Melbourne Polytechnic: Ethics and Governance CEO Remuneration Report

This report critically analyzes CEO remuneration as a corporate governance issue, using the Commonwealth Bank of Australia (CBA) as a case study. It begins by explaining the relationship between CEO remuneration and corporate governance through the lens of agency theory, highlighting the potential conflicts of interest between management and shareholders. The report then examines strategies organizations can employ to align CEO remuneration with their objectives, referencing CBA's approach, which incorporates performance-based measures and alignment with shareholder interests. Furthermore, the report identifies and discusses the corporate governance issues surrounding CEO remuneration, including scrutiny from investors and regulators, the impact of board size, and the challenges of benchmarking executive pay. Finally, it provides recommendations for addressing these issues, emphasizing the importance of transparency, accountability, and aligning CEO incentives with long-term value creation for shareholders. The report concludes by underscoring the significance of effective corporate governance in ensuring ethical and responsible executive compensation practices.

Running head: ETHICS AND GOVERNANCE
Ethics and governance
Name of the student
Name of the university
Student ID
Author note

ETHICS AND GOVERNANCE
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Description of CEO remuneration as an issue of corporate governance:..................................3
Critical review of governance structure of organization:...........................................................5
Strategies used by Commonwealth Bank of Australia to successfully align the CEO
remuneration with its objectives:...............................................................................................5
Identification of the corporate governance issues criticizing organization regarding CEO
remuneration:.............................................................................................................................9
Recommendation for suggested improvement of corporate governance issue:.......................10
Conclusion:..............................................................................................................................11
Reference list:...........................................................................................................................12

ETHICS AND GOVERNANCE
Introduction:
The report is prepared to critically analyze the corporate governance issue of the
organization with regard to the executive remuneration. For the purpose of analysis, the
chosen organization is Commonwealth bank of Australia that had faced the issue of corporate
governance concerning the remuneration of its executive. The remuneration of CEO has
become a highly controversial topic with the level of executive pay becoming an issue in the
corporate governance areas. This particular topic is at the forefront of debate that constrains
the compensation of executives and result in reforming of structure of corporate governance.
This particular paper explores the issues of corporate governance with regard to remuneration
of CEO of Commonwealth bank of Australia. The report intends to create a linkage between
agency cost perspective and corporate governance about the relationship between the
existence of executive compensation and corporate governance providing a basis of social
performance.
Discussion:
Description of CEO remuneration as an issue of corporate governance:
The relationship between CEO remuneration and corporate governance can be
explained by agency theory which depicts that the act of management is in accordance with
the best interest of shareholders. The well being of team members form the basis of well
being of an individual member within the organization although, each of the team member
act in their own self interest. The agency problem is characterized by the separation of
management and ownership which is the reason of the return provided to executives in the
form of salaries, stock option, remuneration, bonuses and shareholders receiving capital gains
and dividends (Aguilera et al. 2016). Therefore, the authority is used by the management

ETHICS AND GOVERNANCE
themselves to pay themselves excessive salaries and benefits. In lieu of reducing the financial
risk, the management rather than paying out profits as dividends decides to retain the profits.
Moreover, the attitude of avoiding risk by the shareholders and management is different due
to influence on the pay resulting from operation. It is only when the pay is related to
profitability and size of the company; the management would do their best for improving the
financial performance of company. Consequently, the behavior of executives are influenced
and controlled by shareholders by designing the directors incentive schemes so that the
directors and shareholder interest are aligned. Therefore, for maximizing the wealth of
shareholders, directors are rewarded and on contrary, they are not rewarded when they are not
able to create value for shareholders (Bell and Van Reenen 2016).
The executive compensation packages include requirements concerning the
performance of company and its relationship with the pay received by the executives of
company. The significance of corporate governance and executive remuneration can be
observed due to the accusation of failure rewards for lack of accountability and failure,
prevailing financial climate and financial collapse of well known organization. The
problematic side of executive remuneration is reflected by the criticism from different
background as the related practices of corporate governance cannot completely handle it.
Therefore, the compensation of executives can bond them to enhance the value of
shareholder. On other hand, moral hazard and managerial entrenchment can be impoverished
by the dysfunction of the mechanism of corporate governance. The corporate governance is
eroded due to excessive amount of pay to executives and thereby sending the message to
shareholders that their money is spent without appropriate supervision (Sauerwald et al.
2016). Therefore, it can be said that the payment of remuneration to executives is associated
with the issue of corporate governance.

ETHICS AND GOVERNANCE
In event of market forces being reflected by the turnover of board, then a positive
relationship can be expected between remuneration and turnover. Furthermore, when the
governance structure of organization is weak, then CEO earns higher compensation and it is
further stated by this relationship that it is difficult for the board to come to consensus so that
the enhancement of pay package is highly influenced by the board. It has long been a view
that the construction of remuneration of CEO should be done in a manner that the incentives
of CEO are well aligned with that of shareholders. Most of the CEO in companies receives
some part of their income in the form of options and shares. One of the points that need to be
disclosed is that it is not considered favorable to have directors employing CEO who earn
considerably less income than the benchmarked companies (Mees and Smith 2019). CEO is
supported by directors in light of strong incentives which are a wish from the interpretation of
shareholders. CEO cannot be expected to act in the interest of shareholders unless there is an
appropriate financial incentive. It is also argued that the compensation of CEO is determined
as a part of outcome of bargaining relationship between board of directors and CEO and this
result in creating an inverse relationship between fraction of equity that board of director
owns and compensation of CEO. The growth opportunities and financial risk of the firm are
the factors that are considered important in setting the compensation of CEO (Muttakin et al.
2018).
Critical review of governance structure of organization:
This section outlines the strategies used by the organization to align their objective
with that of remuneration of CEO. In addition to this, some of the corporate governance issue
faced by the organization regarding the remuneration of CEO has also been demonstrated.

ETHICS AND GOVERNANCE
Strategies used by Commonwealth Bank of Australia to successfully align the CEO
remuneration with its objectives:
It is advised by the principles of good corporate governance council led by the ASX
Corporate governance council that the listed companies should establish the remuneration
committee which represents that the board opportunity for ensuring that the activities of
Committee is conducted in line with the best practice of Board committee. Furthermore, it is
suggested by the principles of corporate governance that the remuneration of executives
should have a balance between incentive and fixed pay. The Australian code of corporate
governance council requires the organization to disclose the remuneration of directors in their
annual report. The remuneration system of corporate in light of the criticism faced and it has
a considerable influence on the amount of executive pay. In Australia, there has been an
increase in average salary per week from 1990 to 2016 as sourced from the Australian Bureau
of statistics. The factor remuneration is identified as an important method that helps in
reinforcing corporate culture that helps in supporting the achievement of strategic objectives
of organization along with promoting right behavior (Oecd.org 2019).
It is the responsibility of the board of directors of organization to determine the
remuneration policy along with the structure and level of compensation for senior executives
and CEO. For boards, it is becoming more important to have a transparent and clear
remuneration process due to heavy scrutiny from media and shareholders. The directors of
company are encouraged by the Australians securities and Investment commission that
requires approach of remuneration to be in aligned with the objective of providing investors
with the comprehensive information. The remuneration report should be able to explain the
relationship between the remuneration of CEO and the performance of company. In event of
making any particular payments, such approach will inform shareholders by limiting the
controversy and surprises. A detailed summary of performance condition should be disclosed

ETHICS AND GOVERNANCE
by the board and there should be a disclosure of the reason behind choosing the performance
condition along with the details of discretion of the incentives plan of the company (Mollah
et al. 2019).
The remuneration framework of Commonwealth Bank of Australia supports the
interest of shareholder and strategy of bank. In order to create further alignment between the
objective of organization and remuneration framework by imposing remuneration
consequences for the customer outcome and poor risk on the senior leaders of Bank this
includes CEO. Due to the adjustments to the partial and variable remuneration or lapsing of
the outstanding of remuneration awards of deferred variable, there has been reduction in
remuneration of former and current senior leaders by excess of $ 60 million
(Commbank.com.au 2019). For CEO, the measure of long term variable remuneration
performance, one of the factors that have been incorporated includes employee engagement.
The financial year 2018 has marked that the former CEO would not receive any of the
unvested long term variable remuneration and short term variable remuneration award. The
long term variable performance remuneration for CEO focuses on the effort of organization
to achieve superior performance for key stakeholders which included community, people,
shareholders and community tends to create long term value for shareholders.
While setting the remuneration of CEO, the bank takes into account the market peers
remuneration along with the expectation of company and broader shareholders. The changes
in role of CEO determine their fixed remuneration. Assessment of CEO is done on the
outcome of risk with the board applying a negative adjustment of 20% on the outcome of
short term variable remuneration (Sauerwald et al. 2016).

ETHICS AND GOVERNANCE
Remuneration framework of CBA:
(Source: Commbank.com.au 2019)
The remuneration framework applied to CEO is illustrated in the diagram above. The
existing variable deferral for remuneration for CEO complies with the Banking executive
accountability regime. The shares of bank are required to be accumulated by CEO over a
period of five years from the date of their appointment in the role of executives. The
performance measure of CEO is chosen that support the strategy of group for providing a
balanced assessment of the performance because they reflect a mix of qualitative and
quantitative outcomes (Petrou and Procopiou 2016).

ETHICS AND GOVERNANCE
Identification of the corporate governance issues criticizing organization regarding
CEO remuneration:
The banks of Australia are receiving significant scrutiny from their investors and they
are also subjected to significant regulatory supervision and control. It is required by the
corporate entities to ensure that the composition level of remuneration has a reasonable link
with the performance level of senior executives which include CEO and also such
composition is sufficient. The role of corporate governance as a factor in determining the
remuneration of CEO is ignored by most of the studies. It is considered desirable to explore
the impact on the pay of directors resulting from the corporate governance factor given the
heightened importance and justified global interest of corporate governance in banking. From
the analysis of data on corporate governance of Commonwealth Bank of Australia, it has
been found that the pay scale of CEO is positively affected by the size of board as indicated
by the variables of corporate governance. The solid performance of the bank has resulted in
creating a positive association between larger CEO pay and institutional ownership
(Boatright 2017). It has been further found that the ownership association and the pay
directors of CEO is non linear and the pay of CEO increases at the low level of ownership of
directors. Some of the study conducted on the banks depicts longer links between the
performance and pay of CEO.
When it comes to sitting remuneration, some of the Australian organization cited the
need to rely on the United States benchmark and it is required by them to look at the
executive pay of US as it is considered as an effective yardstick. Commonwealth Bank of
Australia was the largest Australian corporate for bearing the shareholder outrage wrath
regarding the remuneration of CEO and other executives (Yeates 2019). The payment to
executive in Australia is considered as controversial issue and the voice of shareholders can
be used as meaningful and objective benchmark for setting the pay of CEO of Australian

ETHICS AND GOVERNANCE
banks. Since the market of executive labor in Australia is small, the payment to CEO is of
particular concern in the country. The reasonableness of pay scale of executive pay is
assessed by benchmarking executive pay against the pay scale of overseas countries that
would serve as objective yardstick. There is a vast difference in the governance structure and
concentration of US and Australia (Zalewska 2016). For instance, in Australia CEO is the
chairman of company for less profitable and small firms as against US where CEO is the
chairman only for the large firm and more profitable firm. The shareholders of
Commonwealth bank of Australia voted no for accepting the remuneration package of CEO.
The benchmarking of pay of CEO of Australian companies against their US counterpart
would not result in generating higher executive remuneration. The reasons for determining
the executive pay should be factored into a comparative process that can be done by tracking
the performance of companies of Australia (The Conversation 2016). It might be a good idea
to set the pay scale of CEO by tracking the performance of counterpart firms. However, if the
firms are operating in a different institutional environment, then it becomes difficult to set the
CEO compensation by comparing with its counterpart. Therefore, it can be inferred from the
analysis of the above mentioned fact that the executive remuneration in the Commonwealth
bank of Australia was one of the issues of corporate governance.
Recommendation for suggested improvement of corporate governance issue:
The rights of shareholder section should be amended to cover the central issue of
remuneration of key executive and that of board. It should be expected by the board that they
formulate and disclose remuneration policies that highlights the link between the
performance and remuneration in the long run. Any components of equity should be subject
to the approval of the shareholders and they should be able to make their views on the policy.

ETHICS AND GOVERNANCE
The policy makers have been focusing on the measures which seek to make an improvement
in the capacity of corporate governance structure of the firms for producing the appropriate
incentive and remuneration outcome (Zhang and Gimeno 2016). Such measures can be
characterized as the measure that is intended to enhance the disclosure on the outcome of
shareholders and the incentive based remuneration is well aligned with the performance of
company in a better way. It should also include the measures for improving the internal
governance of firms and also providing mechanism that would allow shareholder means to
express their view on the executive and director remunerations that include CEO
(Balachandran and Faff 2015). Furthermore, the alignment of corporate governance interest
with that of the remuneration system structure can be further enhanced by the adoption of soft
law measures. The remuneration cannot be set as the function of incentive arrangements that
would create dynamic risk, risk policy and it is essential to ensure that the risks are
adequately monitored by the control system.
Conclusion:
The current paper investigated the link between CEO remuneration and corporate
governance and it is demonstrated from the analysis that the remuneration of executives is
considerably influenced by the structure of corporate governance. From the analysis of the
above facts, it can be inferred that the remuneration framework of executives of
Commonwealth bank of Australia is well aligned with the experience of shareholders. The
operation of remuneration framework and governance of board of bank has been strengthened
by the adoption of material steps provided from the feedback of shareholders. It has also been
found that in accordance with the measurable performance, the executive of remuneration has
reduced. Furthermore, the shareholders of Commonwealth Bank of Australia have voted
against the adoption of benchmark in setting the remuneration of CEO and other executives.

ETHICS AND GOVERNANCE
Reference list:
Aguilera, R.V., Florackis, C. and Kim, H., 2016. Advancing the corporate governance
research agenda. Corporate Governance: An International Review, 24(3), pp.172-180.
Balachandran, B. and Faff, R., 2015. Corporate governance, firm value and risk: Past,
present, and future. Pacific-Basin Finance Journal, 35, pp.1-12.
Bell, B. and Van Reenen, J., 2016. CEO Pay and the Rise of Relative Performance
Contracts: A Question of Governance?(No. w22407). National Bureau of Economic
Research.
Boatright, J.R., 2017. Ethics and corporate governance: Justifying the role of
shareholder. The Blackwell Guide to Business Ethics, pp.38-60.
Chen, S., Ni, S.X. and Zhang, F., 2018. CEO retirement, corporate governance and
conditional accounting conservatism. European Accounting Review, 27(3), pp.437-465.
Commbank.com.au. (2019). [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 13 Apr. 2019].
Lee, J.M., Park, J.C. and Folta, T.B., 2018. CEO career horizon, corporate governance, and
real options: The role of economic short‐termism. Strategic Management Journal, 39(10),
pp.2703-2725.
Mees, B. and Smith, S.A., 2019. Corporate governance reform in Australia: a new
institutional approach. British Journal of Management, 30(1), pp.75-89.
Menzel, D.C., 2016. State of the art of empirical research on ethics and integrity in
governance. In Ethics in public management (pp. 24-54). Routledge.