Managerial Accounting: Evaluating Financial and Non-Financial Measures for Executive Remuneration

The purpose of this study is to illustrate the variety of financial and non financial measures that promote remuneration pay of executives. It studies how the financial measures contribute to the overall remuneration plan as well as the non financial measures that has a part to play in impacting the incentive plan of executives. This report compares the remuneration policies of two companies that belong in the same industry and summarises the findings of the remuneration policies found on reviewing those two companies. The study aims to find out what means best promote employee performance and what financial and non financial measures have on the growth of overall organisational objectives.

Running head: MANAGERAL ACCOUNTING
Managerial Accounting
Name of the Student
Name of the University
Author Note

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Executive summary
The purpose of this study is to illustrate the variety of financial and non financial measures
that promote remuneration pay of executives. It studies how the financial measures
contribute to the overall remuneration plan as well as the non financial measures that has a
part to play in impacting the incentive plan of executives. This report compares the
remuneration policies of two companies that belong in the same industry and summarises the
findings of the remuneration policies found on reviewing those two companies. The study
aims to find out what means best promote employee performance and what financial and non
financial measures have on the growth of overall organisational objectives.

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Table of Contents
Introduction................................................................................................................................3
Review of topic and of literature................................................................................................3
Company review........................................................................................................................6
Reliance worldwide....................................................................................................................6
Details for remuneration committee and its membership......................................................7
Allocation of executive remuneration....................................................................................7
Mix of performances used......................................................................................................8
ALS limited..............................................................................................................................12
Details of remuneration committee and its membership......................................................12
Allocation of executive remuneration.................................................................................12
Summary of findings................................................................................................................17
Analysis and comparison of remuneration methods used........................................................18
Conclusion................................................................................................................................19
References................................................................................................................................20

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Introduction
The ability of organisations to reward and evaluate the performance of executives in
the public sector is of the upmost importance. This is especially important if the performance
measurement systems can promote a positive implementation of the strategic goals and
objectives of a company. In his report we provide variety of methods that can be used to
evaluate the administrative performance in public sector undertakings(Kerzner,2017). These
methods allows the managers to concentrate on what is most vital to their company and
customers. This makes their performance assessments not only to the organisation’ objectives
but also but also gives the leaders an explicit linkage between performance attributes to the
individual and organisation objectives (Buchanan, 2016). We evaluate the various methods
of measuring executive performance and how their effectiveness we also give detail about
what these methods provide to aid in the evaluation process and examine in detail about the
implications of these systems on performance management. we take two companies and
compare their remuneration reports and based on that we analyse the performance of
executive employees(Van Dooren, Bouckaert and Halligan, 2015)
Review of topic and of literature
There has been a significant growth of performance based management system . This
has been rising both in terms of their norm and importance. Performance management is the
methodical way by which a company involves its employees in improving organisational
effectiveness (Mone and London, 2018). It can be applied to organisations, departments ,
processes ,programs or products to internal or executive customers in both private and public
sector organisations. This helps in pushing executives to measure and examine results.
Executive evaluation should be directed in such a way that it should help the organisation in
achieving the desired outcome (Arnaboldi, Lapsley and Steccolini, 2015).

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Executive performance management needs to be effective in maintaining the
effectiveness of organisations. The system must have the backing or support of stakeholder
executives. Executives must understand its purpose and how it works. They must see how the
system and how it will benefit them personally (Kamierczyk, Kamierczyk and Aptacy,
2016). According to a study sponsored by the us department of veteran affairs, it revealed a
number of essentials for effective executive performance management that includes: 1)
strategic alignment 2) result based organisation culture 3) executive buy in 4) unambiguous
performance evaluations
A major finding from this study suggested that performance evaluations directly
relate to executives job levels and roles. Executives must have the ability to influence
outcomes that they will be assessed against. Only then they will be motivated enough to
pursue t recognition and rewards that come from achieving performance targets. In the
absence of a direct link between performance evaluating criteria and executive
responsibilities, performance measurement is reduced from a powerful behaviour change tool
to a potentially frustrating and demotivating administrative task.
Management by objectives(MBO) is a concept that makes all managers of a firm
participate in the strategic planning process. This is a process that improves execution of a
particular planning process. Further the MBO process requires the management to use a
range of performance measurement systems. This would help the organisation to achieve its
organisational goals. MBO principles have helped in creating a performance measurement
system for evaluating the performance of employees in public sector organisations. The
principles of MBO include cascading organisational goals and objectives and also defines
the specific roles of each member of an organisation. This includes in involving managers in
providing an evaluation and feedback on performance(Kamierczyk, Kamierczyk and Aptacy,
2016).

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A balanced scorecard is also a method to evaluate effective executive performance.
Senior executives comprehend that the measurement system of the organisation affects the
behaviour of managers. Executives also comprehend that old-fashioned financial practices
like return on investment and earning per share give misguided signals for incessant
improvement and innovation. These are the type of activities that the competitive
environment demands (Akkermans and Van Oorschot, 2018). The traditional financial
measures might have worked well in , but they are out of their depth in the context of today’s
environment. Nowadays the managers chose to focus on operational measures as well as
financial measures. They believe that operational measures will automatically improve
financial measures. The balanced scorecard allows managers to view the business from four
important angles namely financial perspective, customer perspective , internal business
practice and innovation and learning practice. The balanced scorecard link performance
measures with that of four perspectives that raises important questions. These questions
relate to how do customers see the organisation( customer perspective), how do they look to
shareholders( financial perspective),what must the company excel at (internal practice) and
what the company can do to prove and crate value(innovation and learning perspective).this
helps in minimising information overload by limiting the number of measures used. It makes
the manager in focusing on the handful of measures that are the most critical (Hansen and
Schaltegger, 2016).
There is also another approach called a results based leadership. It focuses on
attributes and results. Leaders must strive for excellence not only in terms of results and
objectives , but by demonstrating attributes of success. This approach offers four criteria for
judging whether managers are focused on achieving results. Those four criteria includes the
executives balance concerns of employees, the results linking strongly to the strategy of the
firm’s strategy and competitive position , whether results meet both short term and long term

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goals and finally whether results support the whole enterprise and transcend the personal
gain of managers. This approach moves management away from thinking about inputs of
leaders and instead focuses the management to take steps about the outcomes of their
leadership. It thus provides an effective framework that measures the effectiveness of the
leader(Donate and de Pablo, 2015).
Company review
This section deals with comparing the remuneration practices of two companies in
Australia belonging to the same industry. The first company that is already included in the
assignment, is Reliance Worldwide. Reliance worldwide belongs to the industrial sector and
is the world’s largest manufacturer of plumbing fittings. It also specialises in the
manufacture of specialist water control valves. Another company that has been chosen for
this comparison purpose is ALS limited. It is a global leader in providing laboratory testing,
inspection, certification and verification solutions. It provides high quality , innovative and
professional testing services to clients .it also belongs to the industrial sector.
Reliance worldwide
The first part of this remuneration analysis illustrates the remuneration policy of reliance
worldwide.
Details for remuneration committee and its membership.
The procedure for selecting directors for appointment purposes is ovesseen by the
nomination and remuneration committee. It also does the performance evaluation of
individual directors(Rwc.com, 2018). This committee is headed by an independent director.
Other members include two non executive directors (Tan and Liu, 2016.) .The nomination

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and remuneration committee consists of members that are Jonathan Munz, Ross Dobinson
and Stuart Crosby.
Some of its responsibilities include mentioning to the Board about the remuneration
arrangements to the CEO. It also includes reviewing and facilitating shareholder and other
stakeholder engagement
Allocation of executive remuneration
According to the remuneration report, it has set out remuneration arrangements for the
key management personnel.KMP includes both non executive and executive
directors(Rwc.com, 2018).
The board, through the remuneration committee is accountable for designing and
revising remuneration policies . These help in aligning the remuneration of executives with
the long term interests of shareholders (Sauaia, 2014). The remuneration policy for senior
executives are set to correctly reflect a senior executive’s duties and
responsibilities(Lazonick, 2016) .The executive remuneration package is comprised of fixed
remuneration that consists of a base salary and contributions to superannuation pension
funds. It also includes cash bonuses that are awarded at the discretion of the company
(Kolev, Wiseman and Gomez, 2017).
The remuneration percentages to executive members have been illustrated as follows:
Senior executive Fixed remuneration STI (%) LTI(%)
Heath sharp 36.3 55.1 8.6
Gary bollman 55.9 11.7 32.5
Terry scott 82 18.0 -

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Figure 1- remuneration percentages
Source- (Rwc.com, 2018)
Mix of performances used
The remuneration structure of reliance worldwide were as follows:
Fixed remuneration- according to this the terms of this remuneration structure containthr
following;
 A fixed annual remuneration component encompassing a base salary and appropriate
superannuation funds
 Other accepted benefits include items such as free transport, vehicles, mobile phone
etc
Senior executives have obtained a competitive fixed remuneration. This is in accordance
with the terms as set in the senior executive’s remuneration service agreement(Cecchetti and
Kharroubi,2015).some key performance indiactors that impact remuneration pay of
executives include:
Figure 2- key performance indicators

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Source- (Rwc.com, 2018)
The company’s share price increased of 8.1 % during financial year 2017 . the public
offering had an issue price of $2.50 per share so that the closing price of 30th june 2017
represented a 33.6 percent premium to that issue price. Senior executives were rewarded I
recognition of this strong performance and delivering quality returns to shareholders.
Short term incentive
Under the company’s bonus plan, bonus are awarded to senior executive at the option
of the board . The overall performance of the group needs to be considered in determining
whether a cash bonus will be awarded in deliberation to attainment of key performance
objectives(Rwc.com, 2018).
The STI bonuses is awarded to the senior executives. It recognise their performance
in leading the company during its successful first full year since listing in the ASX. . the
company also experienced positive financial results in the financial year 2017 , as evidenced
by the positive shareholder returns. (Bussin and Modau, 2015).
Long term incentive
The company established the Equity incentive Plan . This plan was established to
assist the motivation, retention and reward of eligible employees. The plan is designed to
align the interests of employees with the interests of shareholders . This can be done by
providing an opportunity for eligible employees. This helps in receiving an equity interest in
the company(Ghazvini et al.,2015). There were an award that included being provided to the

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senior executives that include the LTI award that was delivered in the form of 1,307, 190
share options(Rwc.com, 2018). Each option enables the chairman to obtain an ordinary share
in the company. It is however subjected to meet specific conditions.
Options that were granted to senior executives during FY2017
Figure3-optons to senior executives
Source- (Rwc.com, 2018)
Movements in options held by senior executives
name Balance at 1st
July 2018
Granted
during the
year number
Granted
during the
year $ value
Balance at 30th
June 2017
Heath sharp 4,000,000 - - 4,000,000
Gary Bollman - 1307190 967321 1,307, 190
Terry scott - - -
Figure4- movements in options of executives
Source- (Rwc.com, 2018)
Executive remuneration
The details for the remuneration for executive personnel are as follows.it is determined as per
the relevant provisions of the Australian accounting standards.

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Figure 5-remuneration details
Source- (Rwc.com, 2018)
ALS limited
The next part of this remuneration policy deals with the company ALS limited.
Details of remuneration committee and its membership
A new committee, now called the people committee , formerly known as the
remuneration committee was established by the board to create a wider scope for the existing
remuneration committee. The committee consist of the three independent non executive
directors. The committee considers to consider all aspects of remuneration strategy , policy
and process for executive key management personnel. It also has an oversight of the key
remuneration programs for the company globally(Alsglobal.com,2018).

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The people committee consisted of the following people:
 John mulcahy – chairman of people committee
 Bruce phillips- non executive director
 Tonianne Dwyer- non executive director
Allocation of executive remuneration
The financial performance has increased overall compared to the last year. The short
term incentives payments provide a fair outcome based on good financial performance and
align better with the results off shareholders. The executives long term plan award was
achieved at the overall rate of 37.5 % of the maximum potential as two of the four
performance hurdles were not met and done hurdle was achieved only in part. Therefore the
executive pay outcomes for 2016-17 demonstrate an alignment with shareholders
outcomes(Shaw and Gupta, 2015) . This confirms that the current remuneration policies are
working properly to ensure that there is a correlation to company performance. The LTI plan
rules will continue to include the current four performance hurdles of TSR, EPS, EBITDA
and ROCE. As these measures increase, the remuneration plans for the executives will
increase.
The company has a strategic plan in place. This plan will help in assisting the company in
achieving its financial and other business goals. The remuneration strategy is put in place
incorporates the following
Fixed remuneration Short term incenives-cash
based
Long term incentives- equity
based
46% 27% 27%
60% 20% 20%

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Figure 6- remuneration structure
Source- (Alsglobal.com,2018).
The fixed remuneration part is set to align executive reward to growth in shareholder
value. The short term incentives record financial growth against last year’s performance. It
improved financial and health and safety outcomes of the employees(Bennett, 2018). 60
percent of the reward is set against financial KPI’s while 5% of the reward is set against
health, safety and environmental KPI’s. While the next 35 % of the reward is reserved for
achieving business plan milestones(Alsglobal.com,2018). The non financial measures
include achieving health and safety measures and setting business milestones. However if
threshold performance is not met there is no STI payment. A portion of the non financial
KPIs has the executives performance viewed against the performance of peer companies. The
KPI was set against the positive performance indicator scorecard of health, safety and
environmental level indicators . A minimum score of 90 percent is required to achieve the
HSE KPI. Other non financial KPIs are set using each divisional annual business plan(Alissa,
2015). The annual business plan provides for a balanced scorecard of improvements,
initiatives and cost management practices. The long term incentives plan is 3 year based and
includes four hurdles. The four hurdles include EPS growth, TSR, EBITDA and ROCE.
These are all financial measures(Barros and Carvalhal, 2015). The equity settled
performance right vests and if exercised convers to an ordinary share in the company at nil
exercise price.
The actual remuneration of executive employees for the year 2017 include:

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Figure 7-actual remuneration details
Source-(Alsglobal.com,2018).
The performance hurdles include:
EPS- the growth in EPS is calculated by comparing the diluted underlying EPS from
continuing operations achieved by the company in the base year(eg march 2016) and
the final year of the performance period( eg year to March 2017)
Particulars 2016 2017
Basic EPS 23.7 22.4
Diluted EPS 23.6 22.3
Figure 8- EPS details
Source--(Alsglobal.com,2018).

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EBITDA- the EBITDA margin measurement is contingent up performance of the
company against a group of peer companies that are comprised of key global
competitors . It can be illustrated with the help of a table:
Figure 9-EBITDA details
Source-(Alsglobal.com,2018).
Total shareholder return
The total shareholder return measures the growth over the performance period in the
price of shares plus dividends notionally reinvested in shares . the TSR hurdle needs to be
higher than the 50th percentile or higher against the TSR s of the nominated groups of
comparative companies for the same period(Schlechter, Thompson, and Bussin, 2015). A
diagram that illustrates the following:

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FIGURE 10- TSR
Source- (Alsglobal.com,2018).
Company performance related and equity related remuneration
Incorporating all the financial and non financial measures details of each of the named
executives performance related and equity based remuneration as apportion of their total
remuneration is given below:

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Figure 11- proportion of LTI and STI of total remuneration
Source-(Alsglobal.com,2018).
Summary of findings
As per the findings of the two companies in question, we have seen that the
remuneration policy of reliance worldwide is composed of both fixed and variable parts. The
variable part composes of both short term incentives and long term incentives. The positive
shareholder returns is associated with incentive plan of the executive directors. There was an
equity incentive plan that assists in the motivation, retention and reward of employees that
are eligible for variable plan(Alsglobal.com,2018). There were share options that were
eligible for executives as well. It enabled them to acquire ordinary shares in the company.
These options were granted free of cost. There was another financial measure called total
shareholder return that measured the performance of the company in relation to the
remuneration. There were no such non-financial measure that ties this company’s
remuneration pay .
The next company ALS has a much wide ranging remuneration structure that
incorporates both financial measures and non financial measures. The fixed remuneration
plan responds to the growth in shareholder value .this means that the executives will earn
more remuneration as the shareholder value increases. Other financial measures include
growth in EPS , ROCE and EBITDA(Alsglobal.com,2018). Non-financial measures include
achieving a desired degree of health and safety measures and achieving desired business
objectives. Another non financial measure that is there include the performance of peer
companies and setting business plan improvements in terms of providing a balanced
scorecard of improvements . The commonality that can be found is that both company uses
total shareholder return as a measure to rank the company in terms of shareholder growth in

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other peer reviewed company. Both companies also provides share options to companies at
nil exercise price.
Analysis and comparison of remuneration methods used
In terms of the remuneration policy of the company reliance worldwide, both
companies followed a short term and long term incentive structure that measured employees
pay based on financial and non financial measures of the executive employees. The principla
goal behind these incentive plans is to focus the executives on long term outcomes, ensuring
the retention of top employees and encouraging teamwork and motivation through company
performance hurdles(Barros and Carvalhal, 2015). In the case of ALS global, the NPAT
target was fully met as were all the non financial KPI’s. The second NPAT hurdle was
however only partially met while an STI payment is due at 71 percent of the total potential.
In the case of Reliance worldwide, the financial targets were fully met in terms of NPAT and
positive shareholder returns. The company recognises the performance of the senior
executives and hence awarded the bonus during its first successful year since listing in the
ASX.
Conclusion
As per the discussion above it is clear that both financial and non financial measures
form a key component of the remuneration structure of the executives who work in the two
companies , reliance worldwide an ALS global. However financial measures are more
significant of the two. It is clear that financial measures that relates to EBITDA, EPS have a
more greater impact in expanding remuneration pay since large scale companies like these
are judged by the shareholder value or their market capitalisation rate. Both these companies
provide share options to executives. This makes them feel more involved in the company and
its operational activities. They feel like that they are part of the company itself. A further

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remuneration report analysis off the two companies shows their incentive plans which is
designed to improve organisational performance as well as improve the motivational levels of
employees. Some of the measures are attached to achieving health and safety standards and
achieving milestones in business process. A variety of financial measures enable a more
encompassing view of how the remuneration policy is structured in terms of meeting specific
targets in EPS, shareholder value and total shareholder return.

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