (Shehata, 2014). By reporting on the director compensation information, Goodman Company directors have provided a signal of crucial information to the shareholders and reducing the agency conflict. The stakeholder theory extends the shareholder point of view by including other interested parties and their relationship with the organization. Under the stakeholder theory, the organization is accountable to the shareholders in two different ways including management responsibilities as well as ethical responsibility (Yi, Davey & Eggleton, 2011). Voluntary disclosure of company information including managerial compensation is a managerial duty that the business managers must fulfill to the shareholders. Goodman Group Ltd has met this obligation to the shareholders by reporting on the executive compensation package as its managerial responsibility. Goodman has also met the ethical responsibility of ensuring that compensation package of the company directors fits the shareholders interests. Voluntary reporting is one way of building moral strength of the firm by providing information about the shareholders value in the business. Courtenay (2013) says that ignoring the reputational risks usually have a devastating effect of the profile as well as the profits of the firm. Unsatisfied security holders will not continue investing in the company. Therefore, at all means, corporate managers must work towards protecting the reputation of the enterprise to encourage more investments from the investors. The International Accounting Standards Board states that companies should adopt a responsible executive compensation that takes into consideration the value of the shareholders (Chingos, 2004). Responsible executive compensation is one where the board or committee knows when they hire a CEO that is a good match. According to Allgood, Farrell & Kamal (2012), a good determination of the initial compensation package for a new CEO is crucial in achieving responsible executive compensation for business. The compensation package should match the quality of the hiring firm. The researchers revealed that CEOs with qualified candidates for the executive position usually have an experience of more than four years and requiring higher initial compensation packages. Inside CEOs often receive higher compensation package than outside CEOs. In the case of Goodman Group Limited, the board uses a fixed remuneration package aimed at attracting skilled as well as qualified executives. However, the board sets the level of initial compensation below the median level against a selected comparator group. The committee does not set the initial compensation for the CEO at the required standard. The reason is that the current level which is below the median of the comparator group will not match the quality of the firm. Good candidates for CEOs are good experience skills and higher initial package. The starting pay package at Goodman does not help in resolving the agency conflicts between the CEO and shareholders. Additionally, responsible executive compensation requires independence of the board in making executive remuneration decisions (Allgood et al., 2012). The committee should not allow the CEOs to contribute or alter the pay-setting process and inflate their compensation packages (Gregory-Smith, 2012). The committee should be independent as much as possible to avoid any interference by the managers when setting the CEO’s pay package. In setting the short-term incentives the board at Goodman Group Limited is usually independent of the influence of the CEOs to inflate the pay setting. The committee takes into consideration the overall performance of the company as well as the individual CEO performance, their contribution to the achievement targets to exercise their discretion regarding the STI and LTI awards. However, in the year 2015, the Goodman CEO influenced the pay setting by the board. Because the CEO contributed to the success of the company in executing the Urban Renewal Strategy, the CEO demanded a pay increase that would inflate his remuneration package in that year. The committee did give an additional LTI for the CEO. The CEO did influence the board independence in setting the executive pay package. It is an unacceptable as a responsible executive remuneration package setting. It increases the agency conflicts between the CEO and shareholders. The IFRS-2 requires the full disclosure of the executive salary in a company’s financial records. It also dictates that the stock options granted to the executives for inclusion in the accounts (Nyhuus & Bredesen, 2013). The Goodman company director’s remuneration report captures the stock option given to the executive as an award. The long-term incentive proportion capped at 5% of the company’s issued capital. The reporting of stock option helps in resolving the conflict between the CEO and shareholders. The investors can understand the stock option that the board considered in setting the pay package for the executive in the business. However, the board did not disclose the rights granted to the CEO as compensation as required by the Australian Accounting Standards Board (AASB 29.7.2, 2009). Recommendations The Goodman Group Limited director’s compensation package needs to change so as to align the CEO’s and shareholder’s interests. The board requires recognizing the value of the shareholders by ensuring the adoption of a responsible compensation package for the CEO. In that case, the board needs to have an improved initial remuneration with the capability of attracting skilled candidates for the CEO position in the business. Allgood et al., (2012) says that higher initial compensation package draws good matches of candidates with experience of more than four years. Shareholder’s interests are to have a qualified person in the CEO position. It is advisable that the CEO stop interfering with the executive pay package based on any reason. The board should be independent at all times when setting the reimbursement package. According to the positive accounting theory, companies should use its resources to maximize their profits (Omran & El-Galfy, 2014). Therefore, not interfering with the board in the CEO pay setting will help in maximizing the company profits. The board should also disclose the rights granted to the CEO compensation as vital information that the shareholders need to know. Bhagat, S., & Romano, R. (2009) says that reforming of executive compensation requires greater transparency and commitment in the long-term. The signaling theory of voluntary disclosure also denotes that companies have the responsibility of signaling particular information to the shareholders. The information is to reveal to the investors that the firm is doing better than other corporations in the market. It helps in attracting more investments and enhancement of reputation (Shehata, 2014). Media Release Goodman’s CEO compensation package to change in the next three months Reviewing the past year’s compensation package of the executive in the Goodman’s company, the various gaps in the pay needs revision to align the interests of the CEO to that of shareholders. Currently, the board at Goodman Group Limited sets three types of the compensation package for the CEO including the fixed remuneration, short-term incentive, and long-term incentive packages. The fixed salary is the initial compensation package for the CEO. It aims at attracting adequately skilled and qualified executives. The fixed pay is below the median level against a chosen comparator group. The short-term incentive package is performance based and aims at rewarding the CEO for a particular achievement against the performance goals set for the period. The long-term incentive compensation package aims at creating a retention bonus and achieving a substantial alignment of CEO and security holder’s interests. It helps in the making of decisions to generate long-term sustainable returns of 6% operating earnings per share. It also contributes to the making of a decision on performance hurdles based on a 75% operating earnings per share and a relative TSR against 35% of the ASX 100 25%. The compensation package is strong when viewing the decision of remunerating the CEO a short-term incentive based on performance. It shows that the decision aligns with the shareholders interests. The STI payment is after achieving the defined target goals of the organization. Such a remuneration decision caters for the shareholder interest and aligns that with the CEO pay setting. The financial goals keep the board on the lookout not to pay the incentive when there is the achievement of the financial objectives during the specified period. The long-term incentive also provides for alignment of CEO and shareholder’s value since it is set primarily for this purpose. However, the compensation package of the executive director of the company is not adjusted at the required level of initial remuneration that encourages skilled and qualified executive for the position. In the year 2015, the CEO influenced the decision of the board in making independent decisions in the pay setting. That pressure led to an increased salary setting favoring the CEO and does not align with the shareholder’s interest. Based on the above information, the Goodman Group Limited wishes to announce to the public and the shareholders that the compensation package for the CEO will change to ensure alignment of the CEO and shareholder interests. The potential changes will be made to increase the initial compensation package above the median level of the comparator group. It is a measure that will encourage achievement of a good match of a new executive for the business with the necessary work experience and skills. The long-term remuneration package will also reduce from the package paid in the year 2015, not to include CEOs additional LTI based on his contribution to the company success in executing the Urban Renewal Strategy. With these changes, Goodman’s board will ensure that the CEO interests align with the shareholders value. References Allgood, S., Farrell, K., & Kamal, R. (2012). Do boards know when they hire a CEO that is a good match? Evidence from initial compensation. 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Questions raised as top firms' bosses reap rewards. ProQuest. Monash University Library. Nyhuus, M., & Bredesen, T. (2013). Share-based payment and IFRS-2: Stock options performance and the effects of implementing IFRS-2 in Norwegian publicly traded firms. BI Norwegian Business School. Omran, M., & El-Galfy, A. (2014). Theoretical perspectives on corporate disclosure: a critical evaluation and literature survey.  Asian Review of Accounting, 22(3):257 – 286.  Rankin, M. (2010). Structure and Level of Remuneration across the Top Executive Team. Australian Accounting Review, 54. 20(3):241-255. Sharma, N. (2013). Theoretical Framework for Corporate Disclosure Research. Asian Journal of Finance & Accounting, 5(1): 183-196. Shehata, N. (2014). Theories and Determinants of Voluntary Disclosure. Accounting and Finance Research, 3(1):18-26. Yi, A., Davey, H., & Eggleton, I.R.C. (2011). Towards a comprehensive theoretical framework for voluntary IC disclosure. 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