Review of NAB's Executive Remuneration Strategy

This report provides a comprehensive review of the remuneration strategy of National Australian Bank (NAB) and analyzes whether it helps resolve agency conflicts among shareholders and executives. Recommendations are provided to the CFO to avoid a second strike in 2019.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance financial accounting
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Table of Contents
1. Introduction..............................................................................................................................2
2. Theory and literature review....................................................................................................2
3. Discussion and analysis............................................................................................................5
i. Review of NAB’s executive remuneration strategy.............................................................5
i. Analysis of remuneration principles.....................................................................................7
4. Recommendation to CFO.........................................................................................................7
Reference and bibliography.............................................................................................................8

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1. Introduction
As the largest business bank of Australia, National Australian Bank (NAB) works with
large, medium and small scale business enterprises. The bank serves more than 90,00,000
customers with the employees of more than 30,000 at more than 900 location of New Zealand,
Australia and all over the world. The bank provide funds to some of most important
infrastructure of Australian communities including roads, hospitals and schools and the bank
performs its duties in innovative, inclusive and responsible way (Nab.com.au, 2019). Main
objective of the report is to carry out the comprehensive review for the remuneration strategy of
NAB. It will highlight the requirement of corporate governance and framework and will identify
issues with the company’s compensation package. The report will further analyse whether the
remuneration principle of the entity for the year ended 2018 will help to resolve the agency
conflicts among the shareholders and executives. Finally recommendation will be provided to
CFO to help avoiding the expected 2nd strike in 2019 (Duong & Evans, 2015).
2. Theory and literature review
Australian securities exchange corporate governance council was formed in the year 2002
and is chaired by ASX group. The corporate governance laid down the recommendation and
principles as follows –
 Principle 1 for laying solid foundation for oversight as well as management
 Principle 2 for the structure of board (Asx.com.au, 2019).
 Principle 3 for promoting ethical as well as responsible decision making
 Principle 4 for safeguarding integrity in the financial reporting

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 Principle 5 for making balanced as well as timely disclosures
 Principle 6 for respecting the rights of the shareholders
 Principle 7 for recognising and managing risk and
 Principle 8 for remunerate fairly as well as responsibly (Asx.com.au, 2019).
As per the requirement of principle 8 the entities shall assure the composition and level of
the remuneration is reasonable and sufficient and the relationship with performance is clear.
Further, the remuneration committee shall be structured in such way that it majorly consist of the
independent directors, chaired by the independent chair, has minimum 3 members (Asx.com.au,
2019).
Shareholders provide their capital to the entity in exchange of the contractual claim on
entity’s assets and income. Further, they delegate the discretion to the corporate management for
making decisions regarding how to employ the capital and hot to supervise other contracts of the
entity. In this context, shareholders are the principals and the managers are considered as their
agents. In any kind of relationship where the interests of agent and principal are not same it will
lead to agency costs (Stewart, Stanford & Hardy, 2018). 2 components are there in agency costs
– (i) cost of divergence among actual decision of the agent and the decision that will maximise
the welfare of the principal (ii) costs those are incurred by parties in efforts for constraining the
divergence (Nab.com.au, 2019). Component of residua loss for the corporate agency cost are
measured through examining the level to which management fails in maximising the firm’s
shares market value. The area of executive compensation where it is not able to fully align the
interests of shareholders and managers, agency costs will not be reduced. On the other hand, the
properly designed package for executive compensation creates the possibility for reducing the

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agency costs and hence, creates substantial wealth for the society as well as for the shareholders
(Abc.net.au, 2018).
As per various researches conducted in past, executive compensation is comparatively
high in the entities with the higher agency costs and performances of these entities are
comparatively poor as compared to others. Hence, pay performance line for the firms with higher
agency costs will be poor. When the managers set the pay for their own as an agent and the
shareholders only receive ‘say on pay’ through rejecting or approving remuneration report, the
shareholder’s votes are expected to reflect to the extent to which they are in the view that as
compared to the company’s performance the pay is higher. Apart from that, if the shareholders
judiciously exercise their voting power, strong dispute of the shareholders will be associated with
the poorer pay-performance link. Hence, empirical evidence does not support the pay-
performance link (Nab.com.au, 2019, Pp 39-64).
Over last 2 decades increasing global concern was there regarding excessive pay and the
government was under tremendous pressure for taking measures to control executive
remuneration. Hence, during 2011 Australia introduced the new legislation to regulate the
executive remuneration. As per the new regulation, if any firm received 25% or more ‘no’ votes
on remuneration report in consecutive 2 years, legislation will provide spill motion for dissolving
existing board and re-electing the new board that is two-strike rule (Stanford, Hardy & Stewart,
2018). As per various analyses it is found that approximately 50% and 58% of first-strike
organisations respectively in 2011 and 2012 came only from 2 industry sectors that are energy
and materials. The reason behind that may be the shareholders have over-reacted to exercise the
voting power as the legislation introduced 1st in 2011 and it was the 1st time for them. However,
shareholders seemed to have exercised voting power more judiciously in 2012 as compared to

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2011 and suggested that they were going through the learning process (Businessnewsaus.com.au,
2019).
3. Discussion and analysis
i. Review of NAB’s executive remuneration strategy
During 2018, the entity introduced new framework for executive remuneration for
encouraging long-term decision making and drive the performance that will represent interests of
all the shareholders of the entity. New frameworks for the executive’s remuneration for CEO and
the executive leadership team is comparatively simpler and removed complexities and will
encourage the performances that will represent interests of all the shareholders. Further, the new
framework demonstrates appropriate balance among being internationally competitive for the
talent and delivering the remuneration aligned with the shareholder and customer outcomes.
Moreover, the deferred shares will be allocated on the basis of face value rather than fair value.
This method is simpler and will provide transparency in terms of the remuneration value earned
(Nab.com.au, 2019, Pp 39-64).
As per the remuneration framework and governance disclosed by NAB in its annual
report for the year ended 2018, the remuneration committee’s responses are to review, assess and
recommend to the board, remuneration practices and policies that will encourage the outcomes of
good customer, outcomes for sustainable enterprise, nurture the strong culture, improve
shareholder’s return for long term and are in compliance with the applicable global regulatory
trends and regulatory requirements. Further, the committee considers interest of all the
shareholders while fulfilling the responsibilities (Nab.com.au, 2019, Pp 39-64). Remuneration
governance framework of NAB is as below –

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CEO of NAB Andrew Thorburn and senior executives of the bank took big pay cut in the
previous year as per the new system of executive pay that was introduced by the chairman Ken
Henry who responded to disturbing revelations from Hayne royal commission. Annual report
released by the bank for the years ended 2018 revealed that the remuneration of Mr Thorburn
was reduced by 31% that is reduced to $ 4.4 million from $ 6.4 million (Nab.com.au, 2019, Pp
39-64). He received 45.5% of variable remuneration in current year as compared to highest
possible level if he could achieve his targets. However, Mr. Thorburn accepted his accountability
for the failure of the bank for fixing the mistake in quick manner, remediate the customers
promptly and set the things right. These failures adversely impacted the reputation of the bank
(Dickfos, 2016). Further, as reported by The Age and Herald Mr. Thorburn took the luxury
holiday to Private Island in Fiji and he received the thermo mix arranged through Human Group,

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an external event entity that was subject to police investigation as the shareholders raised
concerns for alleged frauds committed in association with the bank (The Age, 2019).
i. Analysis of remuneration principles
The board of NAB in their annual report for the year ended 2018 mentioned that it has
determined to drive the focus on the exceptional customer service at each level of the bank for
achieving strategies and delivering sustainable and long term performance (Nab.com.au, 2019,
Pp 39-64). Further, the employee’s remuneration is aligned with the shareholders and customer’s
interests for doing so. Further, the bank in 2018 introduced new framework for executive
remuneration for encouraging long-term decision making and drive the performance that will
represent interests of all the shareholders of the entity (Nab.com.au, 2019, Pp 39-64). Further, all
over the business, 100% of the people now have balanced scorecard or the performance plan
with the risk measures and compulsory control. Moreover, the variable reward plan covers 97%
of the people. Hence, the new remuneration principal formed by the board in 2018 will help to
resolve the agency conflicts among the executives (Nab.com.au, 2019, Pp 39-64).
4. Recommendation to CFO
It is recommended to CFO of NAB that for avoiding the second strike the remuneration
structure shall be aimed to increase accou8ntability and transparency in context of executive
compensation. Remuneration strategy should be linked with the pay-performance link. Further,
the remuneration structure should be formed in such way that the executives shall work in
interests of the shareholders. Apart from that, the remuneration framework should maintain
appropriate balance between talent and performance and should be aligned with shareholders and
customer’s outcomes for this years as well as future years.

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Reference and bibliography
Abc.net.au. (2018). ABC News. Retrieved 23 April 2019, from
https://www.abc.net.au/news/2018-11-16/nab-ceo-andrew-thorburn-takes-a-large-pay-
cut/10504002
Asx.com.au (2019). Asx.com.au. Retrieved 23 April 2019, from
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf
Businessnewsaus.com.au. (2019). Business News Australia. Retrieved 23 April 2019, from
https://www.businessnewsaus.com.au/articles/nab-takes--525m-hit-as-it-repays-short-
changed-customers.html
Dickfos, J. (2016). The Costs and Benefits of Regulating the Market for Corporate Insolvency
Practitioner Remuneration. International Insolvency Review, 25(1), 56-71.
Duong, L., & Evans, J. (2015). CFO compensation: Evidence from Australia. Pacific-Basin
Finance Journal, 35, 425-443.
Faghani, M. (2015). Chief Executive Officer Remuneration and the ‘Two-Strikes’ Rule of
Australia (Doctoral dissertation, Griffith University).
Faghani, M., Monem, R., & Ng, C. (2015). ‘Say On Pay’regulation And Chief Executive Officer
Pay: Evidence From Australia. Corporate Ownership & Control, 12(3), 28-39.
Nab.com.au. (2019). Nab.com.au. Retrieved 23 April 2019, from https://www.nab.com.au/, Pp
39-64

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Onnis, L. A. (2019). An Integrated HRM Framework for Remote Managers. In HRM and
Remote Health Workforce Sustainability (pp. 121-133). Springer, Singapore.
Peetz, D. (2015). An institutional analysis of the growth of executive remuneration. Journal of
Industrial Relations, 57(5), 707-725.
Riaz, Z. (2016). A hybrid of state regulation and self-regulation for remuneration governance in
Australia. Corporate Governance, 16(3), 539-563.
Riaz, Z., Ray, S., & Ray, P. (2015). The Synergistic Effect of State Regulation and Self-
Regulation on Disclosure Level of Director and Executive Remuneration in
Australia. Administration & Society, 47(6), 623-655.
Stanford, J., Hardy, T., & Stewart, A. (2018). Australia we have a problem. The wages crisis in
Australia: What it is and what to do about it, 3-20.
Stewart, A., Stanford, J., & Hardy, T. (2018). The wages crisis in Australia: what it is and what
to do about it. University of Adelaide Press.
The Age. (2019). Latest & Breaking News Melbourne, Victoria | The Age. Retrieved 28 April
2019, from https://www.theage.com.au/
Thenewdaily.com.au. (2019). Sort out bank boss pay or we’ll do it ourselves, regulator says.
Retrieved 23 April 2019, from
https://thenewdaily.com.au/money/finance-news/2019/03/27/bank-bosses-pay-apra/

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