Effectiveness of Control Systems Within Companies

MANAGERIAL
ACCOUNTING
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1. Introduction:
• Compensation or payment
received for services is
remuneration
• Development of literature review
on executive performance and
remuneration of Westpac, one of
the big four banks of Australia
• Review from the perspectives of
its remuneration committee,
allocation of remuneration, use of
performance measures, changes in
remuneration reporting and
company pay against executive
pay

2. Review of topic and
review of literature:
2.1 Executive performance
evaluation and remuneration in
public companies:
• Better described procedure
evaluates the previous
performance to develop future
targets
• Extending support to the
remuneration committee for
undertaking suitable decisions to
set effective strategic goals, future
compensation and employment.

2. Review of topic and
review of literature
(Continued):
2.2 Effectiveness of control
systems within companies:
• With the help of control systems, an
organisation could fulfil its objectives
by adhering to the internal, legal and
regulatory standards.
• Data could be obtained timely;
however, there needs to be
processing of various kinds of
financial information leading to
delays.

3. Company reviews:
3.1 Details of remuneration committee
and its membership:
• Four members are present in the
remuneration committee of Westpac and they
are independent, non-executive directors
• The remuneration committee is entitled to
review and recommend the board in relation
to the remuneration policy
• The committee is accountable to review and
recommend the individual remuneration
levels of the key personnel of the bank.
• The committee is accountable to held four
meetings in a particular financial year or
more based on the internal and external
circumstances.

3. Company reviews
(Continued):
3.2 Allocation of executive
remuneration:
• Fixed remuneration could be explained as
the overall annual compensation that an
individual receives for the services
rendered to the organisation
• In case of Westpac, fixed remuneration
takes into consideration the complexity
and size of the role, individual
responsibilities, competence and
experience
• This type of remuneration is set
depending on the pertinent benchmarks
within the financial services sector of
Australia

3. Company reviews
(Continued):
3.3 Mix of performance measures
used:
• Financial and non-financial measures
• Financial measures:
Earnings per share:
• The earnings per share of Westpac have
fallen from $2.55 in 2015 to $2.25 in 2016;
however, the increase is significant to
$2.38 in 2017.
• In case of Wesfarmers, due to the
generation of higher net income in 2017, it
has managed to provide adequate returns
to the shareholders.
2017 2016 2015
2.10
2.15
2.20
2.25
2.30
2.35
2.40
2.45
2.50
2.55
2.60
2.38
2.25
2.55
Earning Price
Per Share
Westpac

3. Company reviews
(Continued):
3.3 Mix of performance measures
used (continued):
Return on investment:
• Return on investment of Westpac has
fallen from 0.99% in 2015 to 0.89% in
2016; however, the increase is significant
to 0.94% in 2017.
• For Westpac, even though there is
increase in this particular ratio, it is
significantly lower due to the cutthroat
competition from the other three big banks
operating in the financial services sector of
Australia.
2017 2016 2015
0.82%
0.84%
0.86%
0.88%
0.90%
0.92%
0.94%
0.96%
0.98%
1.00%
0.94%
0.89%
0.99%
Return On
Investment
Westpac

3. Company reviews
(Continued):
3.3 Mix of performance measures
used (Continued):
Return on equity:
• The return on equity of Westpac has
fallen from 13.04% in 2015 to 12.81% in
2016; however, the increase is significant
to 25.09% in 2017.
• In case of Westpac, increase could be
observed due to rise in net income, which
has helped the bank in generating
adequate returns to be distributed to its
stockholders.
2017 2016 2015
11.50%
12.00%
12.50%
13.00%
13.50%
14.00%
14.50%
15.00%
15.50%
13.04%
12.81%
15.09%
Return On
Equity
Westpac

3. Company reviews
(Continued):
3.3 Mix of performance measures used
(Continued):
• Non-financial measure (Balanced scorecard):
Financial perspective:
• Involvement in high return activities and raising
profits
Customer perspective:
• Adequate fund is kept for research and
development to obtain increased customer
knowledge
Internal processes perspective:
• Westpac cross-sells its products and services due
to the presence of proactive employees in the bank
Learning and growth perspective:
• Allocates resources in the areas claiming to offer
the maximum profitability

3. Company reviews
(Continued):
3.4 Changes in executive remuneration
reporting:
• In 2016, the total shareholder return of the LTI plan
of Westpac for the past three years has been 15.2%,
while in 2017; the return has been 11.791%.
• The STI outcomes of the group have accomplished
95% of target in 2016, which have fallen by 11%
compared to the previous year. On the other hand,
the STI outcomes have achieved 109% of the target
in 2017, which is increased by 14% in contrast to
2016.

3. Company reviews
(Continued):
3.5 Company performance versus
executive pay:
• Despite the fall in price/earnings ratio in
2017, the remuneration of the Managing
Director and Chief Executive Officer along with
the current executives of the group has
increased over the year.
• Despite the increase in net income in 2017,
the dividend payout ratio has fallen in order to
pay higher remuneration to the executive
members of the bank.
2017 2016 2015
11.00
11.50
12.00
12.50
13.00
13.50
14.00
14.50
13.01
14.09
12.10
Price/Earnings
Ratio
Westpac
2017 2016 2015
68%
70%
72%
74%
76%
78%
80%
82%
84%
86%
79%
84%
73%
Dividend
Payout Ratio
Westpac

4. SUMMARY OF
FINDINGS:
• Westpac has followed an effective remuneration
policy to drive its performance for the executives
and the group.
• Standard package of payment is made to the
staffs.
• The performance-related payment designed for
the managers has increased the issues related to
the bank.
• Relationships with the shareholders could be
affected and the impact would be similar on
corporate social responsibility of the bank as well

5. ANALYSIS OF
REMUNERATION
METHODS USED:
• The share price of the bank has remained stable
over the years and it has succeeded in retaining
second position in Australian banking industry.
• Due to the stability in share price, the bank has
made several structural changes after reviewing the
policies of its competitors.
• The remuneration committee has reviewed the
remuneration framework of Westpac and there are
approvals for changes to ensure continued
alignment with the experience and performance of
the shareholders along with business objectives.

6. Recommendations:
• Westpac could add a table in its annual report by
disclosing the key pay elements and supporting
information including the way of accomplishing the
business strategy, performance metrics and
maximum potential value.
• It needs to provide detailed information regarding
the contract related to employment.
• Westpac could provide information on the
percentage change in dividends, profit and total
amount incurred on pay.
• Material factors should be considered at the time of
setting the pay policy, particularly shareholder
views and staffs pay.

7. Conclusion:
• Better described procedure evaluates the previous
performance to develop future targets for assisting
the board committee so that decisions could be
undertaken regarding future performance and
employment of the executives.
• Based on the official information, the payment
scale of Westpac could be identified based on their
positions and qualities.
• Material factors should be considered at the time of
setting the pay policy, particularly shareholder
views and staffs pay.
• Westpac has improved its financial performance
and position in 2017, which has helped in increasing
the remuneration pay and returns to the
shareholders.

REFERENCES:
Afrifa, G.A. and Adesina, O.O., 2017. How does directors'
remuneration affect SMEs' performance?. Review of Accounting and
Finance, (just-accepted), pp.00-00.
Albertsen, O. and Lueg, R., 2014. The balanced scorecard's missing
link to compensation: A literature review and an agenda for future
research.
Chang, C.S., Yu, S.W. and Hung, C.H., 2015. Firm risk and
performance: the role of corporate governance. Review of Managerial
Science, 9(1), pp.141-173.
Dawid, H., Harting, P. and Van Der Hoog, S., 2018. Data for the Paper:
Manager Remuneration, Share Buybacks and Firm Performance.
Doran, T., Kontopantelis, E., Reeves, D., Sutton, M. and Ryan, A.M.,
2014. Setting performance targets in pay for performance
programmes: what can we learn from QOF?. BMJ: British Medical
Journal, 348.
Goh, L. and Gupta, A., 2016. Remuneration of non-executive
directors: Evidence from the UK. The British Accounting
Review, 48(3), pp.379-399.
•Westpac.com.au., 2018. Annual reports | Westpac. [online] Available at:
https://www.westpac.com.au/about-westpac/investor-centre/financial-
information/annual-reports/ [Accessed 7 May 2018].