AYB311 - Financial Accounting Issues: Analysis of CBA Compensation

This report delves into the financial accounting issues surrounding executive compensation at the Commonwealth Bank of Australia (CBA) during the 2016-2017 financial year. It examines the debate on whether remuneration significantly impacts corporate culture, focusing on the reward systems for top executives. The report reviews literature on executive pay structures, including short-term incentives, long-term incentives, and fixed remuneration, and analyzes the potential drawbacks of performance-based incentive schemes. It discusses the ethical concerns arising from the disparity in executive compensation compared to ordinary employees and the absence of social performance metrics in incentive structures. The report recommends incorporating the stewardship theory for long-term incentive programs and suggests alternative incentive mechanisms to mitigate employee dissatisfaction and potential brain drain. Ultimately, the analysis emphasizes the need for CBA and similar firms to shift from performance-based approaches to models that prioritize community service and employee welfare for long-term sustainability.

Running head: FINANCIAL ACCOUNTING ISSUES
Financial Accounting Issues
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Table of Contents
Introduction:................................................................................................................................................2
Literature review:........................................................................................................................................2
Discussion and analysis of the issue:...........................................................................................................3
Recommendation:........................................................................................................................................4
Conclusion:..................................................................................................................................................5
Reference:...................................................................................................................................................7

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Introduction:
There is a long standing debate that whether the remuneration has wide spread effect on
the corporate culture or not. For this purpose understanding the reward system of the top
personalities of a firm possess paramount importance. According to the (CBA Annual Report
2017, 2018), data regarding the remuneration of the business executives entails the auditors what
amount of return the board of directors expect from the trade-off between the various financial
metrics along with the other metrics like community, safety, environment and others. However,
it has also been observed that, if the incentive of the business executives has increased
exorbitantly, then it generally attracts rejection from the employee of the lower levels (O’Reilly
et al., 2014). As the practical instance of the same, case of the Commonwealth Bank of Australia
(CBA) can be considered that faced large amount of revolt during 2016.
CBA with the target to achieve higher transparency in the business and in the case of the
executive compensation enhanced the compensation of the business executives (CBA Annual
Report 2017, 2018). It attracted the revolt from the lower segment employee of the firm to roll
back the same in front of the force. Under this situation, this business report is aimed to research
and provide comprehensive analysis of the compensation package of the executives of the CBA
that took place during the 2016-2017 financial year. In addition to this the report is aimed to
provide recommendations to gauge the present situation and doing same it will provide a
summarized overview regarding the finding of the analysis.
Literature review:
According to the research of the Australian Human Resource Institute it can be seen that,
there are three components that determine the executive pay structure, which are short term
incentive, long term incentive and the fixed remuneration (Dyballa & Kraft, 2016). As the three

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part structure promotes, human resource profession is one of the key factor that determine the
incentive structure of the individual executive, however, recent studies highlights that
performance based scheme of the incentive structure does not provide better organisational
performance rather it deteriorates the same. According to the recent study published in The
conversation, (2018), prevailing multilayer accounting based performance (MAP) measurement
has enhanced the incentive of the company executive to 43.3% as compared to the 16.5% during
the 1996. On the other hand according to the same source, incentive structure of the employees
has been surpassed by the 1.67 million dollar in front of the executive incentive structure that
highlights the magnitude of the polarisation in the case of the incentive of the employees.
On the other hand it has been observed that the MAP based incentive has moved far from
the stock price based approach toward the stock-performance based mechanism of incentive that
has polarised the incentive scheme for the employees in higher magnitude (Abernethy, Kuang &
Qin, 2016). From the perspective of the independent board of directors, it can be stated that there
is no change in the situation. Though the idea has been introduced in order to bring in clarity and
transparency in the process of executive incentive construction mechanism, however, in reality it
has further polarised the situation (Dyballa & Kraft, 2016). Performance based approach of
incentive construction has constrained the allocation of newer brains into the firm and it has
further escalated into the situation like brain drain.
Discussion and analysis of the issue:
It has been seen that the Commonwealth Bank of Australia has been facing serious issue
with its executive incentive structure. Stakeholders has argued that the incentive structure is
highly polarised and it provide undue advantage to the executives of the organisation. As the
statistics highlights the CEO of the CBA has been paid 12.3 million dollar during 2016, which is

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three times higher than the ordinary employee of the firm and the inactive structure of the
organisation provides 48.6% higher to the CEO compared to other employees (Li & wang,
2016). According to the statistics, citizens of the Australia is unsatisfied with the ethical index of
the large banking organisation that highlights the ethical issue faced by the firm while
constructing the executive incentive structure. Most of the ethical issue comes from the absence
of the social performance into the executive incentive structure. In presence of the same it can be
seen that the managers tend to perform more ethically and behave with the employees according
to the corporate manners. Compared to the 2016 governance framework new model has come
with a new framework that includes the ethical performance as well social recital measurement
for constructing the executive incentive structure (Australians think a fair pay for a CEO is
around $300,000, 2018). Under this situation the updated framework is has provided enhanced
weightage to the relative TSR by 75% as compared to the 60% of the 2016 (Core, Holthausen &
Larcker, 1999). In addition to this, 25% weightage has been provided to the customers
satisfaction compared to the 92% during 2016 (O’Reilly et al., 2014). Thus the updated
remuneration principles is expected to solve the issue and provide the stakeholders solution to
deal with their issue. However, there is ample scope to perform better with the introduction of
the stewardship theory.
Recommendation:
Considering the literature and present condition of the CBA regarding the executive
incentive structure following recommendations can be portrayed:
 There is limited amount of talent pool and if the Australian firms are not willing to pay
the market rate, then it will face brain drain. It will reduce the performance of the firms
like CBA that require skilled employees only.

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 From the studies it can be seen that performance based incentive scheme is not suitable
for better industrial performance rather it deteriorate the same. Under this situation it will
beneficial for the firms like CBA to introduce alternative mechanism of incentive
construction
 It would be ideal for the firm to bring in stewardship theory in order to frame long term
executive incentive structure. It depends on the social orientation as well as the
behavioural parameters of the mangers that aids the organization to determine the long
term incentive program
These are essential recommendations that the CBA need to follow in order to reduce the
scope of further escalation of revolt among the employees regarding the executive incentive
structure. In addition to this, it would be beneficial for the firm to focus on the other institutional
context as well as the operational aspect of the business on which it operates.
Conclusion:
From the comprehensive analysis of the compensation packages provided to the
executives it can be seen that the main thing that well against the disparity between the incentive
policy of the firm. In addition to this performance based payment approach of the firm has
provided stimuli to the revolt of the lower level employees of the firm. The report has found that
one of the main argument of the literatures states for the change in the incentive and role of the
executives, which will be more focused to provide service to the wider community rather that
polarizing the same to a limited number of stakeholders. As per the finding of the analysis it can
be perceived that the CBA has completely ignored the customer satisfaction parameter as well as
the environmental practice of the firm under the regime of the executive while making the
incentive structure of the firm. Thus to conclude it can be stated that, rather than going further

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with the performance based approach of the 19th century , firms like CBA need to bring in the
Stewardship theory while making the incentive structure. It will contribute to the prosperity and
welfare of the firm while fulfilling the personal requirement of the employees that can provide
much amount of sustainability to the firm.

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Reference:
Commbank.com.au. Retrieved 19 April 2018, from
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
annual-reports/annual_report_2017_14_aug_2017.pdf
Abernethy, M. A., Kuang, Y. F., & Qin, B. (2014). The influence of CEO power on
compensation contract design. The Accounting Review, 90(4), 1265-1306..
Australians think a fair pay for a CEO is around $300,000. (2018). Business Insider Australia.
Retrieved 19 April 2018, from https://www.businessinsider.com.au/australians-think-a-
fair-pay-for-a-ceo-is-around-300000-2017-8
Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive
officer compensation, and firm performance1. Journal of financial economics, 51(3), 371-
406.
Dyballa, K., & Kraft, K. (2016). How Do Labor Representatives Affect Incentive Orientation of
Executive Compensation?
Li, Z., & Wang, L. (2016). Executive compensation incentives contingent on long-term
accounting performance. The Review of Financial Studies, 29(6), 1586-1633.
O'Reilly III, C. A., Doerr, B., Caldwell, D. F., & Chatman, J. A. (2014). Narcissistic CEOs and
executive compensation. The Leadership Quarterly, 25(2), 218-231.
We need to change more than pay for executives to do better. (2018). The Conversation.
Retrieved 19 April 2018, from https://theconversation.com/we-need-to-change-more-
than-pay-for-executives-to-do-better-66113