EXECUTIVE COMPENSATION

Published: 2018-01-29 17:10:39
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Executive Summary

Nine Entertainments Co. Holdings Limited offers a comprehensive executive remuneration package comprising of fixed remuneration, short-term incentives, and long-term incentives. These packages are determined by the board of directors upon consultation with an independent, external remuneration consultant. The purpose of engaging the services of an external remuneration consultant is to ensure that the remuneration packages are in conformance with the applicable legislations such as the two- strike rule and that the packages are capable of promoting a positive relationship between the company's executives and the shareholders.  

Introduction

In many countries, the issue of executive compensation has been a very controversial one.  The controversy has widened over the years partly due to increased media scrutiny and decreasing corporate performance. Growing concerns about potential misuse of company resources in the form of excessive and uncontrolled executive compensation have triggered new corporate regulations in many countries (Matolcsy & Wright 2011, p. 746). Australia is one of the several countries that have enacted laws to regulate executive remuneration in the publicly listed companies. In 2011, the country enacted the two-strike rule to help improve accountability in executive compensation. The aim of this paper is to explore the compensation packages of the executives of a publicly listed company in Australia. The paper will use theoretical frameworks to evaluate the structure and size of the company’s chief executive remuneration.

Analysis of Nine Entertainments Co. Holdings Limited Executive Remuneration 

Nine Entertainments has set a comprehensive remuneration framework for its key management personnel. The company defines key management personnel as individuals having responsibility and authority for controlling, planning and directing major activities of the company. These individuals include the chief executive officer, chief operating officer, group director in charge of sales and marketing, commercial director, and executive and non-executive directors among others. Under the company’s rules and regulations, the board sets remuneration levels of key management personnel in accordance with the aggregate pool limit as agreed by shareholders during the company’s annual general meetings. The company’s Board of Directors approves remuneration packages for the key management personnel following remuneration by the board’s Nominal Remuneration Committee (NRC). In order to determine optimal levels for executive compensation, the nominal remuneration committee engages the services of independent remuneration consultants. The consultants provide crucial information regarding latest trends in executive remuneration, policy development, emerging incentive programs and other crucial strategic pieces of advice (Nine Entertainment Co. Holdings Limited, 2015).

In terms of the structure, Nine Entertainment's executive remuneration package (as per the 2015 remuneration report) consists of three components: fixed remuneration; short-term incentives and long-term incentives. The table below shows the size of each component as a percentage of total remuneration.

Target Remuneration Mix

Fixed Remuneration (%)

Short-Term Incentives (%)

Long-Term Incentives (%)

Chief Executive Officer

33.3%

33.3%

33.3%

Other Key Management Personnel

40-50%

25-30%

25-30%

Source: Nine Entertainment Co. Holdings Limited, 2015

The company’s fixed remuneration comprises of base salary, superannuation and non-monetary benefits accorded to the executives. The fixed remuneration is set competitively to fulfill the objective of attracting and retaining talented executives while also considering the scope of responsibilities, experience of the individuals and trends in the external market. According to the company’s policies, total fixed remuneration is pre-determined but the individual components comprising the total can be varied depending on various factors such company performance. In effect, the changes in one component are offset by changes in another component such that the total fixed remuneration does not change significantly (Nine Entertainment Co. Holdings Limited, 2015).

The company operates a short-term incentives program for its executives. This program offers rewards based on the attainment of specified business and personal targets. The actual amount of short-term incentives awarded to each executive varies depending on the extent to which the targets are met. Usually, these incentives are awarded at the end of the year after a thorough evaluation of the individual's performance against set financial and non-financial targets. The short-term incentives plan is subject to annual review by the nominal remuneration committee and therefore its weightings, performance measures and structure may vary from one year to another (Nine Entertainment Co. Holdings Limited, 2015). 

The long-term remuneration plan seeks to align the executive’s long-term remuneration outcomes with the expectations of stakeholders based on the delivery of the company’s operating and strategic goals.  Besides, the executives (and other qualified employees) are entitled to employee gift offer plans. Under these plans, the executives receive a specified amount of dollars worth of shares in the company. The shares carry the same rights and entitlements as other ordinary shares. In 2015, the company did not offer any shares as part of the form of employee gift offer.  

Overview of the Two-Strike Rule 

The two-strike rule is legislation enacted by the government of Australia to hold company directors accountable for the remunerations of executives. The legislation came into effect in July 2011 as an amendment to the Corporations Act. The legislation provides that the entire board of directors can face re-election if a company's shareholders raise objections regarding the compensation of executives. Under the legislation, the first strike occurs when at least a quarter of a company's shareholders pass a ‘no' vote against the executive remuneration report during the annual general meetings. It is during these meetings that the remuneration report is read to shareholders. Once the first strike occurs, the board of directors is required to take measures to address the issues raised by shareholders and to report these measures in the subsequent report. The second strike occurs when the subsequent remuneration report (during the following year) also receives a ‘no' vote of more than twenty-five percent (MacMillan 2012, p. 639).

In the case of a second strike, the shareholders will vote (during the same annual general meeting) to determine whether the board of directors will need to be re-elected afresh. If this vote is supported by at least half of the shareholders, then a spill meeting will have to take place within a period of ninety days. During the spill meeting, the individuals who served as the directors when the second strike occurred will stand for re-election by the shareholders. The managing director (or chief executive officer) is allowed to continue managing the affairs of the company (MacMillan 2012, p. 640).      

The two strike rule is considered the most important corporate government reform in the history of Australia. A fundamental difference between this law and the previous laws is that even the initial stage (first strike) requires companies to respond adequately to concerns raised by shareholders (Monem 2013, p. 213). This can be through justification or restructuring of the executive remuneration packages. According to Thomas, Palmiter and Cotter (2012, p. 1214), the two-strike rule will go a long way in strengthening the pay-performance link in Australian companies and in making Australia’s executive compensation packages more competitive internationally. The law will also protect shareholders of smaller firms from misuse of resources by directors and the executive.

Critical Evaluation of Nine Entertainment’s Executive Remuneration and Impact of the Two-Strike Rule

i. The Agency Theory 

The agency theory provides an important theoretical framework for analyzing the structure and size of Nine Entertainment’s executive remuneration as well as the impact of the two strike rule. This theory is concerned with resolving any issue or problems that may arise due to differences between the interests of the principals and those of the agents. With regard to companies, shareholders are the principals while members of the management are the agents. The agents have a duty to maximize shareholders returns in both the short-term and long-term (Jensen & Meckling 2001, p. 305). At the same time, the agents are entitled to fair compensation for their work. The agency theory recognizes that problems may occur if managers use their discretion to engage in activities that satisfy their self-interests instead of promoting the objectives of shareholders. Similarly, problems may occur of the shareholders are not fully informed of the activities undertaken by the management or are prohibited from accessing the information. Other situations that may lead to agency problems include paying managers less competitively and managers making rules that make it difficult for them to be ousted (Linck, Netter & Yang 2008, p. 302).

According to Gillan (2001, p. 11), executive compensation is one of the most common issues that cause agency problems. Thus, any discussions regarding a company's executive compensation can be successful if they are carried out against the backdrop of the agency theory. In this regard, the most dominant view is that executive remuneration provides a partial remedy to the agency problem. Under this view, executive remuneration packages are designed with the view of providing managers and directors with sufficient incentives to work towards maximizing shareholders returns. The view recognizes that members of the executive management are not automatically motivated to seek ways of maximizing shareholders returns. Thus, providing the executives with adequate compensation is one way of motivating them.

Based on the above view, it can be said that the board of Nine Entertainment used the agency theory to determine the structure and size of the company’s executive remuneration. As already explained, the remuneration package comprises of three components (fixed remuneration, short-term incentives and long-term incentives designed to motivated the executives. In order to arrive at optimal sizes of the packages, the board engaged external consultants who in turn compared data from the market to determine the most competitive rates. Based on these considerations, it can be said that the company’s executive compensation policies are progressive and capable of attracting dedicated executive talents that will push the company’s strategic agenda (Klein 2002, p. 374). 

Another view of the agency theory focuses on the relationship between the level of executive compensation and the agency problem. Under this view, executive compensation is not only a solution to the agency problem but can also be a cause of the problem if either the agents or the principals are not satisfied with the remuneration packages (Bertrand &Sendhil 2001, p. 904). This approach directly relates to the Australia’s two-strike rule, which requires company directors to step down if shareholders are not satisfied with their remuneration packages. Overall, a key impact of the two strike rule is that it may cause executives to focus on policies and activities that will help to evade a ‘no’ vote. For example, the executives may decide not to pursue further investment opportunities if they think that shareholders will not want them (executives) to benefit from increased returns as a result of these investments (Matolcsy & Seethamraju 2012, p. 79).  

ii. The Legitimacy Theory

The legitimacy theory explains the extent to which disclosures by companies are influenced by the limits and boundaries established by the society and other stakeholders. According to this theory, corporate disclosures are specially designed to avoid penalties by the society in which the company operates (Merhebi, Swan, Pattenden & Zhou 2006, p. 309). The theory considers that the actions of a company are proper and appropriate of they reflect the wishes and interests of the society's accepted system of norms, beliefs, and values (Cho & Patten 2007, p. 639). For corporate organizations’, the immediate society comprises of shareholders and the members of the executive management. Therefore, the activities undertaken by companies and their disclosures should be in the best interest of shareholders and the executives.

Based on the legitimacy theory, Zhou (2000, p. 232) argues that executives deserve competitive remuneration packages so that they can promote the company’s objectives and advance shareholders interests. This means that shareholders should give attractive remunerations and other incentives to the executives as a way of motivating them to perform optimally. At the same time, the executive should focus on implementing measures and strategies that promote a positive link between their performance outcomes and their remuneration levels (Tosi, Werner, Katz & Gomez-Mejia 2000, p. 301). In simple terms, compensation levels should be beneficial to the business, the executives and the shareholders. The compensation should not be varied to the detriment of any of the three parties. Based on this theory, it can be said that Nine Entertainment's executive remuneration packages are reflective of the society's wishes. The three components of the company's executive remuneration are an indication that the board is determined to ensure that the two-strike rule does not jeopardize the company's operations as well as the interest of the shareholders and the executive.

Conclusion

From the above analysis, it is evident that Nine Entertainment's executive remuneration comprises of several mutually reinforcing components. The three main components are fixed remuneration, short-term incentives, and long-term incentives. The amount of financial and non-financial incentives given under each of these components is determined by various factors including market trends, company performance, and individual's skills and experience. The remuneration packages are aligned with the company's performance and shareholders’ expectations while taking into account prevailing legal provisions as set out in the two-strike rule.

sheldon

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