The Remuneration Packages of Chief Executive Officers - Essay Example

Accounting and Society Student’s Name: Instructor’s Name: Course: Date: Question One: Types of Compensation Included in Remuneration Packages of C.E.Os The remuneration packages of Chief Executive Officers in Australia have been reported to both the wider community and business world from what the C.E.Os consider to be distorted overall remuneration realities. To contextualize this argument, the Australian Councils of Superannuation Investors noted that the best approach in understanding the pay rise of C.E.Os is to evaluate types of compensations included in remuneration packages for these bosses (Niap 2013). Based on this understanding, this question succinctly reviews types of compensation included in remuneration packages of C.E.Os from Sigma Pharmaceuticals Limited. The data that informs this study to evaluate types of compensations included in remuneration packages was from annual report to shareholders dated 2015/06 financial year. Retirement Packages The first type of compensation Sigma Pharmaceuticals Limited advances to its C.E.Os is retirement package which are given to their executives upon retirement from Sigma Pharmaceuticals Limited. In accordance with section 206K of the Corporations Act 2001, Sigma Pharmaceuticals Limited has provided details of retirement packages that it will advance to its retired C.E.Os. Details as revealed on page 16 of the report assert that the company has a process of engaging remuneration consultants in arriving at the packages that benefit their retirees. According to the report, between 2015 and 2016, Ms. L. Nicholls, AO was retired on 9th December 2015 and will be entitled to this package (see more details of this package on page 16 of Sigma Pharmaceuticals Limited report as attached). This package reflects recent report by Australian Councils of Superannuation Investors which noted that CEO pay as well as bonuses has grown by at least 200 percent as a result of including retirement packages which when assessed keenly, stretches the burden beyond what was previously projected (Staude 2015). Furthermore, this retirement is in tandem with the CEO Profile Survey-Remuneration Overview in the sense that it provides details on the CEO increased salaries and point to what studies have termed as a restrained remuneration landscape in Australia which continue to burden the profitability of companies (Safari, Cooper and Dellaportas 2016; Schultz, Tian and Twite 2013). Long-Term Incentive Plans (LTIPs) The second type of compensation included in remuneration packages of C.E.Os at Sigma Pharmaceuticals Limited is long term incentive plans. According to the report, this remuneration package is premised on a total reward structure that has been aligned with the Company’s long term goal but it is comprised of fixed remuneration as well as at-risk remuneration. Additionally, the report points that the compensation is designed to align it with achievements of financial and strategic objectives that when implemented between 2015 and 2016 will lead to the creation of shareholder value and give the company a cutting edge and thus allowing it to focus efforts and consolidating specific expertise around the product and not the function, which brings in a more focused set of skills and experiences. According to the report, the goal of incorporating LTIPs is to attain the following: The introduction of LTIPs is considered to be consistent with the direction taken by other pharmaceutical companies who used a loan funded LTIPs plan, as a result strengthening the company’s market competitiveness of the Executive framework of remuneration The move is aimed at strengthening the connectedness between performance and pay by aligning incentive payment and performance period The approach is seen to be appropriate move that differentiate existing plan between short term incentive plans and LTIPs, particularly with regard to the timing or rewards as well as the method of delivering rewards Fixed Remuneration Sigma Pharmaceuticals Limited has provided elaborate details on fixed remuneration as another types of compensation included in remuneration packages of their C.E.Os. According to the details on page 20 of the report, the remuneration is considered as Executive total compensation or reward that the company expresses as a total package that consist of Executives’ base salary as well as statutory superannuation contributions. According to the report, this remuneration differs from the other two discussed above as it reflects the performance and the complexity of CEOs roles as well as their experience, performance, and knowledge in the company. Considering individual performance, market movement and business operations Sigma Pharmaceuticals Limited awards a 3 percent increase to their CEOs fixed remuneration as well as an average of about 7.4 percent increase to other packages already enjoyed by their CEOs which according to the report, was effected on 1st May 2015. Relating this remuneration with researches, Rampling and Eddie (2016) noted that there have been relatively fewer practices in most companies in Australia where CEO have either been rewarded based on their performance or reward that are in tandem with practices in other countries. According to the study, the approach Sigma Pharmaceuticals Limited has taken whereby they peg their remuneration to experience, performance, and knowledge in the company is an indication that companies have begun to set remuneration levels in line with performance and importantly, a reflection on individual’s roles and financial contribution to the organization. Perhaps, this type of remuneration points to the exponential growth in the cash component of Australian executive remunerations that have been witnessed for the last 5 years. If the remuneration is evaluated and compared to other countries, it is apparent, just it has been noted by Australian Councils of Superannuation Investors that the remunerations have been driven majorly by a greater use of performance related pay in term of cash incentives. Question Two: Two Strike Rule Over the last few years (about 2 decades) there have been growing worries over what studies considered as ‘excessive executive pay’ resulting to government pressure to device measures that streamline executive remuneration. As a result, the government introduced a new legislation in 2011 which argued that if a firm receives 25 percent or more ‘no’ votes on their remuneration report in two consecutive years then the legislation guides the operations of the company in the sense that it guides on a ‘spill’ motion that leads to dissolution of the existing board and a re-election of a new board. From the surface, the Two Strike Rule is a law that has been put in place that seeks to hold directors to be more prudent and accountable with regard to salaries, bonuses and benefits (remuneration packages) given to executives. Scholars who have looked at the rule argue that the applicability of Two Strike Rule should be seen as an amendment to the Corporations Act 2001 (Tang 2015; Bugeja et al. 2016). However, there is more to how Bugeja et al. (2016) link Two Strike Rule to Corporations Act 2001. This study first acknowledges that Two Strike Rule is perhaps, the most essential corporate governance reform strategy that corporate Australia has witnessed since Australian Stock Exchange (ASX) corporate governance principles that were implemented in 2003. As a matter of fact, it is for this reason that after Remuneration Amendment Act was passed, Parliamentary Secretary to the Federal Treasurer, David Bradbury termed Two Strike Rule as “an internationally competitive system of executive remuneration that is transparent and accountable to shareholders” (Tang 2015 p. 36). First, the rule is aimed at creating and enhancing accountability and strengthening the non-binding vote (this view was also expressed by The Australian Financial Review, 2012). As a result, it is likely that prudent shareholders will likely reflect on the level of shareholder wealth as created by firm managers especially when they will be voting on executive pay. While this is the first approach of understanding Two Strike Rule, the rule notes that the primary responsibility of managers is to generate wealth for company’s shareholder. Again, wealth of shareholders is influenced by the performance of the firm and thirdly, rational shareholders are likely to assess the performance of the firm in terms of increasing function of managerial efforts which according to Tang (2015) are not observable to shareholders. Relating this studies and Two Strike Rule to Sigma Pharmaceuticals Limited, pay performance link is likely to improve in the company owing to the fact that Sigma Pharmaceuticals Limited received a first strike in 2011 but managed to avoid a second strike in 2012. Furthermore, the Two Strike Rule is helping Sigma Pharmaceuticals Limited to exercise their voting power prudently and judiciously as reflected in the 2015-2016 report. Question Three a. Agency Theory and the Size and Structure of CEO Remuneration and Two-Strike Rule The argument on the size and structure of chief executive remuneration and the potential impact of the two-strike rule as seen by shareholders remain multifaceted. From the one hand, the argument needs to be defined within the scope of Agency Theory. Economists allied to the theory argue that the shift from base salary increments and now incentives is justifiable with regard to Agency Theory. That is, the theory is focused on the distinction existing between salaried managers and owners. Looking at the point from the perspective of Monem and Ng (2013), the size and structure of chief executive remuneration and the potential impact of the two-strike rule is two-fold. First, the principal-agent problem should be separated from Two Strikes Rule. Secondly, the Agency Theory will certainly affect size and structure of chief executive remuneration but such effects will be controlled by Two Strikes Rule which is now increasing the accountabilities of the Board so that there will be potential solutions that address the causes of inefficient remunerations packages that may be advanced by proponents of Agency Theory. However, it has to be noted that Two Strikes Rule now limits the assumption of the Agency Theory of principal-agent paradigm. Such limitations will definitely re-align the size and structure of chief executive remuneration. Shareholder Theory and the Size and Structure of CEO Remuneration and Two-Strike Rule Organisations management is supposed to be organized prudently and as such, shareholder theory states that management needs to set business ethics that addresses values and morals of the organization. In light of this theory, the objective of any organization is to create as much value as it will be possible for shareholders. Monem and Ng (2013) add that for success and sustainability over time, executives are obliged to keep the interests of shareholders aligned to the interests of business. The best approach of assessing the connectedness between shareholder theory and the size and structure of CEO remuneration and two-strike rule is to assess Friedman and Miles (2006) quote when they argued that, "the 21st Century is one of managing for stakeholders. The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction” (p. 35). Based on this argument size and structure of CEO remuneration will have to be readjusted downward to conform to what Friedman and Miles term as “manage to get stakeholder interests.” Such conformance means that two-strike rule will have to be observed keenly to ensure that the procedures by which executives are remunerated or paid is seen as fair. References Bugeja, M., da Silva Rosa, R., Shan, Y., Walter, T.S. and Yermack, D., 2016. Life after a Shareholder Pay'Strike': Consequences for ASX-Listed Firms. Friedman, A.L. and Miles, S., 2006. Stakeholders: Theory and practice. Oxford University Press on Demand. Monem, R. and Ng, C., 2013. Australia’s ‘two-strikes’ rule and the pay-performance link: Are shareholders judicious?. Journal of Contemporary Accounting & Economics, 9(2), pp.237-254. Niap, D.T.F., 2013. CEO remuneration: Australian evidence of the influence of reputation, performance and governance (Doctoral dissertation, RMIT University). Rampling, P.N. and Eddie, I.A., 2016. Australian CEO Remuneration and Firm Financial Performance in Australia after the GFC. Available at SSRN 2722243. Safari, M., Cooper, B.J. and Dellaportas, S., 2016. The influence of remuneration structures on financial reporting quality: evidence from Australia. Australian Accounting Review, 26(1), pp.66-75. Schultz, E., Tian, G.Y. and Twite, G., 2013. Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), pp.447-472. Staude, S., 2015. Comparative Corporate Governance and Executive Remuneration. GRIN Verlag. Tang, T., 2015. The Two Strikes Rule on Executive Pay. Felix Qui Potuit Rerum Cognoscere Causas, 11, p.125. Read More