Managerial Accounting Report: Performance Measures and Remuneration

This report examines the managerial accounting practices of two major Australian corporations, Saracen Mineral Holdings and Newcrest Mining Ltd., focusing on their executive remuneration strategies and performance evaluation methods. The analysis includes a review of the companies' remuneration committees, the allocation of executive compensation (fixed pay, STIs, and LTIs), and the mix of performance measures used, such as operating and non-operating KPIs. The report assesses the correlation between company performance (total shareholder value) and executive pay, supported by research commentary on each company's financial outcomes, including earnings per share, share price, and return on assets. The findings highlight how these companies align executive remuneration with strategic business objectives and shareholder wealth creation, providing insights into the effectiveness of their compensation models in driving performance and value.

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Executive Summary
Recently, Australian public companies have been required to provide details regarding
remuneration of their senior executive teams and how the remuneration is determined. Every
board of any company which is public is mandated to establish a remuneration committee that
generally comprises of at least two members who are executive, from the board of the company,
and a chairperson. The remuneration committee has a primary role of determining and approving
the approaches as well as amount of remuneration awarded to the company’s executive team.
This includes the base salary and other benefits, the calculation approach as well as limits that
surround the Short-Term Incentives awarded, and the approach of calculating the Long-Term
Incentives as well.
The remuneration scheme details are published in the Remuneration Report within a
Company’s Annual Report and then voted on by shareholders at the AGM. If the remuneration is
voted down by a number of stockholders exceeding 25%, the Board must consider revising the
remuneration plan. If the shareholders still reject the revised plan, the position of the Board is
considered not acceptable to shareholders and must therefore resign from their positions.
For purpose of this assignment, two major publicly listed Australian corporations are
selected and their academic literature reviewed on methods used to evaluate executive
performance and the level of success that is considered to occur from using such methods both
from a shareholder return perspective and a management motivational perspective. These
companies are Saracen Mineral Holdings and Newcrest Mining Ltd.

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Introduction
The paper is mainly purposed for analyzing and comparing methods of remuneration
used by Saracen Mineral Holdings Limited and Newcrest Mining Ltd. In this report, an analysis
of how well the approaches of each company worked in encouraging higher performance by the
executive teams is given. In addition, this report considers whether or not this performance
translated to higher performance of the companies. The paper focusses on performance and
remuneration measures for the two companies.
Company Review
a. Remuneration Committee and Its Membership
In accordance with the Saracen Mineral Holdings Limited 2018 annual report of, the
company’s remuneration committee for the financial year 2018 was composed of the following
directors and members:
i. Geoffrey Clifford (Non-Executive Chairman)
ii. Raleigh Finlayson (Managing Director-Executive)
iii. Mark Connelly (Non-Executive Director)
iv. Martin Reed (Non-Executive Director)
v. Samantha Tough
vi. Roric Smith
The company’s Key Management Personnel (KMP) for the year were:
i. Craig Bradshaw
ii. Gerard (Gerry) Kaczmarek

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iii. Morgan Ball
iv. Daniel Howe
v. William (Troy) Irvin
According to the 2018 annual report of Newcrest Mining Ltd, the company had the
following directors in its remuneration committee:
i. Sandeep Biswas, CEO.
ii. Gerard Bond, CFO.
iii. Melanie Allibon, EGM.
iv. Craig Jetson, EGM.
v. Craig Jones, EGM.
vi. Ian Kemish, EGM.
vii. Francesca Lee, EGM.
viii. Michael Nossal, CDO.
ix. Philip Stephenson, EGM.
x. Bonikro, EGM.
b. Allocation of Executive Remuneration (Fixed pay/STIs/LTIs)
For Saracen Mineral Holdings Limited, the base or fixed salary for the Managing
Director and other executives for financial year 2018 was $700,000. The maximum STI that
could be received by the Executive during financial year 2018 ranged between 25% and 40% of
Total Fixed Remuneration and the maximum LTI was 40% of TFR. The TFR consists of base
pay and benefits, which include superannuation. The STI includes cash payments which are a

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specified target of FR percentage, while the LTI are mainly composed of performance rights
(Horngren 2009, pp. 89).
For Newcrest Mining Ltd, the outcomes of STI of executives during the fiscal year
ending 2018 were kept in the range of fifty-seven percent (57%) to sixty-nine percent (69%) of
their potential maximum allowed (Kuppapally 2008, pp. 74).
c. Mix of Performance Measures Used
Saracen Mineral Holdings Limited uses operating as well as non-operating Key
Performance Indicators (KPI) as a performance measure of determining or forming a basis as to
which the company assesses the levels of future remuneration for its executive teams and Key
Management Personnel (KMP). The company mostly aligns its set KPIs of KMP to the intrinsic
business performance of the group. For instance, the company evaluates performance against the
annual budget and safety as well as health measures. The remuneration committee has the right
to assess remuneration of the executive team depending upon the outcomes of their reviews on
annual performance of each executive and KMP, in addition to other relevant factors (Gopal
2009, pp. 35).
Newcrest Mining Ltd used several performance measures. For instance, the company
uses outcomes based on ROCE, comparative cost reduction and TSR as well, for its Long term
Incentives (LTI). However, the company uses results that are determined by a combination of
business performance as well as personal measures for its Short-Term Incentives (STI). The
company rewards its executive team for their contributions in increasing the shareholder value
through achieving or exceeding their individual as well as company objectives. Through its LTIs,
the company encourages its executive team to put more focus and attention on key drivers of

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performance underpinning the strategies and objectives of the company to deliver a long term
growth in the value of their shareholders. Performance conditions of Newcrest Mining Ltd are
comprised of a combination of individual measures and business measures. A fixed threshold,
target and maximum targets are developed by the company for every measure for purposes of
driving high levels of business performance as well as performance per every person. The yearly
budget is usually used by a company for basing its target performance that the board of
remuneration establishes (Weygandt, Kimmel and Kieso 2015, pp. 85).
During the fiscal year 2018, the important elements of the measures of individual
performance for the executive team were established by the board of Remuneration for aligning
it with the company’s strategic objectives. The personal performance measures were selected for
recognizing the significant role played by the CEO in respect to individually advancing the
company’s strategic goals of improving as well as enhancing the safety and sustainability
performance of the Company, its operational performance, value and cash generation as well as
progressing its initiatives of growth. The measures of personal performance for other Executive
team members such as the KMP during the fiscal year 2018 focused much on areas of their
responsibility that in the case executives of operations comprised of safety, saving of costs
production and efficiency of operations. The company generally aligned its non-financial targets
to its main values, such as safety and key strategic goals as well as objectives of growth
(DRURY 2013, pp. 62).
d. Company Performance (Total Shareholder Value) Versus Executive Pay
For Saracen Mineral Holdings Limited, the group’s main objective is aligning the
remuneration of its executive team to its strategic objectives of business and goals, as well as

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creating and maximizing the shareholder wealth. According to its annual report for the financial
year 2017, the Group’s basic Earnings per share (EPS) increased from 3.26 cents in 2017
financial year to 3.52 cents during the financial year 2018. However, the share price dropped
from 1.44 cents to 1.17 during the financial years 2017 and 2018 respectively (Saracen Mineral
Holdings 2017, pp. 75).
The company’s TSR is calculated independently and it is placed at 192%, which is at the
seventy-fifth (75th) percentile of the identified peer groups used as benchmarks. This can be
attributed to vesting of third Tranche and fourth tranche performance rights of class A. The
company’s ore reserves increased significantly by approximately 27.9% over the period from
2014 to 2017. This is highly attributed to Tranche 3 and Tranche 4 performance rights of class B,
which were vested. Furthermore, the company’s share price is calculated to have recognized an
increase of 185% over this period from 2014 to 2018. This is due to issuance of Tranche 3 and
Tranche 4 performance rights of class C to its executive team and KMP (Saracen Mineral
Holdings 2018, pp. 29).
For Newcrest mining Ltd, the remuneration of its executive team and Key Management
Personnel (KMP) was highly correlated. The key operational and financial outcomes for the
company for the financial year 2018 are also discussed. For instance, the company realized a
profit of $308 million and there was a key improvement in its margin of EBITDA. The company
also recognized free cash flows amounting to $739 million, and experienced significant
reduction in its net debt. Additionally, the ratio of its net debt to EBITDA increased to 1.1 times.
Furthermore, there was a significant reduction in the company’s gearing to 16% (Newcrest
Mining Ltd 2018, pp. 78).

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e. Research Commentary on the Company’s Performance
i. Saracen Mineral Holdings Limited
The earnings of Saracen Mineral Holdings Limited from December 31, 2017 amounting
to AU$59.49 million has increased by approximately 81% in comparison to the previous
financial year 2017. Additionally, this particular growth rate of one year exceeds the annual
growth rate of the company for the last five years, which is approximately 21%. This is an
indication that the Saracen Mineral Holdings Limited is growing at an accelerated rate
(Macintosh & Quattrone 2010, pp. 34).
Figure 1: Comparison of SAR Performance with the Market performance
Over the fiscal years, Saracen Mineral Holdings Limited has improved its bottom line at
a more rate than its revenue through successful control of its costs and expenses. This led to a
significant expansion of its margin and profitability over the years. Reviewing its growth from an

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industry perspective, the Australian mining industry has grown its average revenues by double
figures (18%), during the previous one year. However, this growth rate was 8.70% during the
last five fiscal years (Macintosh & Quattrone 2010, pp. 34). This is illustrated below.
Figure 2: SAR's Earnings and Revenue History
However, in terms of returns on investments, the company has not made a good
investment of its equity. Due to this, the company had a ROE of 17.21%, which is below the
acceptable minimum ratio of 20%. However, Saracen Mineral Holdings Limited had a ROA of
13%, which exceeds that of the Australian mining industry (9.64%). Furthermore, the company
had a Return on capital of 18.4%, which is a significant increase from the previous three years
from 1.3% (Collier 2015, pp. 73).

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Figure 3: Comparison of SAR's Annual Growth Rates
ii. Newcrest Mining Ltd
The latest profits of Newcrest Mining Ltd for the last one year amounted to $308 million,
which is a drop of 7.23% from the previous financial year. The annualized value of Newcrest for
the last five years is ($679 Million). This is an indication that the company experienced a
significant drop in its earnings from the previous fiscal years (Abraham, Glynn and Murphy
2008, pp. 25). However, from a long term perspective, the earnings of the company have been
increasing at an average rate as shown below.

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Figure 4: NCM's Earnings and Revenue History
f. Summary of Findings
i. Saracen Mineral Holdings Limited
In accordance with its 2018 fiscal year annual report, the group company recognized a
net profit amounting to $28.4 million, before tax. This was an improvement of ten percent from
its previous fiscal year. This financial performance was inclusive of write downs involving non-
cash items amounting to approximately three million that related to disposal of one of its
subsidiaries, Red October. The revenue from sales during the year 2018 amounted to
approximately 423 million, which was an increment of fifty-three percent from that pf the
preceding fiscal year. The production of Gold also increased by forty-five percent from
approximately 188655 ounces during the preceding year. The sales of Gold during the fiscal year
2018 were approximately 266,555 ounces, which was recognized as a significant increase from
the previous fiscal year (Macintosh & Quattrone 2010, pp. 35).

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The gross revenue recognized by the group from its operations in mining during the fiscal
year 2018 was approximately fifty-one million dollars, after making deductions amounting to
approximately fourteen million dollars and seventy-four of depreciation expense as well as
amortization expense amounting to approximately thirty-three million for the financial year then
ended (Saracen Mineral Holdings 2018, pp. 29).
ii. Newcrest Mining Ltd
Short term incentive (STI) outcomes for Executive team and KMP of Newcrest Mining
Ltd during the fiscal year 2018 was between fifty-seven percent and sixty-nine percent of the
potential maximum limit. Just like its previous fiscal years, there are significant adjustments
made by the board of remuneration regarding the STI outcomes of the business due to impacts of
prices of commodities, exchange rates of foreign currency as well as other important items that
highly depended on the decision of the board as they were considered to have be out of their
control. With regard to the 2018 fiscal year, the adjustments were for these items that were not
controllable by the company’s management were made. There were adjustments that were also
made to the measure of the company’s cash flows with regard to the LTI (Newcrest Mining Ltd
2018, pp. 75).
Three of the nine executive team members of Newcrest Mining Ltd were granted an
improvement in their TFR during the fiscal year 2018. The CEO of the company was also
granted an improvement in TFR, and this was considered part of annual review on his pay,
resulting from benchmarks acquired from its peers in the industry. However, there were no salary
increments granted to non-executive managers or directors (Bhimani & Horngren 2008, pp. 15).