Review of Literature
Discuss About The Control System Effectiveness Executive Performance.
The report is prepared for evaluating the remuneration and executive performance of public companies that is listed on Australian Stock exchange. Remuneration framework of company is analyzed with the objective for determining the control system effectiveness in terms of executive performance and reward system. For this purpose, a detailed analysis of literature review is conducted on the mix of performance measures that is employed by organizations. In this particular report, much required evidence is detailed on the relevance of disclosure of remuneration along with releasing of formal and explicit disclosure requirement. In this regard, the annual report of chosen company that is Healthscope is adequately evaluated concerning remuneration structure and framework. Helathscope is a company based in Melbourne, Australia that was established in year 1985 with its primary operations in the management and ownership of medicals and hospital centres (Healthscope.com.au 2018). In addition to this, company is also engaged in provision of diagnostic and other pathology services. It is a leading private healthcare provider in the country having leading pathology operations across Malaysia, Singapore and Newzealand.
In this section, analysis of literature review concerning the methods used for the computation of pay performance is demonstrated. In addition to this, the guideline and position of shareholder association of Australia on remuneration executive is also demonstrated. The relationship between the organization strategy and human resource management is increasingly identified in the report. There are two common approaches involved in the making payment for individual performance. As reviewed from literature, there is increase in merit salary popularity and there is decline in popularity of incentive pay.
Incentive pays are the incentive plans that are based on bonus payment of employees depending on their productivity at work. It is the most direct way employed by organization for creating link between performance and pay structure and it is evident that individual behaviour at workplace would be motivated by structure of incentive payment. The reason is attributable to the fact that deserving employees end up being paid more as this plan helps in attracting and selecting good performers (Adams 2017). In literature, a detailed description is provided regarding the plans of incentive pays of the counterproductive behaviours.
There some issues that is associated with the incentive plans such as maintenance cost, diversified workforce, organization culture and small group’s incentive plans. The approach of incentive pay is not adopted by several organizations because the negative impacts of the plan and maintenance cost outweighs the increase in performance by performance incentives. In some situation, incentive pay is considered as the best fit for organizations where it is possible to measure the work comprehensively and they are repetitive, simple and designed for individual. Incentive plan is associated with the management control approach and it would involve oriented management style that would stress fairness, due process and participation pay of incentives (Ahmed et al. 2015).
Methods used for computation of pay performance
Under this system, there are two types of incentive pay that has been designed and this involves long term incentive plans (LTI) and short term incentive plans (STI).
LTI are the scheme that helps in establishing relationship between overall long term performance and bonus schemes as the main focus of such plan is to focus on long term performance. Some of the plans under this scheme are based on options and stocks. Under this plan, executives are able to achieve target value for certain measure of performance, they are granted with the options or stocks and enabling organization to lower the amount of fixed costs. LTI intends to create alignment between long term objectives and interest of shareholder and executives of company. However, this particular approach of scheme comes with the drawback as employee perceives that performance is associated with reward level. This is so because such approach is confined towards higher level of executives who directly impacts the overall performance of company. Employee under such benefits scheme is not able to derive direct benefits as it creates restriction on liquidity of company (Gitman et al. 2015).
STI are the schemes where the period of performance measurement is usually one year and employees are paid in cash such as gain share, share of profit, bonus scheme and commission. The performance criteria under such scheme incorporates qualitative, non qualitative and some non financial measures. Employees are able to prioritize bottom line and become well acquainted with the profit margin under the method of profit sharing (Pickering 2017).
It is viewed by the association of Australian shareholder that incentive schemes are not properly aligned with shareholder returns and they are too often made for less than the superior performance. The guidelines advocated by the Australian association for LTI plans are as follows:
- LTI involves two components that help in improving the performance of company in long run. The progress of long term cycle is reflected across business cycle that make hurdle based on pre set and superior level of increase in company earnings. Making use of relative total shareholder return against the suitable group of comparator is another component that is vested at a maximum of 10%.
- LTI should be provided to senior executives for creation of shareholder value.
The guidelines advocated by ASA for STI plans are as follows:
- Financial performance metrics forms the basis of 50% of STI that is verified by company in area of responsibility and is based on quantifiable performance indicators.
- Equity forms the basis of 50% of STI awards are provided to executives that is regardless of whether the executives are in the same position.
The remuneration structure of Healthscope group is based on performance with the objective of recognizing and encouraging high performance in a manner that helps in aligning the long term interests of shareholders and organization as a whole. Outcome of remuneration is reflecting in the performance when the financial or non financial targets are exceeded or achieved. It is recognized by the board that it is important to ensure continuous alignment between shareholder and senior executives. Remuneration arrangement of key management personnel of Healthscope is detailed in the annual report. It is the responsibility of board to ensure that structure of remuneration is equitable and well aligned with the long term interest of stakeholders and organization. Board is further responsible for establishment of remuneration committee that provides recommendation to the board about incentive arrangements and fixed remuneration for senior executive and other executives reporting to CEO. Any major change and development in the incentive plans of employees is also recommended by the remuneration committee. The incentive plans of organization were affected in the current year because the financial performance was below target.
Incentive pay and its effectiveness
STI- The outcome of STI was reduced for participants in corporate roles and such discretion was exercised by the board. Outcome was reduced to a maximum of 40% of the target of individual regarding STI opportunity. Such decision was taken by management after accounting for a range of factors that included the financial performance of group lower than it is anticipated (Boer et al. 2017).
LTI- The two performance conditions following the testing of performance for the financial year 2015 of the performance rights of LTI that is earning per share and return to shareholder return (Leong et al. 2015).
An appropriate focus on internal and external performance was continued to be provided due to hurdles created by current dual performance. In financial year 2018, the weighting of measures will be adjusted so that equal weight age will be provided to performance measure. There is likelihood that such re weighting will help in aligning the interest of shareholders. Under the LTI plan, there will also be revision of future grants regarding the EPS target setting practice. This will have three year target for replacing current approach of cumulative annual target setting. The commitment of Healthscope remained to providing a retrospective performance disclosure against the metrics of EPS at the end of each performance period (Maas and Rosendaal 2016).
Remuneration policy of Healthscope intends to ensure that the organization has the capability of attracting and retaining suitably experienced and qualified personnel.
The above section details literature review analysis on the framework of remuneration and importance of disclosing remuneration in the annual report of organization. It also elucidates the discussion on the remuneration framework and structure of Healthscope group. According to review of literature, it can be inferred that computation of incentives are done using several methods and accordingly it helps in determining the measure of performance. Nevertheless, there are some considerable differences between the methods of computing performance pay that are used practically and those discussed in the literature. This is so because such methods take into account some realistic and market related factors impacting the structure of remuneration (Qu et al. 2016). In addition to this, such factors need to be well aligned with the performance of organization. This will help in strategizing the remuneration in line with goals and objectives of organization. From the analysis of remuneration report of Helathscope group, it is depicted that remuneration is structured through an engaging and equitable rewarding framework.
Drawbacks of incentive pay
The remuneration committee is composed of majority of independent directors who have the responsibility of conducting review of key aspects of remuneration structure and arrangements of Healthscope. During the process of developing framework of remuneration, the committee consults with other key external shareholders. Such external independent advice is sought by the committee when required that will help in guiding the informed decision making. The function of remuneration committee is to make arrangement for remuneration to non executive directors, make major development and changes in the employee incentive plans and make recommendations for incentive arrangement and fixed remuneration for senior and other executives reporting to chief executive officer (Rao et al. 2015).
The plan of STI is designed for rewarding performance and increasing focus against those areas that considerably drives the strategic initiatives of Healthscope. For senior executives, targets of STI were aligned with the approach of balance scorecard and the STI measures of CEO and CFO is based on operating net profit after tax and it does not involve non operating items that are not related to business in their usual operations. Balanced scorecard makes use of financial and non financial measure for measuring the performance. Using the scorecard at organizational level helps in providing the information by aligning the goals and performance plan of employees. For senior executives, financial targets are based on operating earnings before interest and tax. On other hand, there are some non financial measures involves goals and setting specific targets in relation to quality. The key to positive outcome of Healthscope is related with area of safety, culture and people (Healthscope.com.au 2018).
STI awards based on financial and non financial measures:
(Source: Healthscope.com.au 2018)
LTI plan on other hand is designed for aligning the shareholder interest and providing them with equity interest by way of granting performance rights and it is subjected to the achievement of dual performance conditions. There are dual performance hurdles under this particular approach that involves relative total shareholder return and earnings per share. This performance measures are indicative of the fact that organization utilize both lag and lead indicators. Measure of EPS was chosen because it has lower susceptibility to volatility of short term share price and correlation with long term return of shareholder (Healthscope.com.au 2018). The performance of ordinary shares of Helathscope is measured under relative total shareholder return against the performance of comparator group of companies. It is believed by the board that this particular measure is an appropriate hurdle as it helps in creating linkage between relative share performance of company and senior executive reward. Assessment of performance of RTSR is done independently over the performance period against the constituents of S&P ASX 100 index. Computation of EPS on other hand is done by dividing operating net profit after tax by weighted average number of shares (Healthscope.com.au 2018). Furthermore, it is believed by the board of company that such methods of assessing the performance are considered as the most appropriate way of assessing true financial performance and accordingly determining the outcome of remuneration.
Types of incentive pay – LTI and STI
Total remuneration received during financial year 2016-2017 by senior executives:
(Source: Healthscope.com.au 2018)
The financial and operational performance of company is considered as critical indicator of share value driver and performance. Remuneration outcome of senior executives and CEO is reflected in performance measure outcome of country (Riaz et al. 2015).
A comprehensive review of remuneration framework of Health scope was conducted during year 2017 that involved short as well as ling term incentive plan. It was declared in the annual report that an appropriate focus on internal and external focus is provided by hurdles of current dual performance. In financial year 2018, it is sought by the board that there will be adjustment in weighing of measures for brining equal weight age of earning per share and return to shareholder. Such re weighting intends to align the interest of shareholders
Link between company performance and LTI and STI:
(Source: Healthscope.com.au 2018)
From the analysis of remuneration structure of Healthscope group, it has been viewed that the remuneration strategy is based on ownership that provided senior management with the opportunity of receiving equity instruments as a component of long and short term remuneration. Organization has made use of financial and non financial measures for determining the performance pay. The remuneration framework for year 2017 was weighted towards at risk remuneration. A clear link has been noticed between the performance of company and outcomes of its incentive schemes for its senior executives. Remuneration of executives is also determined by performing benchmarking exercise. However, it is required on part of management of Healthscope to look at overall interaction when incorporating shareholder engagement in determining the executive’s remuneration. Since, shareholder engagement in determining remuneration of executives is regarded as essential to the good corporate governance practices; there should be considerable involvement of shareholder (Kanapathippillai et al. 2015). Furthermore, there should be well alignment between overall performance and objective of remuneration reporting framework.
Conclusion:
The above discussed paper demonstrates the comparison and analysis of methods that are used paying for performance by reviewing the annual report of Healthcsope and literature. It is illustrated from reviewing the literature that computation of performance pay is done by using various methods. It is depicted from annual report analysis of Healthscope that disclosure relating to executive of remuneration is done according to applicable regulations and legislations. Moreover, the incentive plan that is short term and long term incentive plan and its outcome reflects the performance of organization. There is adequate amount of disclosure regarding the measures of such incentive schemes. On contrary to this, the methodology of allocation of executive remuneration is not disclosed properly. Some of the changes have been brought in current year regarding the weight age of schemes plan. From the analysis, further conclusion can be drawn regarding the methods used for computing the pay performance that there is considerable difference between the computation methods of pay performance used by Healthscope and those discussed in literature. Hence, there is difference between the theoretical and practical implications of the methods used for performance pay due to the factors such as market data and other important factors.
Guidelines for LTI and STI
Reference list:
Adams, C.A., 2017. Conceptualising the contemporary corporate value creation process. Accounting, Auditing & Accountability Journal, 30(4), pp.906-931.
Ahmed, A., Ng, C. and Delaney, D., 2015. Women on corporate boards and the incidence of receiving a ‘strike’on the remuneration report. Corporate Ownership & Control, 12(4), pp.261-272.
Bartram, T., Boyle, B., Stanton, P., Sablok, G. and Burgess, J., 2015. Performance and reward practices of multinational corporations operating in Australia. Journal of Industrial Relations, 57(2), pp.210-231.
Boer, H., Berger, A., Chapman, R. and Gertsen, F. eds., 2017. CI Changes from Suggestion Box to Organisational Learning: Continuous Improvement in Europe and Australia: Continuous Improvement in Europe and Australia. Routledge.
Chen, Y. and Jermias, J., 2014. Business strategy, executive compensation and firm performance. Accounting & Finance, 54(1), pp.113-134.
Dumay, J., Frost, G. and Beck, C., 2015. Material legitimacy: blending organisational and stakeholder concerns through non-financial information disclosures. Journal of Accounting & Organizational Change, 11(1), pp.2-23.
Duong, L. and Evans, J., 2015. CFO compensation: Evidence from Australia. Pacific-Basin Finance Journal, 35, pp.425-443.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Healthscope.com.au. (2018). [online] Available at: https://healthscope.com.au/application/files/3715/0344/5418/HS_Annual%20Report%20FY17_v15_FA_low.pdf [Accessed 14 May 2018].
Kanapathippillai, S., Johl, S.K. and Wines, G., 2016. Remuneration committee effectiveness and narrative remuneration disclosure. Pacific-Basin finance journal, 40, pp.384-402.
Leong, M.S.W., Paramasivam, A., Sundarasen, S. and Rajagopalan, U., 2015. Board Composition and Companies’ Performance: Does Political Affiliation Moderate the Relationship?. International Journal of Business and Management, 10(10), p.216.
Maas, K. and Rosendaal, S., 2016. Sustainability targets in executive remuneration: Targets, time frame, country and sector specification. Business Strategy and the Environment, 25(6), pp.390-401.
Moriarty, R., 2018. Asic highlights the importance of annual general meetings and recent trends in corporate governance. Governance Directions, 70(2), p.77
Ndayisaba, G. and Ahmed, A., 2015. CEO remuneration, board composition and firm performance: Empirical evidence from Australian listed companies. Corporate Ownership and Control, 13(1), pp.534-552.
Pickering, M.E., 2017. Strategic decision making in publicly traded professional service companies: an exploration of senior professional participation in acquisition decision processes. Journal of Professions and Organization, 4(2), pp.179-202.
Qu, X., Percy, M., Stewart, J. and Hu, F., 2016. Executive stock option vesting conditions, corporate governance and CEO attributes: evidence from Australia. Accounting & Finance.
Rao, K. and Tilt, C., 2015, November. Board Diversity and CSR Reporting: Australian Evidence. In A-CSEAR 2015-Proceedings of the 14th Australasian Centre on Social and Environmental Accounting Research Conference: A-CSEAR 2015 (p. 116). Academic Conferences and publishing limited.
Riaz, Z., Ray, S. and Ray, P.K., 2015. Collibration as an alternative regulatory mechanism to govern the disclosure of director and executive remuneration in Australia. International Journal of Corporate Governance, 6(2-4), pp.241-274.
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.
Shamsabadi, H.A., Min, B.S. and Chung, R., 2016. Corporate governance and dividend strategy: lessons from Australia. International Journal of Managerial Finance, 12(5), pp.583-610.
Swan, P.L., 2016. Mandated divorce: company boards, incentives and performance.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
