AYN418 Advanced Financial Accounting : Essay Fountain

Question:

Within annual reports, companies frequently disclose information about how their managers are rewarded in terms of components of their management compensation package. For example, within IAS 25 there is a requirement for information about the components of rewards paid to key management personnel be disclosed within the company’s annual report.

Required:

Select two large companies listed on the securities exchange and identify the components of their management remuneration plans. Explain how the respective components would be expected to align the interests of the managers with those of the owners and to minimise the contracting costs of the organisation.

 

Answer:

Choice of Accounting Methods:  JB Hi-Fi Limited and Harvey Norman Holdings Limited

JB HI-FI Limited

JB Hi-Fi Limited (JB Hi-Fi) is one of the leading as well as fastest growing retailer of home entertainment products in Australia. The main business philosophy of the company is to provide its customers with a specialist range of Hi Fi and recorded music at the lowest price. The main products of the company is leading brands of computers, TVs, Tablets, Hi-Fi, Cameras, Home Theatre, Car Sound, Speakers, Stacks, Portable Audios and others (jbhifi.com.au, 2019).

Harvey Norman Holdings Limited

Harvey Norman Holdings Limited (Harvey Norman) is one of the largest multi-national business organizations operating in the Australian retail industry. The company provides its customers with the products such as furniture, bedding, computers, communications and consumer electrical products. The company was established in the year of 1982 and it is headquartered at Homebush West, New South Wales, Australia.

Management Remuneration Components Of Jb Hi-Fi

Executive Remuneration

The management remuneration plan of JB Hi-Fi has two components; they are Fixed Remuneration and Variable Reward Plan Incentive. These are discussed below:

Fixed Remuneration – Fixed remuneration is paid in the form of base salary, superannuation and motor vehicle allowance. The elements of fixed remuneration do not depend on the condition of performance.

Variable Reward Plan Incentive – There are two sub-components of this variable reward plan incentive; they are Short-term Incentive (STI) Plan and Long-term Incentive (LTI) Plan (investors.jbhifi.com.au, 2019)

STI Plan – In case of STI, 80% of this is paid in cash and the rest 20% is deferred into shares that are subject to restriction of sales or disposal within one year of issue.

LTI Plan – In case of LTI plan, this is paid to the executives in the form of shares of JB Hi-Fi based on the performance of the executives.

Group Share Option Plan – JB Hi-Fi has also employed share ownership-based remuneration scheme for both the executive and non-executive management that include non-executive directors. This particular remuneration scheme makes the executive and non-executive management team of the company to purchase parcels of ordinary shares at different exercise price or to acquire shares at zero exercise price (investors.jbhifi.com.au, 2019).

 

Non-Executive Remuneration

  • In case of the remuneration of non-executive directors, JB Hi-Fi makes the superannuation contribution on behalf of non-executive directors as per the statutory requirements and it is included in the remuneration package. The policy of the company is not to pay any lump sum retirement benefits to the non-executive directors.
  • As per the remuneration policy of the company, there is not any element of risk in the remuneration components of non-executive directors. Non-executive directors are not eligible of receiving any bonus payment and they are not authorized in participating in share option plan of the company.
  • The company has introduced one time the base board fees for the non-executive directors (investors.jbhifi.com.au, 2019).

Management Remuneration Components Of Harvey Norman

Executive Remuneration

There are three key components of the executive remuneration of Harvey Norman. They are as follows:

  1. Fixed Remuneration,
  1. Short-term Incentives (STI)
  1. Long-term Incentives (LTI).
  1. Fixed Remuneration – The elements of fixed remuneration of Harvey Norman includes basesalary, superannuation contributions and other benefits. The main purpose of this is to provide the executive directors with competitive set of fixed remuneration in line with their roles, markets and experience (static1.squarespace.com, 2019).
  1. Short-term Incentives (STI) – Harvey Norman pays the STI to the executive directors in theform of cash as Performance Cash Incentives (PCI) and this is subject to the Executive Directors’ minimum shareholdings. The main purpose of STI in JB Hi-Fi is to reward the executive directors for their contribution towards the overall achievement of the outcome of the company.
  1. Long-term Incentives (LTI) – Harvey Norman provides its executive directors with the LTI inthe form of performance rights that provides the executive directors with the right of acquiring one ordinary share of the company at zero exercise price. The aim of LTI is to reward the executive directors for their contribution towards financial performance of the company along with the contribution towards net assets generation for increasing the wealth of the shareholders (static1.squarespace.com, 2019).

Non-Executive Remuneration

  • The main component of the remuneration of the non-executive directors of Harvey Norman is fees of the directors.
  • Non-executive directors of Harvey Norman are not entitled to receive a fee for being a director of the firm. They have different remuneration structure as compared to the remuneration structure of the executive directors.
  • According to the annual general meeting (AGM) held on 21stNovember 2006, the approved aggregate remuneration of the non-executive directors of Harvey Norman approved by the shareholders are $1,000,000 per year (static1.squarespace.com, 2019).

Alignment Of Interests Of The Managers With Those Of The Owners

  • It can be observed that the components of the management remuneration of JB Hi-Fi are fixed remuneration and variable incentive plan. The aim of the owners of the business of JB Hi-Fi is to ensure the increased profitability of the company while performing well in the non-financial aspects also. The main components of the remuneration policy of the company plays a crucial role in rewarding, incentivising and retaining the key management employees so that they can majorly contribute towards achieving both the financial and non-financial objectives of the business.
  • While achieving the objectives, the aim of the managers is to also reduce the overall cost of the company for increasing the profitability. This is crucial for reducing the overall contracting cost of the organization.
  • Three components can also be seen in the management remuneration policy of Harvey Norman that are fixed remuneration, STI and LTI. These components of the management remuneration structure of the company is crucial attract, retain and motivate the management personnel with high performance with the aim to align the interest of the executives with the shareholders. This remuneration structure of Harvey Norman employs risk components with the help of LTI and STI plans so that both the financial and non-financial measures can be assessed. Since the incentive plans of STI and LTI are based on the performance of the executive directors, they become majorly motivated to achieve both the financial and non-financial objectives of the company that are aligned with the interest of the owners.
  • In order to increase profitability and income, the management employees develop strategies to minimize the overall cost of the business of Harvey Norman. This contributes to the reduction on contracting cost of the business.
 

References

Investors. jbhifi.com. au.(2019). [online ] Available at : https://investors.jbhifi.com.au/wp-content/uploads/2019/10/Annual-Report-2019-with-Chairmans-CEOs-Report.pdf [Accessed 13 Oct. 2019].

Static 1. squarespace. com. (2019 ) . [online ] Available a t : https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/5d8d636e0db 427274ad065ea/1569547201061/HVN+2019+Annual+Report.pdf [Accessed 13 Oct. 2019].

About Us . (2019 ). JB Hi -Fi . Retrieved 13 October 2019 , from https://www.jbhifi.com.au/pages/about-us

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