GrainCorp - Compensation Package - Case Study Example

Business Report: GRAINCORP LTD Student’s Name Institutional Affiliation Date Executive Summary GrainCorp is a leading Australian firm in the agribusiness sector that owns unique assets associated with oilseed and grain supply chain. The company boasts of its ability to attain a seamless integration of its business assets all over the world. As a result, it has been able to guarantee delivery confidence, competitive pricing, high quality assurance and personal customer service. The company offers remuneration package to its key management personnel (KMPs) as a performance motivator. The remuneration packages offered in the company entail both short term incentives (STI) and long-term incentives (LTI). In 2013, the performance outcome of the CEO and MD with regard to STI was 64% of the maximum performance. The performance was 25% of the maximum performance with regard to LTI. Table of Contents Executive Summary 2 Introduction 4 The CEO’s Compensation Package 4 Analysis of the CEO’s Compensation Package 6 Recommended Changes to the CEO’s Compensation Package 9 Conclusion 12 References 13 Introduction Compensation packages are essential for the enhanced performance of the key personnel in an organization since the KMPs are responsible for controlling, directing and planning all affairs of the company that bear critical significance to its tremendous performance in the market. Being a firm in the agribusiness sector, GrainCorp also offers STI and LTI remuneration packages to its CEO and MD and other executives (GrainCorp, 2015). The report describes the compensation package of the CEO and whether the compensation package has been able to resolve conflicts between the shareholders and the CEO. Finally, the report recommends changes to the compensation package with the objective of improving the alignment of the shareholders’ and CEO’s interests. The CEO’s Compensation Package GrainCorp offers competitive remuneration opportunities while considering the comparable companies. The firm uses the market median to position its fixed remuneration that it offers to its executive staffs. However, the 75th percentile for attaining the stretch LTI and STI targets is the limit for the remuneration package offered by the company. The total fixed remuneration for the Chief Executive Officer and Managing Director (CEO & M D) effective from December 1, 2014 stands at $1,190,000. The cash STI earned by the CEO is $682,000. The other benefits of the CEO amount to $205,000 per annum. The total benefits received by the GrainCorp’s CEO amount to $2,077,000 annually. Short Term Incentive (STI) The compensation packages offered to the CEO and other executives reflected positive financial performance on the part of the individuals. For instance, the performance of the CEO and MD was 64% of maximum performance. The short term incentives offered to the KMPs at the firm reflected a strong positive financial performance against the budget. The malt, storage and logistics unit exhibited the highest positive financial performance. The incentives also resulted in improved safety, environmental and health outcomes since they exceeded the target performance. Even though the company went through tough external environment conditions, the financial performance of the KMPs continued to be tremendous partly due the short term incentives offered to the executives. The performance of the executives was also in accordance with the philosophy of the Board that states that stated that the STI plan was to balance the interests of the shareholders over the short run. The Board understood that the volatile period required the commitment, contribution and performance of the senior executives before opting for the STI plan. The results of the STI plan reveal that the firm rewards its executives with regard to the achievements during the financial year. As a result, the Board believes that associating rewards with achievement motivates the executives towards exhibiting the highest performance. Most importantly, the STI scheme targets to retain the company’s executive team that is crucial to its success. Long term Incentive (LTI) GrainCorp also offers LTI packages to its executive officers including the CEO and M D. the review conducted by the People, Remunerations and Nominations Committee (PRNC) resulted in the introduction of the minimum threshold of performance for the ROE performance challenge. The introduction of the threshold intended to align the interests of the shareholders with those of the executives of the company. Following the introduction of the threshold, the executives receive the LTI only if the company has attained an acceptable return on equity results for the shareholders. Prior to issuing the incentive to executives, the ROE vesting calculated by determining the average of the firm’s performance for a period of 10 years should be at least or greater than the set target. In regard to the 2013 financial year, the LTI awards attained a vesting of 25% over a three-year period. Even though GrainCorp did not meet the minimum threshold performance with regard to the performance hurdle of the Total Shareholder Return (TSR), the firm attained the minimum performance threshold under the ROE performance hurdle. Analysis of the CEO Compensation Package The performance of financial STI measures such as NPAT and LTI financial measures such as TSR and ROE provide a direct connection between the reward outcomes of the KMP executives and the ability of the performance to deliver value to the shareholders both over the short term and long term. It is evident that a significant portion of the remuneration assigned for the KMPs is at risk since the CEO and M D among other KMPs receive the remuneration only if the company has been able to meet the target performance. Attaining the target performance is a prerequisite under both the STI and LTI plans. Therefore, it is only after the KMPs receive the remunerations following the attainment of the firm’s objectives that it is proper to state that the compensation policy is in accordance with the values and interests of both the company and its shareholders. GrainCorp adjusts the company performance targets that it sets as a benchmark for receiving the compensation package with regard to the volatility of the external conditions. The Board reviews the target and performance measures on a regular basis; specifically at the end of every year in the case of ROE. The Board sets challenging targets in accordance with the company’s budget thereby ascertaining that the executives are able to deliver the anticipated performance with regard to the prevailing volatile market conditions. As a result, it is proper to opine that the compensation policy plays a pivotal role in resolving conflicts between the executives such as the CEO and M D and the shareholders since the KMPs receive remuneration only if the firm’s performance has attained or surpassed the target performance. By so doing, it is only after the company’s performance has met the interests of the shareholders positively that the company compensates its KMPs. The use of long-period averaging methods such as determining the weighted average price by considering the firm’s volume of trade over a period of 20 days and the calculation of TSR over a 12-month period is also appropriate towards considering the interests of the shareholders in the performance decisions of the company. The contribution of the averaging method towards meeting the interests of the shareholders emanates from the fact that the methods mitigate the volatility of the share price thereby impacting positively to the interests of the shareholders. The introduction of the minimum performance threshold also targeted to improve the ability of the remuneration package to meet the interests of the shareholders and other stakeholders. To be precise, using the rolling ten-year average ROE performance to set the performance threshold ensures that the LTI plan awarded to the CEO and other KMPs follows the ability of the company to deal with the year-on-year fluctuation of ROE thereby considering the long time interest of value creation that the shareholders focus on. It is also apparent that GrainCorp uses a broad comparator group in setting the relative TSR measure under the LTI. The decision of the firm to use the comparator group emanates from its unique positioning in the market with regard to its operations. As a result, there are limited ASX companies that the firm can use for comparison purposes. As a result, the TSR comparator group selected by the company represents the competitors of the company with regard to organizations that have similar complexity and size. The incentive behind the selection of the three-year period used in setting the LTI is the fact that reviewing the performance of the company over a period of three years enables the alignment of the strategic horizons with the business plans thereby enabling the company to measure its sustained performance over the long term. Apparently, setting such benchmark duration to realize the objective is detrimental towards resolving conflicts between the KMPs and the shareholders. In fact, it is evident that the existing LTI plan has been able to align the performance of the company with the interests of the shareholders as well as retaining KMPs to guarantee their long-term contribution towards the performance of the company. The ability of the company to claw back incentive awards in the event of fraud, misstatement or gross misconduct of the CEO or any other KMP is a merit to the alignment of the incentive plan to the interests of the shareholders. To avert incidences of gross misconduct or fraud by the KMPs, GrainCorp has also introduced mandatory shareholding requirements for its executive personnel. Currently, the Board believes that GrainCorp has already managed to align its executive KMPs and the shareholders by ensuring that the incentives and compensation plans offered to the executives depend on the ability of the executives to meet predetermined performance targets. Gross misconduct also addresses ethical issues affecting the behavior of the CEO. For instance, it is evident that corporate ethics impacts significantly on the profile and profitability of the company (Courtenary, 2013). As a result, it is imperative that a company should portray good corporate ethics as a prerequisite to its sustained performance in the long-term. Recommended Changes to the CEO’s Compensation Package The proper alignment of the CEO compensation package and the interests of the shareholders should also consider the initial compensation packages allocated for the CEO. As a matter of fact, it is evident that many CEOs do not entertain reductions on their initial packages. Therefore, before hiring the CEO, the Board should determine whether or not the initial contracts have an impact on the potential value of the synergy between the firm and the CEO. This is in accordance with match theory that states that the earnings of the CEOs in good matches are high from the beginning of their tenure. As a result, there is a positive correlation between the initial CEO compensation and the match quality provided that the underlying process of hiring the CEO and setting the compensation is rational (Allgood et al. 2012). Apart from considering the initial CEO compensation, the salary, the STI and LTI, cash bonuses are the other incentives that improve the performance of the CEO in the company (Rankin, 2010). Therefore, the Board at GrainCorp should also consider calculating cash bonuses to the CEO and other KMPs as a function of the performance of the company. GrainCorp should also consider CEO charisma as a valid contributor to the performance of a firm (Tosi et al. 2004; Fanelli & Misangyi, 2006). There is a significant relationship between the measures of financial performance and the compensation of executives in the South African listed companies. In fact, the study conducted on the South African listed companies revealed a strong relationship between executive remuneration and the traditional measures of performance such as ROE and ROA. However, it is also proper to consider modern performance measures such as the market value added (MVA) and the economic value added (EVA) rather than concentrating on the traditional measures of ROA and ROE as is the case with GrainCorp. According to De Wet (2013), there is a significant positive relationship between executive remuneration and high MVA exhibited by companies (De Wet, 2013). In accordance with the agency theory, it is proper to acknowledge the fact that a company can use CEO remuneration to align the interests of the management and those of the shareholders thereby averting agency costs emanating from the separation of the ownership and management of the company (Niap & Taylor, 2012). The amount of remuneration awarded to the CEO should also consider the personal reputation of the senior executive. As a result, GrainCorp’s Board should consider awarding initial compensations, salaries, bonuses and other incentives to the CEO with regard to the reputation that the professional holds towards delivering proficient and effective managerial services. Therefore high reputation should attract increased executive remuneration awards on the part of the CEO. It is also proper to integrate other aspects in determining the amount of executive remuneration. Instead of concentrating on the achievements of the KMPs majorly as reflected by the overall performance of the company as is the case with GrainCorp, the company can also calculate CEO compensation packages based on its size, the lagged value of CEO’s pay among other effects that are specific to the organization. According to Doucouliagos et al. (2007), there is a positive relationship between the amount of CEO remuneration and the size of the company. Moreover, there exists a strong positive relationship between the CEO’s compensation package and the lagged value of the CEO’s pay (Doucouliagos et al. 2007). Busin and Modau (2015) also emphasize on the importance of attaching CEO remuneration to the propensity of the professional to attract the compensation (Busin & Modau, 2015). Therefore, GrainCorp should concentrate on pegging the remuneration of CEOs and other KMPs to their tendency to attract the remunerations as a strategy of aligning their interests with those of the shareholders. Over the years, firms have not pegged CEO’s compensation packages to their performance. The result has been the CEOs and other executives getting out of proportion remunerations at the expense of menial salaries and bonuses awarded to other workers (Peetz, 2010; Perel, 2003). As a result, the Board at GrainCorp should endeavor to determine more accurate ways of pegging CEO remuneration to firm performance. According to Sholtz and Smit (2013), the fundamental roles of the CEO are to create value and profits for the company through the implementation of strategic business decisions (Scholtz & Smit, 2013). As a result, GrainCorp should improve on its rigidity towards associating CEO remuneration with the achievement of the professional as manifested by the improved performance of the company. The Board should also increase the degree of CEO remuneration disclosure (Clarkson et al. 2006). The disclosure should be in accordance with the prevailing market attitudes regarding the CEO remuneration disclosure and the existing legislation to aid in resolving conflicts between the shareholders and the CEO. Conclusion GrainCorp compensates its CEO and other KMPs in accordance with its performance. The compensation packages of the executives depend with the position of the KMP. Besides offering attractive salary packages to the CEO, the company also offers both short term incentives and long term incentives. The Board also introduced a minimum performance threshold for the CEO and other KMPs to align the interests of the shareholders with those of the executives. However, GrainCorp should integrate other aspects rather than the company performance and the minimum performance threshold as determinants of whether or not the executive will receive the remuneration award. The other aspects include the reputation and ethics of the CEO as well as including modern performance measures such as EVA and MVA alongside the traditional measures of ROA and ROE. References Bussin, M., & Modau, M. F. (2015). The relationship between Chief Executive Officer remuneration and financial performance in South Africa between 2006 and 2012. SA Journal of Human Resource Management, 13(1), 18-pages. Clarkson, P., Van Bueren, A. L., & Walker, J. (2006). Chief executive officer remuneration disclosure quality: corporate responses to an evolving disclosure environment. Accounting & Finance, 46(5), 771-796. De Wet, J. H. (2013). Executive compensation and the EVA and MVA performance of South African listed companies. Southern African Business Review, 16(3), 57-80. Doucouliagos, H., Haman, J., & Askary, S. (2007). Directors' remuneration and performance in Australian banking. Corporate governance: an international review, 15(6), 1363-1383. Fanelli, A., & Misangyi, V. F. (2006). Bringing out charisma: CEO charisma and external stakeholders. Academy of Management Review, 31(4), 1049-1061. GrainCorp. (2015). Annual Report 2015. Retrieved from: http://www.graincorp.com.au/investors-and-media/presentation-and-events/annual-reports Niap, D. T. F., & Taylor, D. (2012). CEO personal reputation: does it affect remuneration during times of economic turbulence?. 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