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ACCT5006 Corporate Governance Excessive Executive Remuneration Assessment Answer

School of Accounting

ACCT5006 Intermediate Accounting Theories and Issues Semester 1 2019

Assignment Information Sheet (20%)

ESSAY TOPIC: Corporate Governance Excessive Executive Remuneration


Required:

In an essay of between 2000 and 3000 words (+/‐ 5%) students are to discuss their agreement or disagreement with the following statement.

“Senior Executives in large companies get paid too much”

Discuss this comment in line with at least one relevant theory elaborated in this unit and provide examples to support arguments for your agreement or disagreement.

Some Background

Various global and local corporate scandals and government enquiries have placed excessive executive remuneration under scrutiny. The Global Financial Crisis (GFC) in 2008 saw many changes to corporate governance laws worldwide to strengthen accountability and transparency of company operations. In Australia, one of the changes was the introduction of the “Two Strikes Rule.” This rule has been in place since 2011. In simplistic terms if 25% of voting shareholders reject 2 remuneration reports then they can vote to spill the board. In April 2016 a major profit rigging scandal with Target Australia became known and was reported in the media. Target Australia is part of the Wesfarmers group. Coles, also part of the Wesfarmers group has received many fines from the ACCC (Australia’s corporate watch dog) for poor operating practices. The Wesfarmers group is also facing $2 billion dollars in write‐downs associated with Target and a Queensland Coal mine in 2016. Globally there are many examples of excessive remuneration being associated with poor corporate performance, corporate failure and unethical corporate behaviours.

(See selected examples of media reports by following theses links)

The following are the minimum content and format requirements:

(Note: minimum requirements refer to a pass grade. To achieve a high‐grade students must do work and research beyond the minimum expectations)

  1. Students must use at least ONE real example found in journals or media or reliable internet news published in the last 3 years. (Note: More examples/evidence are required if students expect to receive a high grade. Students can reference remuneration data provided in annual reports of companies to back‐up their position on the statement.)
  2. Students must have a minimum of 15 quality references 5 of which must have been published in the last 5 years.
  3. In‐text and end‐text references are required using Chicago referencing style.
  4. Essays should be typed using Microsoft Word with a size 11 or 12 font and using minimum

1.5 line spacing (no single spaced submissions). Left and right page margins should be at least 2 cm.

  1. Using the word count in Microsoft Office write the number of words of your essay at the beginning of the document.
  2. A separate cover page is not required.
  3. Write your Student Name and Student ID in a header in the word document and include consecutive page numbers in the footer, so they appear on each page.
  4. Documents submitted must be properly formatted and checked for appropriate spelling and grammar. Documents submitted that are not formatted correctly will lose 10% automatically. This includes punctuation and ensuring a space after a full stop or comma or semi‐colon or colon and inappropriate use of symbols.

Submission requirements

Students are to submit their essay online using the Turnitin link provided in Blackboard.

Originality reports displaying percentage (%) of similarity can be viewed by students to ensure they have referenced where appropriate and not plagiarised. A high degree of similarity and low degree of referencing will most likely result in a low grade.

Note: There is no specific similarity % for this unit that is acceptable. However, where the similarity

% is over 20% these will be scrutinised more thoroughly. This is not to say that for example 25% is unacceptable, this % may be acceptable as long as the items that are similar are correctly referenced and they are not copied from others work or from internet cheat websites.

A student guide for avoiding plagiarism can be found at the following website: http://academicintegrity.curtin.edu.au/global/studentbook.cfm

University policies and procedures for academic misconduct and plagiarism will be applied. Further information is available at http://academicintegrity.curtin.edu.au.

Answer

Global Finanical analysis

Introduction

With the changes in the economic, many organization is paying a high amount of payment to its senior management. It has big issues for the investors and shareholders to identify the factors for determining the high pay to senior executive. This essay reveals the key understanding of the “Senior Executives in large companies and why they would get paid too much in their management work. Many “Senior Executives in large companies get paid too much because of their divergent thinking and analytical strategic program which they develop. It is considered that their experience and work style helps the company to earn more and in return for their expectation, they are being paid a high amount of capital.

Critical analysis of the statement of "Senior Executives in large companies get paid too much”

The debate of whether the "Senior Executives in large companies get paid too much" is existent in the corporate world since ever. Different views are held by people upon the same. Agreements and disagreements are leashed on each other. However, the current essay puts propositions agreeing with the stated statement. Several examples are also present in the history of corporate sector depicting the need to reduce down the gap existent between the payment made to employees and the senior executives. When excessive remuneration is paid to the senior executives it does results in corporate failures. Bad corporate performance and unethical corporate behavior are expected out the senior executives who are paid way more than what they deserve.

Every time the consideration of excessive payment does not indicate biases of salaries upon the basis of gender. The current essay highlight the excessive payment made to senior executives irrespective of the gender of the senior executives.  The problem here is huge than that. This just not affects a single counterpart of society i.e. women but the entire working race indicated by employees, be them, men or women. The employees in any corporate have a reasonable understanding regarding payment of high salary to a person appointed at a higher post than them, only till the excessive portion in the amount paid is justified (Atif, 2016). 

The issues arise when the gap between the salaries paid to the senior executives and the workers is excessively high. The reason behind is non-compliance of the excessive pay with the quality and quantum of work performed by the senior executives in comparison to the employees. The statement, "Senior Executives in large companies get paid too much", got media's and world's focus when in 2018, a mandatory requirement was hanged on public companies of the United States. The public companies there got required to disclose the ratio of pay existent between the CEOs and employees. This rule was adopted by the Securities Exchange Commission from the Consumer Protection Act and Dodd-Frank Wall Street Reform (Avi-Yonah, et al. , 2017).

Practical implication and assessment of “Senior Executives in large companies get paid too much”

As per the international survey conducted in research, the ideal pay ratio existent between the CEO and worker's salary must be 4.6:1. However, the real estimation made of the ratio that exists between the CEO and worker's salary resulted as 373:1. This estimation had been made using the salary data analyzed for S&P 500 Companies. According to Peter Drucker, renowned as "Father of Modern Management", the ideal pay ratio must be equal to the one existent in the year 1965, i.e. 20 to 1 or 20:1.

However, what is ideal at times remain ideal but not real. The pay ratio continued to rise since the year 1965. In the year 1978, it was 30:1; in the year 1989, it was 59:1; in the year 1995, it was 123:1 and the last observed now was 376:1. If the rise is seen individually in the salaries of senior executives and employees, the results then to are very shocking. The compensation paid at average to the senior executives has shown a rise of around 800-900 percent in recent decades. However, the rise in the same period in the salaries of employees is just a mere figure of 11.2%. The pay ratio also differs when different industries are compared (Carberry, and Edward, 2017).

If the analysis is made on the global level, the United States is found to be the most discriminative in this matter. Even 74% of Americans share the same belief system. At some corporates, it is even observed that the payment made to a CEO in a single day exceeds the payment made to a working employee annually. The excessive payments are being supported by the overpaying companies on ground of richness in performance and results brought by the hard work put into the corporation by these senior executives. However, researches have proved this myth completely unapt (Crawford, et al. 2018).

Assessment cases and their linkage with the issue

It has been seen in many cases that the CEOs who have been paid way too high are on the walk of running corporations giving the worst performance ever. The performance has been worst for these corporations for years as overseen by their highly paid CEOs. Several examples exist where in the recent past the big corporations operating under the supervision of their highly paid senior executives have turned down because of dramatic scandals (Faghani, Reza and Chew, 2015). 

Uber the well-known corporate is also not out from the list of these corporates who paid highly to their senior executives, yet were held in the clutches of scandals, owing to poor executive performance. The company's CEO was not even aware of the actual working culture operating in the organization until the wind took seriousness. The corporation had been accused of sexual harassment at multiple times. A ‘bro' culture existed in the organization. The allegation on the organization was as serious as discrediting an Indian rape victim, who got raped by an Uber driver. Even the members of staff at the senior position were accused of making sexist jokes. The claims are far reaching then these mentioned. Some claims got acclaimed while others were not. However, this all shattered the organization's image and even led to the resignation of CEO Travis Kalanick  (Feito-Ruiz, and Luc 2017).

A practical example of the identified issues

Another example of the organization with poor corporate performance even when the senior executive's performance is seriously excessive relates to Facebook. The Facebook scandal got the limelight in 2018 March. The scandal although had happened in the year 2013 but came into the eyes of everyone in the year 2018. In earlier times, the privacy policy of Facebook was lenient enough to allow several apps to gather data about the friends of users relating to their name, location and birthday. Using this leniency, the Global Science Research accessed the data of approximately 87 million users of Facebook.  However, in reality, only 30,000 users out of them had actually used the app. Only, accessing of data was not the issues. This data was then traded with Cambridge Analytica. Another organization then used the data in the creation of ads that were highly targeted towards encouraging users for voting for Brexit and Trump (Grosse, Stephen and Tom 2017).

Another example relates to a quality scandal which happened at Kobe Steel. In October 2017, a revelation was made by the company regarding data falsification of quality of the company's steel, copper and aluminum products. This scandal directly relates to the use of management practice by senior executives having an emphasis upon money making and improper corporate governance. The product sold by the organization had been used by several big companies including Honda, Mitsubishi Heavy Industries, Toyota and Subaru. This scandal raised quality and product safety concerns in all these user organizations. The fate of this scandal released upon CEO Hiroya Kawasaki, leading to his resignation (Kelly, , and Jean Lin 2016).

These are just some of the illustrative examples. One thing common in all of them is involvement of the CEO in either neglecting the problems existent in the organization or CEOs themselves involved in committing the instances responsible for the scandal. Also, these CEOs are from highly reputed companies, who pay their CEOs excessive remuneration. One more thing evident from some of these examples is a feeling of dissatisfaction existent inside the workers. This factor is also responsible for poor corporate performance (Means 2015).

It has to be accepted after the study of the above examples that the ability of the directors to oversee and monitor corporate functions is affected negatively when they are paid in access of what they deserve. Also recently Facebook has been considered in a lawsuit relating to the payment of excess remuneration to its directors. Although this claim got settled, later on, it highlighted several other institutions where the same practice is being followed. Avoidance of fact of the establishment of self-compensation by directors themselves could also not be ignored (Mishel, , and Alyssa, 2015).

Payment of excessive remuneration to the executives and directors is also not beneficial for the shareholders. An agency relationship exists between the directors and the shareholders. To extract more pay from the organization, the senior executives even go against the values of this agency relationship. A conflict of interest often arises as the senior executives try to compensate themselves excessively by hook and crook. Also, payment of excessive remuneration to the directors brings effect upon the internal monitoring of the organization. Some of the senior executives who work entirely for monetary gains when paid in excess do not care to put extra effort for the excess amount paid. As no pressure from any party exists upon them to work hard, they ultimately get used to in abusing their authority and position (Mohan, et al 2015). 

The overpaid senior executives at times ignore the protection of the interest of the shareholders and are just concerned with making money over the benefit of shareholders. The responsibilities of the senior executives remain the same, even when their salaries increase. This put them in a win-win position where they do not even care about fulfilling the basic responsibilities entrusted upon them. At times, the organizations end up paying the excess to the executive because of certain myths existent with executive payment. It is often believed that the high payment made to the senior executives acts as a motivation factor for them and results in making the senior executives perform exceptionally. Also, there is a myth relating to the payment of excessive remuneration to obtain the best quality of executives from a whole lot of available human resources (Parrino, 2016).

However, the reality of these myths itself is a myth. The senior executives who tend to be master of their field perform exceptionally no matter how excess or reasonable they get paid. Also, these executives as selected by the entire organizations have the same type of skills. Only the level of experience matters. Payment of excessive remuneration which is highly unreasonable does not get justified even when these grounds are placed as reasoning. There is a need to curb down the excessive remuneration paid to the senior executives (Peetz, 2015)

One way to help in doing the same is already being introduced. The method is known with the name "Two Strikes Rule". This rule lays the accountability of salaries and bonuses paid to senior executives upon the directors of every listed organization. This grants power to the shareholders to re-elect the entire board of the organization. The manner in which these power works is simple to understand. The shareholders are given the opportunity to make two strikes. The first strike is considered when the remuneration reported prepared and presented to the shareholders gets rejected by not less than 25% of shareholders at the annual general meeting. The second strike occurs when again the same thing happens with the revised remuneration report.

After the second strike takes place, the shareholders get the right to re-elect the directors of the entire board at the same Annual general meeting. If the same is decided, a "spill resolution" needs to be passed. However, this spill resolution can only be passed only when it votes yes by 50% of the shareholder population. If the resolution gets passed, then the meeting to re-elect the board members is required to be held within a period of 90 days. This initiative is undertaken to raise the accountability and transparency levels in organizations (Pepper, S, 2016).

In Portland too, a very innovative approach has been adopted to curb this excessive remuneration. A tax penalty has been initiated by the city upon the organization who pays their CEOs a salary that exceeds 100 times the median wage paid to their workers. The basic penalty levied is 10%. However, the penalty amount rises to 25%, if the gap between the payment of the CEO's remuneration and median wage exceeds 250 times. These two steps as seen are just illustrative of several ways which can help in driving out the payment of excessive remuneration to the senior executives, including CEOs and directors (Sam, 2018).

Conclusion 

After assessing the case of issues defined as "Senior Executives in large companies get paid too much", it is found that the payment of their work is proposed and approved under the board meeting. However, they are ideally being paid the higher amount but it is based on their skills, mindset, experience and divergent work program. Now, in the end, it could be inferred that to validate the “Senior Executives in large companies payment, there needs to be proper resolution and justified work program for the same.

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