Evaluating Performance and Management Control Systems in Insurance

This report evaluates the performance and management control systems of three leading Australian insurance companies: AMP Limited, IAG Limited, and QBE Insurance Group, focusing on executive performance and remuneration policies. The analysis examines executive remuneration allocation, changes in reporting, company performance versus executive pay, and the mix of performance measures used. The report compares remuneration systems, summarizes findings, analyzes remuneration methods, and offers recommendations for improving reporting and performance measures. The study reveals insights into the relationship between financial performance and executive compensation, highlighting the strengths and weaknesses of each company's approach. The report concludes by assessing the efficacy of the overall organizational performance and providing recommendations for enhanced reporting and performance measurement.

Running head: MEASURING PERFORMANCE AND MANAGEMENT CONTROL
SYSTEMS
Measuring Performance and Management Control Systems
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
Executive Summary:
The current report aims to evaluate the performance and management control systems
of the three leading insurance companies in Australia in order to assess the effectiveness of
executive performance and remuneration policies. The three organisations that have selected
to fit the purpose of this report include AMP Limited, IAG Limited and QBE Insurance
Group. The remuneration systems for the three organisations have been evaluated as well to
assess the efficacy of the overall organisational performance. Finally, the report sheds light
on providing recommendations for improving the reporting along with widening the
performance measures of the organisation. It has been found that it could be stated that the
remuneration methods of AMP Limited are superior in contrast to the other two organisations
due to better financial performance in the Australian insurance industry.

2MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
Table of Contents
1. Introduction:...........................................................................................................................3
2. Company reviews:..................................................................................................................3
2.1 Allocation of executive remuneration:.............................................................................3
2.2 Change in executive remuneration reporting:..................................................................9
2.3 Company performance versus executive pay:................................................................10
2.4 Mix of performance measures used:..............................................................................12
3. Comparison of remuneration systems:.................................................................................15
4. Summary of findings:...........................................................................................................16
5. Analysis of remuneration methods used:.............................................................................16
6. Recommendations:...............................................................................................................17
7. Conclusion:..........................................................................................................................18
References and Bibliographies:................................................................................................19

3MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
1. Introduction:
The current report aims to evaluate the performance and management control systems
of the three leading insurance companies in Australia in order to assess the effectiveness of
executive performance and remuneration policies. The three organisations that have selected
to fit the purpose of this report include AMP Limited, IAG Limited and QBE Insurance
Group. In this report, the company reviews have been evaluated in terms of executive
remuneration apportionment, changes in remuneration reporting, company performance in
contrast to executive payment and combination of performance measures used. The
remuneration systems for the three organisations have been evaluated as well to assess the
efficacy of the overall organisational performance. Finally, the report sheds light on
providing recommendations for improving the reporting along with widening the
performance measures of the organisation.
2. Company reviews:
2.1 Allocation of executive remuneration:
In order to determine the allocation of executive remuneration, it is necessary to
consider the fixed pay, short-term incentives and long-term incentives of the executive
directors (Arnaboldi, Lapsley and Steccolini, 2015).
AMP Limited:

4MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
Executive remuneration in 2016
Executive remuneration in 2014
Executive remuneration in 2015
Executive remuneration in 2013
Figure 1: Allocation of executive remuneration in AMP Limited from 2013-2016
(Source: Amp.com.au, 2017)
According to the above figure, it could be found out that AMP Limited has disclosed
the value of long-term incentives (LTIs) at their face value from 2013-2016, as laid out its
annual report. However, in case of STIs, no such disclosure in relation to short-term

5MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
incentives (STIs) has been made in 2013 and 2014. From 2015, the organisation has revealed
its method of allocating short-term incentives by segregating them into 60% cash component
and 40% deferred into share rights and the allocation process is identical in 2016 as well. It
has been observed that the fixed remuneration of AMP Limited was $8,896,000 in 2014,
which has increased to $9,098,000 in 2014 and the trend is inherent in case of 2015, as it has
increased to $10,240,000 in 2015. However, in 2016, it has fallen to $9,415,000 in 2016. The
organisation has failed to provide any short-term incentive in 2013; however, it has provided
$1,195,000 in 2014 as STIs in 2014 and it has increased further to $11,498 in 2015. In 2016,
it has again declined significantly to $2,219,000 in 2016. In case of LTIs, it has increased
considerably over the years and thus, there is an increase in overall remuneration until 2015,
which has declined in 2016 slightly due to fall in STIs.
IAG Limited:

6MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
Executive remuneration in 2016
Executive remuneration in 2014
Executive remuneration in 2015
Executive remuneration in 2013
Figure 2: Allocation of executive remuneration in AMP Limited from 2013-2016
(Source: Iag.com.au, 2017)
According to the above figure, it has been found that both STIs and LTIs have
increased from 2013 to 2015; however, the trend is similar to that of AMP Limited in 2016.
This is because the organisation has experienced a decline in its STIs and LTIs in 2016. The

7MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
similar trend is observed in case of fixed remuneration as well and hence, there is a fall in
overall remuneration of the executives of AMP Limited in 2016, which has experienced a
steady increase from 2013 to 2015. Moreover, the allocation of STI has been made as 2/3rd of
cash STI and 1/3rd of deferred STI. The LTI has been allocated based on 95th percentile of the
peer group of the organisation.
QBE Insurance Group:

8MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
Executive remuneration in 2016
Executive remuneration in 2014
Executive remuneration in 2015
Executive remuneration in 2013
Figure 2: Allocation of executive remuneration in AMP Limited from 2013-2016
(Source: Qbe.com.au, 2017)
Based on the above figure, it could be cited that the fixed pay, STIs and LTIs of the
organisation have experienced a steady growth over the four-year period. However, no

9MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
detailed breakdown regarding the allocation of STI has been depicted in the annual reports of
the organisation.
2.2 Change in executive remuneration reporting:
The changes in reporting of executive remuneration could be evaluated with the
above-stated figures for all the three selected organisations. This is because they help in
revealing whether the organisations have made additional disclosures or eliminated some
disclosures over the four-year period (Buckingham and Goodall, 2015).
AMP Limited:
In 2013 and 2014, the remuneration strategy of the organisation is to match
remuneration with the creation of shareholder value by retaining and attracting staffs to
contribute to its success. However, in 2015 and 2016, the organisation has developed some
additional strategies for reporting its executive remuneration. These include formation of a
risk management framework along with a governance framework that enables in handling
conflicts of interest, precise responsibilities and ensuring effective checks and balances in
place.
In 2013 and 2014, the organisation has disclosed other remuneration in its executive
remuneration payment, which has been removed from the same in the annual reports of 2015
and 2016. This might be due to the fact that either the organisation has not paid any other
remuneration to its executives during these years or it has manipulated its financial
statements in these years for company benefits (De Waal and Kourtit, 2013). Moreover,
termination payment has been made as an additional disclosure in the annual report of 2016,
as two of its directors are about to part ways with the organisation in 2017.
IAG Limited:

10MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
The remuneration strategy of IAG Limited is developed in such a manner that the
executive remuneration is aligned with the interests of its stakeholders. In addition, it aims to
maintain market competitiveness and risk-taking behaviour to maintain long-term financial
soundness (Mone and London, 2014). In 2016, it has appointed remuneration consultants for
providing the remuneration benchmarking. The reporting policy has remained the same over
the years, as no additional disclosures have been made or any disclosures have been
eliminated.
QBE Insurance Group:
The remuneration strategy of the organisation is to match remuneration with the
creation of shareholder value by retaining and attracting staffs to contribute to its success. In
addition, the organisation has disclosed other remuneration in its executive remuneration
payment, which has been removed from the same in the annual reports of 2015 and 2016.
This might be due to the fact that either the organisation has not paid any other remuneration
to its executives during these years or it has manipulated its financial statements in these
years for company benefits (Rausch, Sheta and Ayesh, 2013).
2.3 Company performance versus executive pay:
The organisational performance in contrast to executive payment could be assessed
with the help of contrasting the change in company price per share and dividends per share
with the executive payments (De Waal, 2013).
AMP Limited:
According to the annual report of the organisation, it has been found that the dividend
per share of the organisation has increased from $0.23 in 2013 to $0.26 in 2014 and it has
increased further to $0.28 in 2015. The dividend per share of the organisation has remained

11MEASURING PERFORMANCE AND MANAGEMENT CONTROL SYSTEMS
constant at $0.28 in 2016 as well compared to that of the previous year. In addition, the share
price of AMP Limited has increased from $4.39 in 2013 to $5.50 in 2014 and it has increased
further to $5.83 in 2015. The share price of the organisation; however, has fallen sharply to
$5.04 in 2016 possibly due to the declining net income and falling market demand (Gerrish,
2016).
From the information depicted in the annual report, it has been found that the STI
pool as a percentage of underlying profit has been 9.8% in 2013, which has increased to
11.3% in 2014. However, it has declined to 9.4% in 2015 and the decline is further inherent
to 7.1% in 2016. This denotes that despite the increase in profit margin in 2015, the
organisation has reduced its executive payments in relation to STIs and LTIs for maximising
its base of retained earnings (Hatry, 2013).
IAG Limited:
As observed from the annual report of the organisation, the dividend per share has
increased from $0.36 in 2013 to $0.39 in 2014; however, it has fallen to $0.29 in 2015. In
2016, it has risen sharply to $0.36 despite the fall in overall profit margin. This denotes that
the organisation has focused on providing greater dividends to the shareholders in 2016
despite increased profit level in 2015. The share price of the organisation has increased
sharply from $5.44 in 2013 to $5.84 in 2014. However, it has fallen considerably to $5.58 in
2015 and the decline is further evident in 2016 to $5.45.
In accordance with the executive payments of the organisation, there is an increase in
their payments, as the profit margin has increased from 2013 to 2015. However, it has fallen
significantly in 2016 with the fall in net income despite the increase for dividends distributed.
Moreover, IAG Limited has not disclosed the STI pool as a percentage of underlying profits
in 2016 in its annual reports.