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Practice Exam – Exam A, Version 1

ACCT90033

INTEGRATED ACCOUNTING STUDIES

Case – Chief executive pay holds up with equity and options helping to buffer the Covid brunt (the Australian, 13^th July 2021)

Use the following case information to answer Questions 1-4 (10 + 10 + 10 + 10 = 40 marks in total):

Executive pay at our top 100 listed companies fell to levels not seen in a decade in the first financial year capturing the impact of the pandemic, but almost 70 per cent of chief executives still received a bonus generally worth more than 12 times an average worker’s salary.

The Australian Council of Superannuation Investors (ACSI)’s CEO Pay in ASX200 Companies report, released on Tuesday, shows that median realised pay for ASX100 chief executives fell 3.6 per cent to $3.99m in 2019-20, to levels not seen for more than 10 years.

However, the devil is in the detail with ACSI pointing out that for the 68 incumbent chief executives in the list, median realised pay actually increased, from $4.19m to $4.34m.

The median bonus paid to the 69 per cent of executives who received one fell to $1.14m - the lowest level in the 10 years ACSI has been collecting this data. In contrast, average weekly ordinary time earnings for a full-time worker in Australia came at about $89,000 the last time it was reported by the Australian Bureau of Statistics in May.

The number of chief executives missing out on a bonus - at 31 per cent - was the highest in the 20 years of the study and more than doubled from 15 per cent the previous year.

At the top end of the scale, CSL’s Paul Perreault left his peers in the dust, trousering $43.04m during the year, after earning $30.53 million the year before.

Mr Perreault’s figure surpassed the previous record for executive pay as measured by the research, with IDP Education chief executive Andrew Barkla taking home $37.76m in 2018-19.

US and Melbourne-based Mr Perreault has delivered for shareholders over his tenure, which started in 2013, with the ACSI data showing the company's total shareholder return over the past five years has been 28.9 per cent.

ACSI said much of Mr Perreault’s haul came from “148,000 options, granted in October 2015 under a legacy scheme and with an exercise price of $89.52, (which) were exercised when the CSL share price was about $233”. CSL shares closed at $279.06 on Monday.

Northern Star’s Bill Beament was second on the list with $31.78m, and Goodman Group’s Greg Goodman rounded out the top three with $26.86m.

“For mining company duo Bill Beament and Jake Klein (Evolution Mining), their inclusion in the Top 10 flowed from ‘mega-grants’ made in FY17, which vested in full in the last months of calendar 2019,’’ ACSI said.

“Over that time, the share prices of both gold mining companies appreciated substantially, with Northern Star shares more than doubling and Evolution increasing more than 50 per cent.’’

Qantas chief executive Alan Joyce, who topped the 2018 list with $23.9m and came in eight the following year with $12.2m, slipped out of the top ten, coming in 12th with $10.7m after forgoing his fixed pay for the last quarter of the year in response to the pandemic.

Required:

1. Apply what you have learned in Week 1 and identify features of an effective senior executive compensation scheme. (10 marks, 200 words approximately)

2. When the news was published, the public responded with two conflicting views, some viewing the compensation obscene and the others considering it fair. Analyse the possible reasons behind these sentiments. (10 marks, 200 words approximately)

3. ACSI chief executive Louise Davidson commented that boards were now “better aligning short and long-term pay with investor outcomes” after a decade of investor engagement. Evaluate such a comment, explain whether you agree or disagree with the statement made by Louise Davidson and why. (10 marks, 200 words approximately)

4. Suppose you are an advisor to the CSL Board. Recommend actions that the Board should be taken to deal with investors’ negative sentiment and explain why. (10 marks, 200 words approximately)