Computershare Limited CEO Compensation Package - Assignment Example

1. Computershare Limited CEO compensation package The company’s CEO compensation package is composed of three components namely, the basic salary, the short term incentives and the long term incentives. The basic salary component is not subject to risk while the variable short term incentives (STI) are based on current year’s performance. On the other hand, the long term incentive (LTI) component is also variable and comprises awards of performance rights over shares in Computershare. The various components of Computershare’s CEO compensation are briefly discussed below; Short term incentives The component is composed of a cash bonus (CSTI) as well as an equity grant of the company’s shares that are made on deferred vesting basis (DSTI). In this regard, the CEO is provided with an on target guide being an amount equal to the base salary and the short term incentive assuming on target performance. If the CEO achieves the on target performance, then the short term incentive equals to approximately 43% of the CEO’s base salary with the maximum benefit the CEO can receive as a shot term incentive being 75% of the his base salary. In the year 2014 WS Crosby received a total of $604,750 as the overall short term incentives. The components of the short term incentive for the CEO are calculated as follows a) Short term cash bonus (CSTI)- The on target package guide places this to 15% or 21.4% of base salary with the minimum entitlement being nil where targets are not met while maximum entitlement is pegged at 22% of the package or 32% of base salary. However, 70% of the CSTI is based on performance against budgeted management EBITDA .The maximum entitlement is achieved if the CEO achieves 120% of the budgeted management EBITDA while no bonus will be awarded where the CEO achieves less than 80% of the budgeted management EBITDA. The remaining 30% of the bonus is based on the CEO’s personal objectives that depend on his role and responsibilities and include matters such as business expansion, cost and risk control. b) Short term equity on deferred basis – this is given as 15% of target performance or 21.4% of base salary. The minimum entitlement is nil while maximum entitlement to the CEO is 30% of the package or 43% of the base salary. 50% of the DSTI depends on the group’s management earnings per share/ EPS growth. The maximum entitlement is reached if the EPS growth exceeds 20% while no DSTI is paid where the growth is below 5%. The remaining 50% DSTI is based on strategic, cultural and organizational measures including financial and non-financial performance measures, leadership, character and replaceability. Long-term incentives The CEO is also entitled to receive long-term incentives comprising grants of performance rights over the company’s stock. These are known as the deferred long-term incentive plan (DLI) 50% of which is subject to performance hurdles that are based on the company meeting group management EPS growth targets while the remaining 50% is not subject to performance hurdles. It should however be noted that these incentives do not vest unless the CEO remains in the company for a five year retention period. In conclusion, it can be argued that the long-term incentives are aimed at motivating the CEO to improve performance and at the same time encourage retention for a longer time given the fact that nurturing talent is not easy. During the year 2014, the CEO awarded performance rights/ options worth $407,139. Consequently, the CEO’s total remuneration was $2,133,788 which was composed of the following components; Component Amount 2014 Amount 2013 Short term incentives Salary and fees 1,087,533 1,225,224 Cash profit shares and bonuses 604,746 608,718 Long-term incentives Other 18,126 20,420 Post-employment benefits 16,244 16,958 Performance rights/options 407,139 458,687 Performance rights reversed (1,376,060) Total $2,133,788 $953,947 2. i) The value to the company of the use of long-term incentives for senior executive remuneration packages As can be seen above, long-term incentives composed a significant percentage of the entire CEO’s compensation at Computershare. In most organizations, long-term incentives form the largest component of executive compensation packages. This means that long-term incentives play a great role in motivating the executive to align their goals to those of the organization thereby leading to overall organizational success. The value of long-term incentives for senior executive remuneration packages to Computershare limited and other similar organizations is explained below; a) Retention of the executives – as stated above, the deferred short term plan at Computershare has a 50% component that dies not vest unless the relevant executive remains with Computershare for five years retention period. The board has stated that one of the aims of the company’s long-term incentive package is to provide a degree of protection for the competitive advantage that results from the highly industry specific knowledge within the team (Thomas, 2010). As can be seen above, the long incentive plan contains a substantial risk of forfeiture in addition to achievement of set performance metrics. It can be seen that continued employment for instance the five years retention is a major requirement. If one does not remain in employment for the stipulated period (5 years for Computershare), then they risk forfeiting the award/ incentive. b) Alignment of personal goals with those of the organization- long-term incentives are aimed at motivating the executives to focus on the desired organizational performance. In the case of Computershare, 50% of the long-term incentive is dependent on performance hurdles which are based on the company meeting group management EPS growth targets. In an effort to meet these targets, the executives work extra hard which makes the overall organizational performance to improve. It is clear that the objective of the long-term incentives is for the executives to achieve certain performance metrics. When the goals have been established upfront, the executives are able to look over the horizon and hence focus on the target. c) Balancing of shot and long term decision making – there is a belief that incentive programs that non-owner participants only aim at short term results. As such, long-term incentives would allow the executives to share in the long-term results therefore almost mandating them to consider the consequences of their short term decisions on the organizations long-term development. d) Sharing in the company’s growth- many executives are concerned that the work and investment they do for the company’s long-term success does not accrue to them. Thus, long-term incentives would allow them share in the company’s value proposition through tying their rewards to the success as though they owned the company also. The overall effect of this is improvement in the company’s future performance. For instance, Computershare performance attributed to the long-term incentives has been analyzed below; Management EBITDA 6% 3% Statutory EPS 60% (0.4%) Management EPS 10% 3% Dividend 4% 6% Key management personnel remuneration 5% 4% 2ii) The accounting profession is questioning the relevance of disclosing executive remuneration. My position on disclosing compensation information about senior executives is that there should be no disclosure of executive compensation. Those who support disclosure of executive compensation cite the need for transparency and accountability. To a big extent, this is true. The executive needs to be more transparent and accountable. Shareholders need to know how executive pay is arrived at and whether the company is getting value for the investment in the executives. In other words, are the shareholders getting value for their money? Of late, shareholders have been up in arms against the high amount of remuneration that the executives are given. Yet they are the ones who n approve these increases. On the other hand, the executives have been accused of practicing creative accounting so as to attain the performance targets so as to be awarded the incentives (Jared, 2013). While this might be true to some extent, the general public and the shareholders have also to some extent misunderstood executive compensation with majority of them accusing the executive of being out to ‘eat’ their money. This is part of the reason why I don’t support disclosure of executive compensation. Another reason why I don’t support the disclosure is privacy. Remuneration is a matter of private negotiation between the employer and the employee. The requirement for disclosure therefore moves the private negotiation and reward system into the public context which an abuse to the executives privacy. By disclosing executives’ pay, the organization will be telling everyone how much the executives are earning. Again, it is unfair to disclose the remuneration of the executives if we are not disclosing the salaries of everyone in the organization. There is lack of fairness in disclosing executive remuneration as they owe their accountability to the board and the chief executive and not to individual shareholders or the public. I feel that executives’ accountability would be better explained by the kind of results they deliver. If they are unable to deliver, the board to which they are accountable should be free to take action. It is worth noting that people are bound to misinterpreted the disclosed information bearing in mind the remuneration includes other things apart from salary. Some details that would help them understand the remuneration level would be missing from the annual report. This is likely to affect the reputation of the executives in the eyes of the public. It is to be noted that other employees also read the reports including fellow executives. This is likely to create rivalry amongst fellow executives and even employees who may feel dissatisfied. References: Thomas, B2010, Executive compensation, London, Rutledge. Jared, M2013, The growth of executive pay, New York, John Willey & Sons. Read More