Executive Remuneration And Performance Measurement: A Study Of Macquarie Group

Discussion

Executive remuneration has long been in the public spotlight for a long period of time. It has again grabbed the public headlines due to the recent upsurge in the pay packets of the Australian CEOs. It has been reported that the Australian CEOs are now earning a mammoth 78 times more than any Australian worker or employee for that matter. On the other hand, going by the same statistics, it could be seen that on the other hand, an average Australian earns a paltry $0.86 dollars. Australia’s top executives today earn on an average of 4.75 million dollars or as mentioned above 78 times as an average Australian worker.  Moreover, the earnings of the CEOs have notched up higher to a staggering 46 percent faster than any typical worker’s income. These differences have been compiled from the noted Corporate advisor Conrad Liveris, who has examined the examined the income of executives of top hundred Australian companies. Such high remuneration is completely uncalled for in current times of financial turmoil and fiscal crunch (Sarasa, Dufo  and Agustín, 2013). This report aims to delve into the remuneration reports of Macquarie Group of Companies. This report would investigate the causes of such high remuneration of executives, the kind of measures used to assess this high remuneration, performance measures adopted by the company including the analysis of the methods of determining both the Short term Incentives (STI) as well as the Long term Incentives (LTI) for the company. This would help in throwing a substantial amount of light upon the arena of executive remuneration in the Australian economy.

The ability to inspire the organisation’s troops into the bold landscapes of the future makes a CEO great, but how does anyone measure the CEO’s performance in this regard. There are a variety of measuring the performance of CEOs. It is by quantifying their performances. In the 1980’s in America, the way of evaluating a CEO’s performances lay in his ability to meet the consensus quarterly earnings set by the Wall Street Stock analysts. If they missed the targets, it would conclude that a CEO was underperforming (Fortune, 2018). Later it analysed that this procedure of measuring quarterly earnings took up huge amount of time, so a new method was brought up to measure executive performances, which came to be known as the ‘Balance Score Card’. It was developed in the early 1990s by Harvard business school professor Robert Kaplan. The main idea here was the recognition of employee motivation and customer satisfaction and other such less tangible factors, on which executives performances depended. An example has been provided below:

There are four perspectives provided here, on the basis of which Executive performance and remuneration can be fixed. It takes into account the non-tangible factors such as customer satisfaction, internal organisation processes as well as financial perspectives as well in order to assess the true quality of executive performance.  Here some hypothetical figures have been provided in order to create a feel of the actual score cards of executives.

Review of recent studies and reports regarding executive remuneration

Hay Group’s most recent study about executive remuneration reveals certain measures which could be used as a true indicator of any executive’s performance. In today’s world, activists of investors and active shareholders prefer the use of short term and quantifying metric measures for executive performance measures. As they believe in numbers. Despite a renewed vigour in quantifying performance, the study revealed the following:

• Further focus must be shown on increasing formal reviews.
• Reviewing the metrics involved
• Incorporating feedback sessions

The board of directors as well as the remuneration board committee of Macquari have thoroughly reviewed the group’s remuneration framework. In evaluating the remuneration policies, the board takes into account the following factors:

• Return to the shareholders
• Balancing of short term and long term incentives
• Employment environment
• Market situation and developments
• Shareholders’ feedback

The composition of the remuneration committee is wide and diverse in nature and its main objective is to assist the Macquarie board in framing correct remuneration policies and practices. The board currently consists of five non-executive directors, who are:

• Michael Hawker (Chairman)
• Gary Banks
• Gordon Cairns
• Diane Grady
• Peter Warne

The committee have the required experience in the field of human resource, remuneration and risk programmes, which makes them a perfect fit for the job. Their main responsibility includes paying minute attention to the creation and implementation of the remuneration practices of the company.

The executive remuneration includes a wide range of incentives in addition to fixed salaries. They have been diagrammatically mentioned below:

The company mainly provides five kinds of performance measures tools which are as follows:

• Net Profit After Tax
• Basic Earnings per share.
• Ordinary Dividends
• Return on Equity
• Annual Total Shareholder Return.

Non- financial performance measures are very frequently used nowadays for performance evaluation, some of the widely used are balance score card in this area. These non-monetary performance measures such as customer service, loyalty and satisfaction, quality of product are important in cases where, monetary market figures are not readily available. The main problem faced by the board is the linking of non-financial performance measures with the accounting performance data. In this case, the quantifying performance measures in the market, such as EPS, TSR, and NPAT are more transparent form of assessing the performance of the executives working in the companies (Blerck and George, 2013). In terms of ROI, it has significantly improved in case of Macquarie, from 14.7% to 15.2 % in 2017 (Static.macquarie.com, 2018). The total shareholder return of Macquarie has also been growing at a strong rate and has outperformed even the Working Capital Index, presently it stands at 700, when compared to the WCI’s 150. Thus, it forms a better, transparent medium of assessing the executive’s performances, when compared to non-financial measures such as product quality and customer satisfaction.

Recent changes in the Executive remuneration reporting between 2016 and 2017:

There have been no recent changes in the remuneration structure of Macquarie group, the remuneration structure which was followed in 2016, was also adopted in the fiscal year of 2017. The basic structure has remained the same, the details have been provided below. Macquarie’s remuneration structure primarily involves three basic components, which are:

• The fixed remuneration.
• Profit share
• PSUs, specially for executive committee members

The structure involved determination of fixed remuneration, performance based remuneration involved determination of profit share pool and performance share units. Determination of performance awards and other performance measures have also remained uniform throughout the two year period.

Performance measures	2016	2017	Percentage increase or decrease
Net profit after tax	2063 million dollars	2217 million dollars	7%
Basic Earnings per share	619.2 cents/share	657.6 cents/share	6%
Ordinary dividends	400 cents/share	470 cents/share	18%
Return on Equity	14.7%	15.2%	3%

The company has a comprehensive remuneration system in place for smooth and effective implementation of the remuneration policies of the company. The remuneration governance of the company is one of the most effective ones, in the entire industry. Macquarie has set up a separate board and committee for looking into the remuneration policies of the company. The major foundation upon which the entire remuneration policies and practices is based on the system of performance based remuneration. It can be seen from the remuneration reports of the company, that Macquarie’ approach towards performance remuneration is based and structured on the individual as well as the group business level. For example, the overall profit pool of the company is determined yearly with references to a proportion of Macquarie‘s after tax profits. The longstanding approach of the company has emphasised over the creation of a solid alignment of the interests of the shareholders and employees and simultaneously managing the risks and enforcing the company’s code of conduct.

Hay Group’s 2015 CEO performance evaluation study

Macquarie has performed exceptionally well in terms of its financial results. It has done overwhelmingly well in the fiscal year of 2017. Net profit after tax as well as Earnings per share have increased by 7% and 6% respectively (Static.macquarie.com, 2018). Total compensation in accordance with the improved performance of the EPS and the NPAT have also increased.  It has reflected the principles of Macquarie in providing appropriate level of remuneration. Along with this, the company has also seen an increase in the returns available to shareholders as a result of which the yearly total shareholders return have improved to a significant extent. The returns have increased to a staggering extent of 44.6% and a substantial amount of increase in the ordinary dividends of 18%, when compared with the returns from the fiscal year of 2016.

Income statement	2017	2016	2015
NPAT towards ordinary share owners	2217	2063	1604
Basic Earnings Per Share (Cents/share)	657.6	619.2	502.3
Shareholder’s returns
Average return on ordinary shareholder’s funds	15.2	14.7	14.0
Interim and final dividend	470	400	330
Share price at 31st March	90.2	66.1	76.7
Yearly total shareholder’s return	44.6	(9.9)	38.9

Calculation methods of short term incentives (STI) and long term incentives (LTI):

While calculating the short term incentives, two ways are generally used which are ‘Bottom up view’ and the ‘top down view’. The bottom up view starts with the amount of money to be paid based on the performance of the business and the personal performance of the individual. The top down view begins with focusing on the bonus pool, which is prepared on the basis of the financial performance and then it distributes the pool to the participants. The diagrammatic presentation of both the approaches are given below:

There are various levels of targets for short term incentives. Mainly they are of three levels, which are:

• Stretch- It is such kind of a task, where exceptional performance is performed, where it is truly challenging in the context of the present business. (E.g.- 110% of the target)
• On-target- This refers to some good performance with some amount of ‘stretch’. Meeting of budget.
• Threshold- Adequate or certain amount of acceptable performance. (E.g.- 90% * Budget)

An example using both the additive as well as multiplication models have been shown here:

Here, both the business score as well as the personal score are added. Here the business score is at (70%) and the personal score is at (30%) and consequently both are added to become 100%. The final score= % Business Score (0-200%)* Business Weight (70%) + %Personal Score (0-200%) * Personal Weight (30%) Bonus %= Final Score * On-Target % and Bonus = Bonus %*GP.

Here, in this case, the business score and the personal score are multiplied. Thereafter, the final score= Business Score (0-150%)* Personal score (0-150%), Bonus %= Final Score * On-target %, Bonus= Bonus %* GP.

Certain specific examples of business score and performance scores have been provided below:

A proper summed up view of the calculation of short term incentive calculation has been provided below:

There are a variety of long term incentives which have been regularly used by various companies around the globe. Mainly, conditional cash and shares are mostly used in the form of long term incentives. The various kinds of long term share based incentives are options, Share appreciation rights, conditional shares, forfeiture of shares, retention of shares and bonus shares.

An example of the kinds of shares to be provided to the CEO and the executives is to be calculated in the following manner. If there are 100,000 shares with a nominal value of 10 a share, therefore the face value of the share is 1000,000. Therefore the expected values are as follows:

• Retention or Bonus forfeitable shares= 100%* Face Value which stands at 1,000,000.
• Retention or bonus conditional shares= 90% * Face Value which stands at 1,000,000.
• Forfeitable performance= 60% * Face Value which stands at 600,000
• Conditional performance= 50%* face value which stands at 500,000
• Option/SAR= 30% * Face Value which stood at 300,000.

Therefore, the CEO earns, the following on the basis of the provisions of the CEO:

Remuneration report overview of Macquarie Group

The company has been very successful in terms of improving the return towards the shareholders of the company. The return on equity have improved, the total shareholder return of the company have also improved significantly. It has continued to outperform the standards set up by the MSCI World Index (Macquarie, 2018).  The total shareholder return graph has been provided below for showcasing a better financial returns of the Macquarie group.

With the outstanding kind of return provided by the company to the shareholders of the company, one of the most impressive achievements of the Macquarie group of companies have been the increased staff retention of the company. Moreover, one of the most important goals of the remuneration policies have been the ability to attract, motivate and retain the successful and high performing employees of the company (Static.macquarie.com, 2018). As a result of which, the executive committee members have stayed at an impressive 23 years of average years of service. This goes on to say that the company has been successful in retaining a wide range of experienced and successful employees of the company.

The company has tried its best to ensure proper governance of the remuneration policies and practices prevalent in the company. The remuneration board has retained Pay Governance as the impartial and independent remuneration consultant. This has been done in order to receive authentic and useful guidance which is required to frame these remuneration policies. This has been made in order to ensure that the interests of the employees of the company are safeguarded.  Pay Governance mainly provided information on the world remuneration and other rules and regulatory trends, it also investigated the overall remuneration of Macquarie.

On careful analysis of the remuneration of the company, certain key factors have come into the limelight. The company has laid too much emphasis on the financial performance measures, like return on shareholders, earnings per shares for the purpose of assessing the performance capabilities of the company executives. Although the company has been very successful in the financial frontier and has also been stuck to its principle of honouring the remuneration policies of sharing the company’s success with the employees and the executives of the company. Nevertheless, the according to the fortune article of Justin Foxx of Fortune magazine, the true indicator of any company’s success lies on the measurement of the non-tangible portions of any company too , like customer loyalty, product quality. These non-tangible activities of any company are one of the most important aspects of any successful business (Geiler, and Renneboog, 2016). Macquarie must also adopt methods of policies measuring these non-tangibles by using methods like balance score cards. Only by assessing both the financial and non-financial aspects, can any executive be truly assessed.

Conclusion:

After conducting a thorough review of the remuneration report of Macquarie and its group of companies, it could be concluded that it has employed one of the most successful remuneration policies and practices in order to pay its executives. Nevertheless, the company’s policies suffer from the loss any effective measurement of non-financial aspects like product quality and customer satisfaction. The report has been able successfully bring out the importance of non-tangible performance measures of remuneration, which needs to be included in the remuneration policies of Macquarie. The company has seen an upsurge in its financial performance and it has served its executives and employees in an appropriate manner. This is pretty evident from the retention policies of the company, where it could be seen that the average number of years of executives at the company, being 23, which in itself is an outstanding feat. Moreover, the company must adopt more extensive and transparent calculations of Short term and long term incentives, which would help in ensuring a just and fair remuneration policy. This is imperative in today’s time, where it is often accused that the executives are being paid high amounts of salaries despite the financial crunches.

References:

Anon, (2018). Explaining Executive Pay. [online] Available at: https://www.sara.co.za/sara/file%20storage/Documents/Conference2013/Martin%20Hopkins%20-%20Workshop%20on%20Variable%20Pay.pdf [Accessed 2 May 2018].

Blerck, V. and George, T., 2013. The relationship between executive remuneration at financial institutions and economic value added (Doctoral dissertation, University of Pretoria).

Chizema, A., Liu, X., Lu, J. and Gao, L., 2015. Politically connected boards and top executive pay in Chinese listed firms. Strategic Management Journal, 36(6), pp.890-906.

Fortune. (2018). CEO succession | Fortune. [online] Available at: https://fortune.com/tag/ceo-succession/ [Accessed 2 May 2018].

Geiler, P. and Renneboog, L., 2016. Executive remuneration and the payout decision. Corporate Governance: An International Review, 24(1), pp.42-63.

References:

Sarasa-Maestro, C.J., Dufo-López, R. and Bernal-Agustín, J.L., 2013. Photovoltaic remuneration policies in the European Union. Energy Policy, 55, pp.317-328.

Static.macquarie.com. (2018). [online] Available at: https://static.macquarie.com/dafiles/Internet/mgl/global/shared/about/investors/results/2017/Macquarie-Group-FY17-Annual-Report.pdf?v=2 [Accessed 2 May 2018].

TRENDS, A., 2014. und 2015. Empiriche Unter suchung mit den Top-1.000 Unternehmen aus Deutschland sowie den Top-300 Unter nehmen aus den Branchen Health Care, IT, Finanzdienstleistungen und Maschinenbau.