Review Of Executive Pay And Remuneration: Evidence From JB Hi-Fi

Review of prior Literature on Remuneration Report

The current study reviews the prior literature that is available for executive payments and remuneration and simultaneously present valid arguments for utilizing both financial as well as non financial dimensions of performance. Moving further, the study elucidates in detail different aspects of the remuneration report with special reference to the operations of the corporation JB Hi-Fi. This study analytically reviews the remuneration report and examines the use of different benchmarking that is used in the report for enumeration of the performance. Furthermore, the study also investigates and at the same time assesses diverse aspects of mechanisms used as performance dimensions. Also, different reports presented by media are also taken into consideration that illustrates the public discussions about the remuneration system of the selected company.

The current study analyses the prior themes on remuneration to analyse the payment or in other words compensation that is necessarily accepted for various services for employment. Essentially, then current topic also includes analytical review of the base salary along with other bonuses otherwise economic advantages that a specific employee accepts during their period of employment. 

Evaluation of remuneration report presented in pronouncement of the declaration reflects that the performance of each division of the business is evaluated and measured with special reference to the ways in which risks are handled. Furthermore, the results are also anticipated to exert influence on remuneration outcomes of workforce. The board intends to remunerate properly by suitable reward, incentivise and hold on to important employees (Braun et al. 2014). Essentially, the board also attains this by establishing competitive packages of remuneration that consists of a amalgamation of both fixed remuneration along with both short along with long term schemes of incentives.

As rightly indicated by Braun et al. (2014), conformation with the remuneration principle issued mainly by the Australian Securities Exchange (ASX) is anticipated to enhance overall quality of the financial reporting. As suggested by Edmonds et al. (2016), Greenbuy essentially chaired a committee on remuneration of directors and he stressed on the directives for the purpose of determination of remuneration of directors particularly in the structure of “code of best practices” again subdivided into four other types namely committee of remuneration, disclosures as well as provisions of approval, policy of remuneration along with service agreement and compensation. Thus, it can be hereby suggested to establish a committee of remuneration of mainly non-executive directors. Ferrier (2014) recommends that committee has the need to report on policy of remuneration counting criteria of performance, pensions, service agreements, fees for mainly severance to particularly the shareholders. As rightly indicated by Ferrier (2014), there are important factors related to the sub-committee of the board particularly audit, committee for both remuneration as well as nomination as per results of study conducted on 361 Australian firms. In this case, size of company, size of the board as well as shareholders is considered as control variables. As per the findings of the study, the nomination committee is said to be related to the assessors, financiers, directors and is associated to board size as well as leverage. As correctly recommended by Forbes and Hodgkinson (2015), there exists a linkage between the turnover of the CEO and the performance of the corporations asserted based on the findings of 1200 firms. As per the results of this study, it can be hereby concluded that CEOs of various emerging market corporations are more likely to lose jobs at the time when performance was necessarily below expectations, reflecting that the corporate governance was effectual in diverse emerging markets.

Company Review

Assessment of the performance of the CEO reveals that performance of CEO is analysed by essentially the Chair and there is ultimate oversight provided by the board. Particularly, this includes review against measures that are both financial as well as non-financial in nature.  In essence, all other executives of the entire group are analysed by the CEO of the group that includes analysis against dimensions against financial as well as non-financial performance, one to one conference between CEO of the group and executive to analyse the performance of the executive. Again, the total amount of remuneration includes monetary as well as non-monetary aspects for the company’s executives. Essentially, the executives of the corporation who possessed the power along with accountability for carrying out planning, directing as well as controlling the actions of the entire group also set the principles that are behind the establishment of the remuneration (Fu et al. 2015). Furthermore, as per the annual pronouncement of the firm it can be hereby mentioned that performance disciplines are calculated by examination of management of firm’s capital that again aids in delivering tough, steady together with sustainable base of capital upon which the business can develop.

JB Hi-Fi is well known Australian and New Zealand based retailer that markets consumer goods, that specialises in particularly products such as video games, DVDs as well as CDs, electronics mainly hardware, Blu-rays, along with diverse electrical piece of equipment for home. Essentially, JB Hi-Fi can be considered as one of the fastest developing and most flourishing retail businesses. 

Analysis of remuneration report of firm JB HI-FI

Detailed evaluation of remuneration report of the firm JB HI-FI reflects that the remuneration stratagem of the corporation is formulated to attract and simultaneously retain qualified as well as practised members of the board and remunerate suitably. Analysis of remuneration policy of JB HI-FI reveals the fact that the remuneration policy of the entire group upholds the vision along with stratagem by means of developing designs and administration of remuneration to adjust to customer’s interests and shareholders (Edmonds et al. 2016). The board of the company JB HI-FI has instituted a remuneration committee that is mainly charged with assessing and providing suggestions to the board as regards the framework, structure as well as quantum of particularly remuneration of firm’s executive officers along with non-executive directors (Weygandt et al. 2015) 

Analysis of the annual assertion of the firm helps in understanding the fact that the directors of the firm are accountable for both preparation as well as presentation of the remuneration report as per the regulations stipulated under section 30 A of the Corporations Act of the year 2001. In essence, the remuneration report of JB Hi Fi is said to conform to the regulations og the directives 30A of the Corporation Act of the year 2001 (Jbhifi.com.au 2018).

Summary of findings

In JB HI-FI both the board along with the remuneration committee of the corporation recognizes both quantitative processes as well as qualitative processes for analysis of performance. The snapshot of the remuneration framework analysed shows use of record revenue, earnings before interest and tax (EBIT) and earnings per share (EPS) as parameters of measurement (Malhotra 2015). The annual report clearly explains the association between financial performance and remuneration. The annual pronouncement mentions that executive remuneration of the firm JB HI-FI is directly associated to the group’s performance by means of links of majority of both short as well as long term incentives to specific financial dimensions

The non-financial measures/dimensions are also said to affect the remuneration policy of the firm. Non financial dimensions also have numerous benefits when compared to the financial dimensions (Jbhifi.com.au 2018). Essentially, high performance on specifically diverse non-financial measures is said to be positively associated to the upcoming future performance of the firm. Similarly, in this way, it can be said that non-financial measures can instigate the chief executive of the firm to undertake string actions that can favourably affect the firm during the long term (Fu et al. 2015). Again, non-financial dimension lessen the overall management of earnings. Essentially, there are diverse determinants that affect the overall type of performance dimensions and this are included in the compensation agreement of the corporation.

-Succession planning as well as team development

-Investor associations

-Strategic schemes

-Internal procedure enhancements

-Inventory management

-Portfolio of property

-Reduction in control (Safari et al.  2016)

-Online schemes

-Expenditure control procedures and programs

-Health and safety in the workplace

-Risk management

-Internal as well as external engagement on important initiatives 

Public Discussion regarding remuneration of the pertinent executives

A news article published by the Financial Review during August 2017 reveals that the retailing giant JB Hi Fi intends to develop sales as well as earnings by over and above 20% in the year 2018 in spite of increase in the investments in staff along with e-commerce  plus technology for shielding the future of business. It is observed that the group sales of the firm is expected to increase by approximately 21% to around $6.8 million, underpinned by around 6% growth in sales and sales from particularly the acquirement of “The Good Guys” (Financial Review 2018).

Presenting a 36% increase in the firm’s underlying profit to around $208 million during the year 2017, the toughest and the best rate of growth as compared to the past eight years. However, the chief executive of the firm issued no guidance for profit for the firm for the year 2018 (Financial Review 2018).  Nevertheless, based on alterations in the remuneration strategies of the firm JB Hi Fi statutory earning needs to grow by (23% -34%) for particularly senior executives of the corporation in a bid to attain short term incentives. Regardless of the strong outlook, the share prices of the firm decreased by approximately 4% to around $24.41 (Financial Review 2018).

Again, as per a news article published by “The Australian” during July 2017 reflects the fact that the management of the firm JB Hi Fi has defied to pass on the mandate passed by the Fair Work Commission (FWC) regarding the penalty rate cut. The management of the firm has arrived at this decision of refusing to pass the mandate for boosting the workers of the firm. Again, this can help in fostering boost in earnings by around 10%. Further, following the social media posts by the company JB Hi Fi, the announcement regarding the refusal of the penalty rate cut for the employees was confirmed (Kitney et al. 2018). The management of the firm asserted that “people” form the most important asset of the customer facing firm as these people reflect the brand of the company and provide competitive edge to the corporation. As told to “The Australian”, the leadership team of the firm considered the potential influence of the decision of the Fair Work Commission on the entire group as well as then people (Kitney et al. 2018). Based on their analysis, the leadership team of the firm decided to arrive at the decision of maintaining the current pay as well as present conditions of the subsisting team members for gaining the best outcome. However, the decision made by the management of the firm JB Hi Fi was supported by the federal government while opposed vehemently by the Labor (Kitney et al. 2018).

As per the annual report of the firm JB HI-FI, the board considers that the executive remuneration has the need to be fair and at the same time reasonable, effectually structured for attracting, motivating, retaining as well as rewarding firm’s valued executives. In addition to this, the remuneration policy also has the need to be produce shareholder value. The remuneration committee carries out a yearly assessment of various remuneration packages of all the executives of the group and presents recommendations to the board. Remuneration packages are assessed with orientation to performance and remuneration data (Riaz et al. 2015). Essentially, remuneration committee also takes into consideration various market conventions as regards divisions between fixed along with long term as well as short term components of incentive (Jbhifi.com.au 2018).

The number of shares that is granted to the firm’s executives is necessarily enumerated based on the volume weighted mean share price for the shares of the company in necessarily ten days after the release of the firm’s results to the ASX (Ferrier 2014).  

 

Table: Remuneration Structure

(Source: Jbhifi.com.au 2018)

Analysis of the remuneration report replicates the fact that the fixed remuneration is essentially paid based on base salary, allowances for motor vehicles as well as superannuation. This section states that no component of fixed remuneration is reliant on conditions of circumstances (Grosse et al. 2015).

Short term incentive:

The short term incentive acquired by the group reflects an enhancement in the deferred component so that the executive accepts 80% of the financial year short term incentive (STI) and they are entitled in cash, and the rest 20% in particularly shares are subject to limitation on sale for a period of 1 year after issuance (Jbhifi.com.au 2018). Essentially, the management of the firm sets that the achievement of STI is necessarily subject to both financial as well as non-financial conditions of performance (Salvioni and Bosetti 2015).

Quantitative components:

Fundamentally, there are quantitative components of the STI of company’s executives. The statutory EBIT of the firm is used as a metric of performance that is related to the short term incentive of the firm (Forbes and Hodgkinson 2015). As such, as per the annual report of the corporation EBIT in case if JB HI-FI was over and above statutory EBIT of the firm recorded during the financial year 2016, the short term incentive can be said to be applicable. However, it can be further added that no part/fraction of the STI will be disbursed by the company in case if the statutory EBIT was recorded to be the same as lesser than the registered amount of the financial year 2016. Again, in case if the statutory EBIT of the firm is equal to surpasses approximately 110% of the statutory EBIT, then in that case 100% of the STI is disbursed by the corporation (Jbhifi.com.au 2018). 

Thus, it can be hereby mentioned that the yearly growth in the EBIT can be regarded by the corporation as the most pertinent dimension of the financial performance of the entire group. This is because it can be regarded as the most important input that can drive and at the same time enhance the value of the shareholders. Thus, it is said to be influenced by the entire team of executives of the firm. In addition to this, these components of STI were enumerated against individual quantitative criteria sanctioned by the remuneration committee that associated specific factors of the business over which the group had considerable influence (Ferrier 2014).

Qualitative components:

There are important qualitative components of the short term incentive that are enumerated as against specific qualitative criteria sanctioned by the remuneration committee as well as board (Forbes and Hodgkinson 2015). This is associated to business over which the pertinent group executive had important influence.

The table presented below also helps in understanding the qualitative bonuses for individual as well as group performances. There are factors that are regarded as dimensions for enumeration of performance of the firm for calculation of quantitative bonuses especially for both individual performances. The factor for quantitative bonus for group performance mainly includes EBIT (Jbhifi.com.au 2018). Again, the quantitative bonus for individual performance include inventory/gross margin, cost of undertaking business, commercial or else online or supply chain, online, diverse operating metrics of store and IT.

 

Table: STI that is made available by executive of JB Hi Fi

(Source: Jbhifi.com.au 2018)

Analysis of the report also replicates the fact that performance of the executive is enumerated as against the applicable targets :

 

Table: Performance of executives of JB Hi Fi

(Source: Jbhifi.com.au 2018)

Thus, it can be hereby again mentioned that during the year FY17 100% of the available short term incentives were disbursed to the firm’s executives since the period of 2009 and represents strong performance of the corporation.

Long Term Incentive Plan

Analysis of the annual report of the firm reveals that earnings per share (EPS) based performance metric is used for long term incentive scheme of the firm. In essence, the options that are necessarily granted to different executives before financial year 2017 get vested during the financial year 2017. In itself, the board of the corporation takes into consideration equity performance that is associated remuneration framework that is effective in aligning overall long term performance of the corporation (Forbes and Hodgkinson 2015).

Analytical evaluation of the annual declaration of the firm reveals the fact that executive remuneration of the entire group is directly associated to the group performance by means of linking of majority of both short as well as long term incentives to specific financial measures as illustrated in the report. The financial performance of the group that is summarised in the table below is associated to the performance of the group while the alignment of the remuneration of the executive to the group’s performance is presented in the graph below.

 

Table: Financial Performance

(Source: Jbhifi.com.au 2018)

The graph below illustrates the association between executive remuneration of the group and the earnings per share of the firm over the past 5 years. The graphical representation shows a high correlation of the entire group’s executive remuneration with performance of the firm.

 

Table: Executive Remuneration and JB Hi Fi’s EPS

(Source: Jbhifi.com.au 2018)

The above graph shows that the EPS of the firm has consistently increased during the period 2013 to 2017. However the remuneration of the firm consisting of (fixed part, LTI and STI) has also increased during the financial year 2017 in comparison to the previous year period.  

Analysis of the compensation of the key management personnel reveals the fact that compensation consists of short term benefits for employees, post employment benefits as well as share based payments. Again, the short term benefits can be subdivided into salaries as well as fees, bonuses along with others (Safari et al. 2016). The table below shows the aggregate compensation of the firm’s key management personnel:

 

Table: Aggregate compensation of the firm’s key management personnel

(Source: Jbhifi.com.au 2018)

 

Table: Compensation of the firm’s key management personnel

(Source: Jbhifi.com.au 2018)

Analysis of the report reflects that as per the Accounting Standards, firm’s remuneration consists of amortisation of particularly fair value of share options that are mainly issued under the share option scheme of the group that are anticipated to vest. This is considered after deducting any write back specifically on options lapsed or else anticipated to lapse owing to actual or anticipated performance as measured against different non-market hurdles (Safari et al. 2016).

The company uses EBIT as well as EPS as financial dimensions of the performance. It can be seen that the remuneration mix of the company is somewhat skewed to the structure of variable payment. Essentially, the management of the firm can consider variation in the remuneration framework that essentially can be utilized for the purpose of delivering remuneration. Again, the fixed remuneration of the company also does not show various factors such as experience of the professional. Therefore, the management of the corporation might consider inclusion of factors such as experience in the dimensions of measurement of performance.

Conclusion

The above study helps in gaining clear understanding regarding remuneration report from the analysed prior literature on the same developed by various scholars. The study also provides clear insight regarding the remuneration report of the firm JB Hi-Fi with special emphasis on the different financial as well as non-financial measures that are used by the company for enumeration of performance and the associated pays. Also, the public discussion is also analysed from the media reports of the Financial Review and The Australian lto analyse the system of remuneration that is used by the management of the company. 

References

Braun, K.W., Tietz, W.M., Harrison, W.T., Bamber, L.S. and Horngren, C.T., 2014. Managerial accounting. Pearson.

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.

Ferrier, N., 2014. Remuneration reporting. Australian Insolvency Journal, 26(4), p.14.

Financial Review. 2018. JB Hi-Fi underlying profit up 36.5pc to $207.7m. [online] Available at: https://www.afr.com/business/retail/jb-hifi-underlying-profit-up-365-pct-to-2077-m-20170809-gxsjxx [Accessed 19 Jan. 2018].

Forbes, W. and Hodgkinson, L., 2015. Executive Remuneration. In Corporate Governance in the United Kingdom: Past, Present and Future (pp. 34-40). Palgrave Pivot, London.

Fu, Y., Carson, E. and Simnett, R., 2015. Transparency report disclosure by Australian audit firms and opportunities for research. Managerial Auditing Journal, 30(8/9), pp.870-910.

Grosse, M., Kean, S. and Scott, T., 2015. Shareholder say on pay and CEO compensation: three strikes and the board is out. Accounting & Finance.

Jbhifi.com.au. 2018. JB Hi-Fi | JB Hi-Fi – Australia’s Largest Home Entertainment Retailer. [online] Available at: https://www.jbhifi.com.au [Accessed 19 Jan. 2018].

Kitney, D., Greenblat, E., Kitney, D. and Greenblat, E. 2018. Staff worth penalties: JB Hi-Fi. [online] Theaustralian.com.au. Available at: https://www.theaustralian.com.au/national-affairs/industrial-relations/our-people-are-worth-the-penalty-rates-jb-hifi-defiant/news-story/4781106a0052df113c33573146d3f94a [Accessed 19 Jan. 2018].

Malhotra, A.K., 2015. VISTA: An Integrated Teaching Model for Managerial Accounting. Asian Journal of Research in Business Economics and Management, 5(6), pp.36-43.

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.

Salvioni, D.M. and Bosetti, L., 2015. Corporate governance report and stakeholder view.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.