Group Report: The match between Practice and Research in measuring performance
Subject Learning Outcomes (LOs) assessed (from Subject Outline):
a) Analyse the roles of cost and management in organisations through the analysis of accounting concepts and tools
b) Evaluate and apply financial and non-financial performance measures and tools used in assessing and rewarding individual and corporate performance
c) Describe how management control theory and concepts apply to organisational settings through the generation of accounting and organisational reports
A Marking Rubric is attached so you are aware of exactly how your submission will be marked.
Most of the second half of this subject focusses on how firms can measure performance and in turn, reward effort through bonus and incentive schemes, often using accounting concepts and tools (LO a) and LO b). It is important that firms have a clear understanding of what their overall corporate strategy is and set targets for performance in line with those goals and in line with the Mission and Vision Statement.
For many years public opinion supported the notion that many executives were grossly overpaid, particularly in cases where the returns to shareholders were mediocre. In some cases, negative returns were experienced while at the same time, the senior executives still claimed very large bonus payments. As society became more sensitive to such „largesse‟ by many Chief Executive Officers (CEOs) and their highest paid executives, regulations were enacted to insist on more transparency from company boards to show what objective methods were being used to calculate bonuses and demonstrate how these methods, and the remuneration made to these well-paid executives, were likely to bring strong „value‟ returns for shareholders.
Public companies in Australia are now obliged to reveal details of how their senior executive team‟s remuneration has been determined. Each public company‟s Board must form a „Remuneration Committee‟ (some companies may use different names for this committee) and generally the members consist of at least two non-executive members of the Company‟s Board plus the Chairperson. (Each student should check the composition of the committee relevant to their selected company and briefly report the details in their report in the company overview.)
The Committee‟s role is to determine and approve the methods and amounts of executive compensation including the base salary and benefits, the method of calculation and limits surrounding the Short-Term Incentives (STIs) paid and the method of calculation and limits for any Long-Term Incentives (LTIs) paid.
The details of the remuneration scheme are published in the Remuneration Report within the Annual Report for the company and then voted on by shareholders at the annual general meeting. If more than 25% of shareholders „vote down‟ (against) the remuneration plan, the Board must revise the plan and if this revised plan is still rejected by shareholders, the Board‟s position in considered „untenable‟ (unacceptable) to the shareholders and typically must resign their position.
Each member of the group is to research the annual report (and corporate website) for one major publicly listed Australian corporation. The companies will be allocated by your Tutor during the tutorial in Week 6 (following the Mid-Trimester Exam). Much of the information you require for management performance measures is likely to be found in the Remuneration Report within the selected Companies‟ Annual Report.
T118 Group assignment task specification: ACC702 PG – Managerial Accounting Page 1 of 15
Your group is to research the DETAIL of the METHODS used to calculate both the STIs and the LTIs that are proposed to be paid to the executives and also the methods that WERE used to calculate the performance pay for the prior 3 periods (years). Note that often the schemes adopted will be in place for up to 5 years, so you may only have to research the one scheme to cover the existing period and the past periods.
You MUST then RESEARCH the academic literature available on each of these methods. For example, a company may use a „(Balanced) Scorecard’ of measures which include both financial and non-financial measures. (Such as Return on Investment – Financial measure, and Net Promoter Score – Non-financial measure.)
Please note: Only ONE method for the STI calculation and ONE method for the LTI needs be considered and must include at least one NON-FINANCIAL performance measure.
You are to determine whether the literature supports the use of these measures and how successful the researchers believe them to be. In addition, examine the results of the selected company over the past 2 years (2016 and 2017) and report on whether you believe these measures are a reasonable measure of performance of their executive team, taking into consideration the returns to shareholders. (i.e. is the remuneration increasing from the STI‟s and LTI‟s paid in proportion to increases in the share price and/or profitability of the Company?)
The following is a Report Format that should be adopted by each group. More details will be given in the Week 6 briefing.
Please note: The research conducted by examining the Annual Reports of the companies MUST also be matched to research of academic articles assessing the effectiveness of Executive Remuneration schemes and methods!
Report format required:
The following format is a modification to the layout suggested in the Subject Outline.
You should follow this guide.
The REPORT component (Learning Outcome c)
Each group member is to research and write an individual summary report that includes the following:
1. Research the Academic Literature using EBSCOHOST and/or other Academic Search Engines and discover academic articles discussing methods of measuring Executive Performance. (Note in the USA, remuneration is referred to as Executive Compensation so you may wish to substitute this term in your searches.)
2. Research and discover the corporate goals of each of the companies reviewed.
(Review the Chairman and CEO‟s Statements in the Annual Report and the
Corporate Website for this information.)
3. Research and discover how the senior managers are having their performance assessed. The CEO and top 5-10 executives will usually be listed.
NOTE – DO NOT REVIEW THE REMUNERATION OF THE BOARD OF DIRECTORS OTHER THAN THE EXECUTIVE MEMBERS SUCH AS THE CEO
4. Discover the performance of the company from a shareholder‟s perspective by reviewing growth (or decline) in the company‟s share price and dividends paid. (Use a copy of the share price chart for the past 3 years)
5. Research commentary on the company‟s performance (see newspaper and other reputable financial information sources – all MUST be referenced) and document (cut
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6. Reflect and COMPARE the information given in the most recent year‟s annual reports to that given 3 years prior. You should focus on whether there is an increasing level of disclosure for your allocated company, or the same amount and/or a decline in transparency. Thoroughly report your findings and present your comparisons.
7. Your group should write up your findings AND conclude if your company is being truly transparent and if it is producing a „good‟ result for the shareholders. In essence, you are concluding whether you believe their management control systems are working
8. The GROUP should then write up a comparison (analyse, compare, AND contrast approaches) for each of the year‟s results.
9. Finally, draw conclusions on whether the company‟s performance measurement systems are producing results for the shareholders. (Note – there may be more than one conclusion, e.g. The company is producing higher share price growth, or perhaps higher brand awareness, or repairing past errors and rebuilding value or producing both better financial returns AND dividends etc.)
How to layout your report
To help you understand how to go about evaluating the Remuneration Report, I have posted an academic article by Clarkson, P., Lammerts Van Bueren, A. and Walker, J. (2006) Chief executive officer remuneration disclosure quality: corporate responses to an evolving disclosure environment Accounting and Finance, 46, pp. 771-796. Please note that you do NOT have to summarise this article (or even read all of it), however please see Table 5 on page 785 to and review the 10 items this study looked at to review the openness of the reporting of the company.
YOU MAY FIND IT VERY USEFUL TO MAKE A TABLE USING THESE 1O POINTS AS A STARTING POINT TO REVIEW YOUR COMPANY‟S REMUNERATION REPORT!
Headings and layout questions often arise and for this report, it is suggested the following headings would make the work more readable:
Executive summary – This is a ONE PAGE review of ALL the report. This should be a stand-alone document which could be read by the CEO (for example) to find out what the report was about AND what was found in conclusion.
Introduction – This is an introduction TO THE REPORT NOT an introduction to the specific company being studied. It introduces WHY the report exists, what it is examining (see the topic and tasks notes above for guidance) and how it is laid out. (Include a short summary of the aims and scope of the report in this section.)
Review of Topic and review of Literature
NOTE – THIS SECTION WILL REPRESENT UP TO 30% OF YOUR TOTAL MARK!!!
Present a summary of the literature researched on the topic of executive performance evaluation and remuneration in public companies. Creating this section allows your group to develop your knowledge on the topic to enable a better-informed consideration of the individual company‟s remuneration reports. Include a discussion on the effectiveness of control systems within companies focussing on management/executive performance and reward systems.
Company reviews – This includes the investigative report – one for each group member on their company – answering the questions about the remuneration report as required in the task requirements above.
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It is suggested that each group decide on the items they wish to subsequently compare in the next section. These should be defined as headings which are used for the company. This provides the points for comparison as well as helps organise your work in a professional and readable format.
For example, you may wish to use the following sub-headings:
1. Details for remuneration committee and its membership.
2. Allocation of Executive Remuneration (Fixed pay/STIs/LTIs)
3. Mix of performance measures used
4. (This could be used to consider the use of or weightings of Financial Performance measures such as EPS/ROI/ROE versus non-financial measures such as balanced scorecards etc.)
5. Report any changes in Executive Remuneration Reporting – 2016 versus 2017
6. Company performance (Total Shareholder Value) versus executive pay
(This could compare the change in company share price AND dividends or Earnings per Share versus executive pay – e.g. Company share price is going up and pay is coming down – or visa-versa?)
Summary of findings – Bring together the findings of the group members about the company and a discussion about how effective (or ineffective) the company‟s remuneration program appears to be in improving company performance.
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