ASX CGC and the Establishment of Remuneration Committee - Assignment Example

ASX CGC has recommended the Establishment of Remuneration Committee Name Institution Name Date Introduction Corporate governance is an integral component in determining how an organization in fulfilling the requirements of different stakeholders. Corporate governance defines how things should be done, and one of the supporting components is the Remuneration Committee. The Remuneration Committee aims at determining remuneration arrangements for strategic purposes and to allow businesses to recruit, retain, and motivate senior executives will ensure compliance with the requirements of governance and regulatory bodies. It ensures satisfaction of the shareholder's expectation and ensuring the process is consistent with the expectations of the entire employees. Different companies that are listed on the stock exchange have integrated Remuneration Committees into their management bodies. The paper discusses Remuneration Committee, the role, and responsibilities and through examples, explores whether Australian companies have embraced the recommendations. Need to have Remuneration Committee Executive compensation incorporates non-financial awards and financial compensation that is received by the executive within an organization for the services offered. It is a mixture of perquisites, benefits, stock, bonuses and salary (Blaze International Limited 2015). The entire process is premised on factoring rewards for performance, desires of the executives and organization, tax law and government regulations (Sultana, der Zahn & Mitchell, 2013). Corporate governance dictates importance of ensuring shareholders and stakeholders are well informed on the operations of the company (Azim, 2012). Numerous complaints had been launched because managers and top executives allocated themselves excessive payments (Sultana, der Zahn & Mitchell, 2013). The executives did not concentrate on the influence they contribute to the company. Some executives received salaries and other benefits while the shareholders were not earning through their investments (Blaze International Limited 2015). It forced the government and other statutory bodies to set policies that require a clear and defined remuneration (Sultana, der Zahn & Mitchell, 2013). The purpose is to ensure the stakeholders are informed on how much the management team receives as payments and the shareholders can question how the company operates relative to the pay (Rosa, Izan, & Lin, 2004). Remuneration Committee removes the conflict of interests especially the executive employees (BHP Billiton 2015). The executive employees make the final decision in companies and presence of Remuneration Committees aims to champion transparency (Tao & Hutchinson, 2013). The executive management sometimes incorporates remuneration consultants and determining which company to apply and which company is better (Sultana, der Zahn & Mitchell, 2013). At the same time, the remuneration consultants aids in drafting the remuneration scale and how other employees should be compensated (Blaze International Limited 2015). Therefore, remuneration committee are crucial towards drafting a conclusive agreement among the employees and the shareholders can easily peruse through the annual reports and have an idea the compensation of employees (Rosa, Izan, & Lin, 2004). Roles of Remuneration Committee The Remuneration Committee is important in maintaining governs through reviewing and making recommendations to the Management Board in the determination of policies and remuneration packages (Tao & Hutchinson, 2013). These packages are given to senior executives, Chief Executive Officer, the Managing Director, Directors and Chairman (Rosa, Izan, & Lin, 2004). For example, the Remuneration Committee advices also Tabcorp Group’s when it comes to remuneration policies and practices that include conditions and terms of any employee option schemes and ownership, termination and retirement entitlements, superannuation entitlements, and incentive performance packages (BHP Billiton 2015). This illustrates the important of the Remuneration Committee in creating a standardized policy of determining wages and other important components that balance the operations of a company (Sultana, der Zahn & Mitchell, 2013). Analyzing and determining the participation of executives in incentives plans that includes share and option plans. Directors across the world have been determining their share and options plan without considering the impact of their decisions in the way the business should operate (Rosa, Izan, & Lin, 2004). It may be claimed as a greedy approach, and specific committee should be in place to determine options for ensuring a balanced approach is achieved (Sultana, der Zahn & Mitchell, 2013). Gender is an integral component in today’s workplace environment. The Remuneration Committee recommends type and estimate of remunerations based on gender (Blaze International Limited 2015). Gender diversity and ensuring gender sensitivity are crucial in developing a workplace that is diverse. In a workplace, different tasks are given to different persons based on knowledge, experience and capability of accomplishing the defined duties (Sultana, der Zahn & Mitchell, 2013). Some tasks require males while others require females, and it is prudent to ensure gender requirements are addressed conclusively (Tao & Hutchinson, 2013). The Remuneration Committee balances the requirements of gender relative to the expectations of the company (BHP Billiton 2015). In the utilization of market benchmarks, the Remuneration Committee determines and defines Chief Executive Officer and Managing Director and recommends to the board. In any business, benchmarks are important to determine the appropriate decision (Tao & Hutchinson, 2013). In employment, compensation benchmarks allow attracting, retaining and motivating the employees since the employees tend to compare compensation. Remuneration is among important motivational component, and the Remuneration Committee utilizes benchmarks in advising the board of directors (Rosa, Izan, & Lin, 2004). The Remuneration Committee also plays an important role in the preparation of annual Remuneration Report (Blaze International Limited 2015). Annual remuneration report highlights and defines how employees are compensated for their work. It defines the management benefits and also other staff benefits (Sultana, der Zahn & Mitchell, 2013). In addition, it is important since the shareholders would just check and understand amounts allocated to each sector. For this reason, the Remuneration Committee is responsible for developing policies and regulations that guide forming and creating structures that are beneficial to all the stakeholders (BHP Billiton 2015). Responsibilities of Remuneration Committee Compensation is an important component in the business environment. The better the compensation, the more a company can attract talented human resource, be able to retain and to motivate them (Rosa, Izan, & Lin, 2004). The following are some of the responsibilities of Remuneration Committee: Define remuneration principles and philosophy in ensuring the Board acts accordingly when it comes to compensation (Rosa, Izan, & Lin, 2004). The committee also defines the philosophy based on the long-term interests, values, objectives and business strategy (Tao & Hutchinson, 2013). These philosophy and principles are annually reviewed to integrate with changes in the business environment (Blaze International Limited 2015). To determine and approve roles that can be viewed as Remuneration Code Staff based on well-defined regulations and rules, to accept these roles and to ensure the defined Code Staff are maintained and proposal who these records would be reviewed and frequency of the review (Rosa, Izan, & Lin, 2004). A board has risk limits and is important to review the remuneration practices frequently to ensure it balances with the risk taking capability of the company (BHP Billiton 2015). The decisions would also be premised on internal control framework and risk management factoring into consideration the requirements of fund investors, shareholders long term interests and other expectations from different stakeholders (Tao & Hutchinson, 2013). Each organization should have defined annual objectives. Approval of recommendation and review should be transparent, and the executive committee members should not be involved in determining, discussing and approving annual objectives (Rosa, Izan, & Lin, 2004). Therefore, the compensation structure should have definite goals and objectives that should be achieved to enable fair compensation (Sultana, der Zahn & Mitchell, 2013). Remuneration consultants advice on how remuneration based requirements should be accomplished (Sultana, der Zahn & Mitchell, 2013). The Remuneration Committee should draft the guidelines on how the remuneration consultants would operate and what information should be contained in the remuneration policy based on benchmarks and other comparable companies (Tao & Hutchinson, 2013). External consultants are important because they are able to advice the company and propose ideas that are crucial to solving remunerations based complications (Rosa, Izan, & Lin, 2004). The Remunerations Committee also should allocate appropriate resources, which includes induction on appointment, provision of different types of updates and creating an environment of continuous development (Rosa, Izan, & Lin, 2004). It includes development of expertise, skills and knowledge that allows the employees to discharge their duties effectively (Sultana, der Zahn & Mitchell, 2013). Biggest Companies Many companies understand the importance of corporate governance and aim to integrate any policy directive in the way it operates its businesses. Recommendations from ASX CGC are crucial since it provides mechanisms for stakeholder requirements are managed effectively (Blaze International Limited 2015). The Remuneration Committee directive from ASX CGC aims to protect shareholders and other employees from wages and salary related abuses. The following are review of some companies to determine whether the larger companies have integrated the directive into their business model. Blaze International Limited has a definite structure that guides the way remuneration is calculated. The company has Board members, and the company argues that since their activities are few, it is not prudent to have a remuneration committee. In addition, all Directors are Non-Executive Directors and all the benefits to them are defined in the Directors’ Report (Blaze International Limited, 2015). BHP Billiton – the company has defined a Remuneration Committee whose Chairman is Carolyn Hewson as of 1st January 2015. Since 2003, Sir John Buchanan was the Chairman and was able to formulate Long Term Incentive Plan that took five years to actualize. The aim of the plan was to ensure the interests of the employees and shareholder are factored into consideration. The Remuneration Committee continues to ensure interests of managerial level employees are managed effectively. Commonwealth Bank of Australia – the Board of Directors, established the Remuneration Committee that assists the Board in determining remuneration at the Bank relative to the requirements of regulators and shareholders. The Remuneration Committee determines the remuneration of top managerial employees and defines the remuneration structure and policy for the bank (Commonwealth Bank of Australia, 2015). In addition, the Commonwealth Bank of Australia Remuneration Committee recommends on remuneration arrangements for Internal Control, Finance, and Risk Personnel. In addition, it manages remunerations for entities that are regulated by Australian Prudential Regulation Authority (APRA) and may delegate some of their activities to other committees in the organization. The Westpac Group – The Westpac Group has a Board Remuneration Committee that helps the Board of Directors in over-sighting shareholders requirements and creates of remuneration practices and policies that reward employees and other individuals (The Westpac Group, 2015). It rewards based on the highest standards of governance, risk management framework and the factoring performance in the determination of remuneration. It also manages the activities of entities that are managed by APRA. Rio Tinto – The responsibilities of Rio Tinto Remuneration Committee include determination of remuneration policies and structure and assessing the cost of the remuneration. Some of the members of the committees include Paul, Tellier, Mike Fitzpatrick, Jan d Plessis and John Varley. The Committee determines the conditions of the pay and also ensures there is a balance between executive remuneration and employee remuneration policies. In addition, Rio Tinto seeks independent advice from consultants (Rio Tinto, 2015). For example, in 2012, Deloitte LLP advised the company on remuneration policies since the recommendations were not premised on internal influence. Different companies have integrated the recommendations in the way it operates with clearly defined persons managing the committee (Rosa, Izan, & Lin, 2004). The aim of the committee is similar in most of the study companies. For example, the Remuneration Committee advices and creates a proposal so that the Board makes appropriate decisions when it comes to salary, wages and other forms of compensation (Sultana, der Zahn & Mitchell, 2013). However, the smaller companies such as the Blaze International Limited have said that span of the business environment is small. Further, the board is made up of few directors (Tao & Hutchinson, 2013). It proposes in the near future as the business expands; it will form the Remuneration Committee to advice on welfare of the employees and management (Rosa, Izan, & Lin, 2004). Conclusion Corporate governance and transparency have been integrated into the way companies are managed. ASX CGC has recommended that companies in Australia should incorporate Remuneration Committees in drafting and advising the board of governors when it comes to salaries, options and other forms of compensation. The executive management members have abused their powers, and most of their compensations are shrouded in secrecy. The Remuneration Committee determines the amounts and types of compensation and also helps in creating the annual report to show shareholders how the management is compensated. The Remuneration Committee also uses benchmark and other mechanisms in determining the appropriate salary that can motivate the employees in fulfilling operational requirements. In Australia, numerous companies have integrated Remuneration Committees into the way the companies operate. Many top or large companies have remuneration committees that advice the board of directors when it comes to compensation matters. This illustrates the urge of sustaining corporate governance and transparency in the companies. Through the Remuneration Committees, transparency has been improved, and it is easier to attract, retain and motivate employees towards making the companies become successful. However, the smaller companies have challenges in incorporating Remuneration Committee into their operations. These small companies argue that there are few executive managers, and they also lack the resources to manage another committee. This means that the ASX and other stakeholders should analyze how small companies should integrate the recommendations. It is not fair to propose some legislation, and some of the stakeholders such as the small companies do not adhere. All the stakeholders should embrace policies and recommendations based on the information contained. In general, all the companies should adhere to the recommendations and policies championed by statutory bodies. References Azim, M. I. (2012). Corporate governance mechanisms and their impact on company performance: A structural equation model analysis. Australian Journal of Management, 0312896212451032. BHP Billiton. (2015). Corporate governance underpins the way we conduct business. Retrieved from http://www.bhpbilliton.com/home/aboutus/ourcompany/Pages/governance.aspx Blaze International Limited. (2015). Corporate Governance. Retrieved from http://www.blazelimited.com.au/governance.php Commonwealth Bank of Australia. (2015). Remuneration Committee Charter. Retrieved from https://www.commbank.com.au/about-us/shareholders/pdfs/corporate-profile/Rem_Committee_Charter_Dec_2013.pdf Deloitte. (2015). Remuneration committee. Retrieved from http://www.corpgov.deloitte.com/site/au/remuneration-committees/ Rio Tinto. (2015). Remuneration committee. Retrieved from http://www.riotinto.com/annualreport2012/governance/remuneration_report.html Rosa, R. D. S., Izan, H. Y., & Lin, M. (2004). Board characteristics of Australian IPOs: An analysis in light of the ASX best practice recommendations. Australian Accounting Review, no. 14, vol. 32, pp. 25-32. Sultana, N., der Zahn, V., & Mitchell, J. L. (2013). Earnings conservatism and audit committee financial expertise. Accounting & Finance. Tao, N. B., & Hutchinson, M. (2013). Corporate governance and risk management: The role of risk management and compensation committees. Journal of Contemporary Accounting & Economics, vol. 9, no. 1, pp. 83-99. The Westpac Group. (2015). Board Remuneration Committee. Retrieved from https://www.westpac.com.au/docs/pdf/aw/ic/BRC_Charter.pdf Read More