Galaxy Resources versus Orocobre: Executive's Remuneration
Cost and Management
Executive compensation packages act as a management control in the corporate agency theory. The senior executives and management are expected to take care of the interest of the shareholders and are paid heavily for that. However, in order to check the activities of the executives, the companies have Executive remuneration committees. The committees set goals and objectives of the CEOs and design their compensation packages in order to keep them motivated in achieving the objectives of the company.
The review of the performance measurement and compensation package of Galaxy Resources Limited shows that the performance of the executives is evaluated on the basis of the performance of the company and the value added to the shareholders. The compensation package of the senior executives is thus a mixed bag of fixed and performance based incentives. The Short term incentives and long term incentives form part of the variable pay.
However the comparison of the executive compensation composition of galaxy resources with its competitor Orocobre Limited shows that the compensation package of Orocobre is more transparent and aligned with the financial performance of the company.
The report discusses the variety of methods used for evaluation of the performance of the senior executives and the basis of designing their compensation packages.
Executives and top management personnel are considered as the agents of the shareholders whose job is to meet the objectives of the shareholders. However the objectives of the executives can be different and hence arise the problem. In order to overcome this agency problem, the executives are compensated heavily. In return of the fat executive compensation, they are expected to take care of the interest of the shareholders and forego their personal interests. The report researches on how the companies assess the performances of their senior executives mainly the CEO and the CFO. It also discovers the various methods used for designing and determining the compensation of the senior executives of the company. The report reviews the performance measurement and compensation planning of the senior executives of Galaxy Resources and finds out if the performance of the company and the remuneration of the executives is related with other.
The report compares the executives’ remuneration of Galaxy Resources with its competitor Orocobre and finds out which company has a more transparent remuneration policy. Also it finds out the company with the better executive remuneration policy in terms of performance of the company. The methods adopted by both the companies for performance measurement of the key executives are compared and their compensation packages are evaluated for effectiveness.
The report concludes with the finding on the relation between the executives’ compensation and the performance of the company and if the management controls of the company through compensation management are effective. The executive compensation of Orocobre is broken in well defined percentage in terms of fixed, STI and LTI portions, while there is no such information available about Galaxy Resources executive remuneration.
Remuneration and performance are directly linked, it is imperative that performance level will impact the remuneration as well. The senior executives like the CEO and the CFO are considered as the flag bearer in an attempt to achieve the goals and objectives of the organisation. It is believed that the senior executives set the tone to the rest of the employees of the company. It is very important that the senior executives of the companies believe in the goals and objectives of the company. They should be fully devoted towards achieving the targets of the company.
In order to ensure this it has been observed that the CEO pay has increased tremendously as compared to the increase in pay of other employees of the company. The question here arises – “Is so high pays are justified for senior executives?”. Some argues that it is justified as the vision of these executives increases the value of the shareholders. While some analysts argue that the high compensation of the executives does not always lead to increase in shareholders’ value (Guillot, C., 2016).
Since it is very difficult to measure and evaluate the performance of the executives, the executive compensation committee is formed. The role of the committee is to set objectives for the CEO and evaluate the performance of the senior executives. The committee also designs the compensation packages of the senior executives to ensure that the executives are motivated enough to lead the company towards its objectives and fulfil the needs of the shareholders (Trammell, J., 2013).
Performance Measurement System
The performance measurement system helps an organization to evaluate the performance of executives and then devise the relevant compensation packages. Further, it creates a record of the performances that indicates much more about the employee, such as behavioural traits, attitude, future potential, prospects for promotion and bonus, required improvements, training needs etc. Performance measurement refers to continuous collection of data pertaining to various functional areas. Once the data is collected, it is collated to present a comprehensive report on workflow, output and results. Any performance indicator must present quantitative and/or qualitative aspects. A performance measurement system comprises of multiple indicators evaluating different aspects. These indicators are used aggressively while evaluating performance of the senior executives as they present all the historical data regarding him or her (ISO, 1994).
There are multiple methods that can be used to evaluate employee performance (UK Audit Commission, 2005):
i. Balanced Scorecard: Balance scorecard monitors the progress towards organization set strategic goals. It primarily focuses on four perspectives, namely customer perspective, internal-business processes, growth & learning and financials.
ii. Benchmarking: Benchmarking is a setting yardstick by setting standard measurements in a service or an industry to be able to draw comparison - within a service or industry, across multiple organisations. This is also deemed to be a quality initiative.
iii. Business Process Reengineering: BPR is redesigning of organisation’s structures and its business processes to increase overall performance. At times this is done from the scratch as well.
iv. Management by Objectives: Aims to align goals and subordinate objectives throughout the organization. MBO aligns the inputs of the leaders/ executives to the outcomes of their initiatives of leadership. Value based leadership is used in this method to evaluate the performance of executives (Webb, N., & Blandin, J., n.d.).
The companies use various methods in evaluating the performance of the executives. According to Joel Trammell (2013) from Forbes, the 6 ways to measure the performance of the chief executive officer of the company can be summarised as follows:
i. Vision: The executive should adopt the vision n admission for the company that fulfils the objectives of the shareholders. The strategies and the goals of the company should be aligned and clearly communicated to all the stakeholders.
ii. Employ required Human resources: The human capital is indispensable and thus the CEO should ensure that he has the right people with him on board. The employees should be given opportunities to learn, grow and perform to their fullest potential.
iii. Financial resources: The senior executives must ensure that the company has required financial resources either internally or externally.
iv. Culture: Culture is the way in which the company works, It is set at the CEO level. The people should be motivated and their personal goals should be aligned with the goals of the company. There should be goal congruence.
v. Good Decision: The CEO should be a good decision maker. He should not hesitate from taking professional and outside expert advice in making important investment and strategic decisions for the company. He should be well informed.
vi. Performance: Alls well that ends well. Thus it is necessary that the CEO is ensuring and delivering performance of the company. Performance for all the stakeholders is the increase in value of the company in monetary as well non monetary terms.
Though it is very difficult to measure the performance of the executives of the company it is believed by analysts that the ultimate test of the performance of the CEO is the performance of the stock of the company in long run (Knowledge@Wharton, 2007).
When it comes to public sector the evaluation of the performance of the executives of the company and the reward allotted to him become very important. The lack of direct and close involvement of the shareholders requires that the executives should promote the objectives and goals of the organisation optimally. Thus performance based management and pay for performance is of paramount importance (Webb, N., & Blandin, J., n.d.).
The Sarbanes Oxley Act (2002) was introduced to improve the corporate governance and included the justification for the basis of determining the executive compensation. The rules in section 5 of the governance act require the compensation committee of the listed companies on NYSE should regularly review and approve the goals and objectives for determining the remuneration oft eh executives. The act requires that the performance of the CEO should be evaluated in accordance with these goals and objectives and the compensation should be based upon this evaluation. It also requires that the compensation committee of the company should be composed of independent directors only. The responsibilities f eh committee should be clearly written in the charter and the performance of the compensation committee should also be reviewed annually. This was done mainly to put a check on the ever increasing pay of the senior executives and increasing difference in the pay of the executives to the average employee pay (Sigler, KJ., 2011).
The studies reveal a strong relationship between the performance of the company and the executive compensation. The remuneration of the executives is based upon the performance of the company. Thus their compensation is directly tied to the shareholder worth. Some companies have their executive compensation packages based on the long term performance of the company though the use of restricted stock shares. Sometimes the bonus of the CEO is based upon the three or five year growth of the earnings per share to ROI of the company (Knowledge@Wharton, 2007).
The compensation packages of the executives are designed to include large percentage as bonus plans and variable pays. The study by the Economic Research Institute done in 2012 revealed that the base salary in the executive salary is only 11.2 percent (Sigler, KJ., 2011). The large part of the salary comprises of incentive bonus which is in the form of cash or companies stock and is based upon the performance of the company. The bonuses are awarded to the executives when they achieve the preset gaols in terms of earning per share of the company or the market price of the share of the company. Executive stock options are another way to remunerating the executives. They can be qualified incentive stock options or non qualified stock pitons. While the qualified stock options provide tax benefits they have complicated tax effects in future; the non qualified stock options results in reporting of taxable income when the stocks are exercised.
There has been observed lots of innovation in designing the compensation packages of the executives in order to keep them motivated and at the same time link them to the performance of the company.
The performance evaluation and compensation of the executives of the company is reviewed and analysed for Galaxy Resources. The executive remuneration of the Galaxy Resources is later compared to its competitor Orocobre to observe the similarities and differences within the industry in the management control over the executive compensation.
Galaxy Resources Limited is a listed company in Australia as GSY is an ASX 200 Index Company. Headquartered in Australia, it is a listed company involved in the mining business. The main business is lithium mining and production, hard rock mines and brine assets. The company has mining facilities in Australia, Canada and Argentina. Some of the main projects include Sal De Vida, Mt Cattlin and James Bay. The demand for lithium minerals and chemicals has reported a steady year-on-year growth rate of 10%-15% per annum for almost a decade now. Lithium is widely used in lithium and lithium-ion batteries, glass and ceramic industries, etc. The major demand is for batteries of laptops, mobile phones, ipads and ebook readers etc. (Company Website, 2018).
The company aims to become the major producer of lithium products in near future. It is committed to observe the principles and practices of good corporate governance according to ASX Corporate Governance Guidelines.
Executive Remuneration Committee
According to the Remuneration and Nomination Committee Charter, the committee is comprised of at least three members, who can be only the non-executive directors of the company. Additionally, the Chairman of the committee is an independent director with majority of the members of the committee being independent directors as well. All of these members are selected by the Board of Directors.
The purpose of creating this committee is to provide suggestions and advice regarding recruitment, retention, termination, related policies and procedures. Additionally, the committee makes recommendations regarding the requisite competencies and re-appointment of the directors. Further, the composition of the board is constantly assessed by the committee. The committee also ensures a balanced remuneration package such that it has all components of fixed and variable pay as well as keeps the executives motivated to perform. The remuneration package portion is designed by the committee such that the reward is linked to corporate and individual performance and also rewards good performance with appropriate bonus amount.
If required, the committee can take independent services such that it helps in discharging their duties. This will be at the cost of the company. The committee can also ask the company to provide information or resources as required for discharging its duties properly. In turn, the committee will provide report of its activities on an annual basis to the Board.
Allocation of Executive Remuneration
According to the company’s Annual Report (2017), Key Management Personnel (KMP) includes directors and senior executives of the company. The remuneration committee sets compensation of KMP so as to ensure retention as well as good performance. For this, they consider trends in the market, comparable peers, and the objectives of the company.
The compensation packages are set in-line with the objectives and goals of the remuneration committee as set above. They consider factors such as attracting skilled professional with required work experience, ability to perform in the desired designation, retention of resources etc. Long term incentive plan as approved by the shareholders aims to ensure retention of performing employees, directors and reward them.
The compensation Package of the executives is a mixed bag of fixed and variable compensation. They also include the short term and long term performance based incentives. The company also provides non cash benefits to its key employees and also contribute to the superannuation plans for them. The fixed pay comprises of the basis pay, fringe benefits given to executive, and employer contribution to superannuation. The performance based variable pay is the fair value of the share options given to the executives and are measured using the Black Scholes and Monte Carlo simulation method.
Performance measures used
The performance of the executives is measured in terms of impact on the shareholders wealth. The performance of the whole group of executives is considered over a number of years while designing the compensation of the executives.
Performance of Company
As can be seen above, the stock price of the company, Galaxy Resources has registered steady growth.
The remuneration of the CEO and CFO are only considered for analysis.
Anthony Tse is the Managing Director and CEO of the company. The senior management comprises of Alan Rule (Chief Financial Officer), Nick Rowley (Director), Brian Talbot (Chief Operating Officer) and John Sanders (Company Secretary and General Counsel) (Company Website, 2018).
|Galaxy Resources||2016 (USD)||2017 (USD)||% Change|
|Managing Director and CEO (Anthony Tse)||$401,959||$2,915,113||625%|
|CFO (Alan Rule) (employed in 2017)||-||$1.059,766|
|KMP’s total remuneration||1,407,147||10,234,340|
|Market Price of Share||$2.63||$3.83||46%|
The increase in Market price of the share corresponds with the increase in executive remuneration.
The second company selected is Orocobre Limited (ASX: ORE) which is headquartered in Brisbane, Australia. It is one of the main competitors of Galaxy Resources. The company has lithium, potash and boron operations based through Argentina. The company has entered into partnership with Toyota Tsusho Corporation for expansion purposes in Argentina as well as Japan.
The remuneration committee comprises of the non- executive directors and the majority of them are independent. The committee has a charter which determines the role of the committee and its interaction with the internal and external advisors. The committee operates under the delegated authority of the board and the board approves the recommendations of the committee.
The Remuneration packages are decided by taking a view of the market trend in the similar industry for the similar roles in Australia. The Charter ensures that the remuneration motivates management to take decisions towards the long term growth and success of the company. There has a clear relationship between the remuneration and performance of the executive. The remuneration has to be a mix of fixed and performance based remuneration. The remuneration of the CEO was 41% fixed, 11% short term incentives and 48% long term incentives for 2018.
The remuneration is based on the performance of the executives which is measured by the performance of the company. Meeting of annul targets and implementing the company’s strategy are some of the measuring features.
The leadership comprises of Richard Seville (Managing Director & Chief Executive Officer), Neil Kaplan (Chief Financial Officer and Joint Company Secretary), Alex Losada (Chief Operating Officer) (Company Website, 2018).
The five year share price chart of the company shows a decent and continuous increase in the share price of the company.
|Orocobre||2017 (USD)||2018 (USD)||% Change|
Summary of Findings and Comparison
It is observed that the shares of Galaxy Resources and Orocobre’s has seen consistent increase within last few years. Both the companies are offering a mixed of fixed and performance based incentives to their chief executive officers. However it is observed that the executive compensation at Orocobre is more transparent and well defined with the fixed, STI and LTI components disclosed in terms of percentage clearly. The same is not seen in Galaxy. Also increase in executive compensation of Orocobre is disclosed in terms of percentage increase for each component and is justified comparing to the increase in earnings per share and market share price of the company. The increase in overall compensation of CEO for Orocobre is 7% while the increase in share price is 49%. Glaxay Resources underwent consolidation in 2016 and hence the data is not readily available for making annual comparison. The data shows that the increase in CEO remuneration is by 625% while the increase in share price is 49%
However it is observed that the executives are oven stock based compensation as part of their remuneration packages. The reasoning behind offering stock-based compensation to top executives is that due to their own interest in company performance (and thereby stock price), they will be keen to make the company perform and it creates a natural incentive factor for their good performance, Further, the stock-based compensation assures the stockholders that executives’ interests are aligned with theirs.
According to Hall (2017), the company delivered high earnings growth rate of more than 100%. This naturally calls for top executives to be given stock-based compensation.
However, in the case of Galaxy Resources, CEO Anthony Tse is receiving minimal stock-based compensation. Further, the fixed amount being paid seems to be in excess of generally accepted level of remuneration for executives in the industry.Similarly, Richard Seville, CEO of Orocobre also receives none or minimal stock-based compensation.
According to the policies of the committee and voted upon by the shareholders, the total cash component of salary for KMP cannot exceed $800,000 per annum. The following table presents components of remuneration for executives for the year 2017 for both the companies:
|Galaxy Resources||Cash Salary & Fee||Superannuation||Option||SARS||Total|
|Orocobre||Cash Salary & Fee||Superannuation||Short term Incentives||Long term Incentives||Total|
It can be seen that the remuneration has taken a huge jump from 2016 to 2017 for Galaxy Resources while it is much more in-line for Orocobre. This is especially true for the chairperson of Galaxy resources.
It was seen above that a company employs various techniques and methods to evaluate the performance of the senior executives. However, it is very difficult to arrive at a consensus on the performance of executives as there are various parameters on which it is evaluated. A company employs a performance management system and various techniques so as to evaluate the executives in a fair and reasonable manner as it becomes difficult to do it objectively, especially in a very large organisation (Raithatha, M. & Komera, S., 2016).
Regarding remuneration as well, both Galaxy Resources and Orocobre have created a remuneration charter committee comprised mainly of non-executive directors so as to guide the company in the right direction towards creation of remuneration packages that are fair to the employees and within cost budget of the company. However, the executive remuneration report of Orocobre is more detailed and transparent than Galaxy Resources. The composition of executive remuneration and the increase in executive remuneration in this year over the previous is more justified as compared to Galaxy Resources.
However, still it would be unwise to say that executive remuneration composition of Galaxy Resources is flawed because of the various parameters on which the executive performance is evaluated. The objective of the compensation packages of the senior executives is to apply control over their activities and making them responsible for their pays.
As rightly said by Justin Fox (2006), what makes a CEO great is a subject to discussion. Is iit the growth of the company in financial terms or to inspire the employees with a vsion for future growth (Fox, J., 2006)