Management Accounting Report: Sonic Healthcare Remuneration Review

This report provides an analysis of Sonic Healthcare's remuneration report, focusing on the company's executive compensation structure and its link to financial performance. The report examines the use of incentives, including fixed remuneration, short-term incentives (STI) based on EBITDA growth, and long-term incentives (LTI) linked to multi-year performance metrics like TSR and ROIC. It highlights the modifications in executive remuneration reporting over time and assesses the linkage between remuneration and executive compensation, demonstrating how executive pay aligns with company performance and shareholder returns. Key performance parameters, both financial (EBITDA, EPS, ROIC) and non-financial, are discussed, revealing the weightage of financial measures in determining executive compensation. The report concludes that the company's remuneration practices are closely tied to financial performance, justifying executive compensation based on financial results and shareholder wealth generation.

MANAGEMENT ACCOUNTING
SONIC HEALTH
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MANAGEMENT ACCOUNTING
The company selected for this task is Sonic Healthcare. The various aspects related to the
remuneration report coupled with the linkage of the remuneration have been discussed in the
form of investigative report highlighted below.
Use of incentives
The remuneration of both the executive and non-executive directors is determined by the
Remuneration and Nomination Committee which consists of four non-executive and
independent directors so as to ensure that pay packages are linked to performance and can be
justified to the shareholders of the company. The remuneration of the executives primarily is
in the form of three main components.
 Fixed Remuneration – This essentially refers to the remuneration component that is
fixed and thus independent of the performance of the firm. This includes fixed salary
coupled with superannuation contributions from employer. In order to cope with 5%
 Short Term Incentives (STI) – For the year 2015 and 2016, the maximum short term
incentives were pegged at 100% of the fixed remuneration and typically is driven by
performance measures particularly EBITDA growth. A target is specified for each
year and the STI are given in accordance with the actual % target achieved.
 Long Term Incentives (LTI) – Options and performance rights are given to key
executives and these are typically linked to long term performance which spans across
multiple years rather than being limited to a single year. Also, for the LTI, the
performance evaluation measures are defined at the time of issue of rights and options
and these tend to differ every year but are announced beforehand. The various options
and grants issued in 2012 are highlighted below for the CEO (Dr. C.S. Goldschmidt)
and Finance Director (C.D. Wilks).
Executive Remuneration Reporting Modifications

MANAGEMENT ACCOUNTING
Even though disclosure s regarding remuneration reporting are on the increase but the same is
not observed for the chosen company i.e. Sonic Health. The disclosures in the FY2013 annual
report have been compared with the FY2016 annual report and the broad information which
is available under the remuneration report remains the same. The lack of any additional
disclosures on the part of the company may be attributed to the quantum of information and
disclosures which are already contained in the remuneration report. The details of the service
agreements with regards to compensation and the various components have been highlighted
in great detail even in FY2013 which allows the shareholders and other external users to
understand the precise basis on which the remuneration has been computed and the extent of
the same. Additionally, the remuneration report for both the years also highlights the close
linkage observed between performance and the change in executive compensation which is
quite useful for the shareholders. Thus, the remuneration report contains useful information
which the external users would require for their respective informational needs.
Linkage between remuneration and executive compensation
It is appropriate that the compensation provided to executives needs to be closely linked with
the performance of the company. This is essential considering the agency problem whereby it
become imperative to align the personal interests of the key executives with the interests of
the shareholders. The trend for Sonic Health in this regards is summarised in the table below.
It is apparent that during the last five years while the CAGR for EBITDA is 6.7%, the
corresponding CAGR growth in cash remuneration is 8.7% while that in total executive

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remuneration is a paltry 0.5%. Also, there has been a compounded growth in EPS at the rate
of 7.7% over the last five years. Further, the shareholders’ returns are also quite impressive
which clearly indicate that the hike in remuneration that has been extended to the executives
of the company is justified based on the financial performance and the generation of
shareholders’ wealth. For instance consider 2015 when there was a decrease in EBITDA by
6.2% coupled with a decrease in EPS and as a result there was a fall in the executive
compensation. Further, it is noteworthy that the fall in cash compensation is comparatively
less in 2015 as compared to the total compensation which indicate that the performance based
pay has linkages with EPS and EBITDA.
The hike in executive remuneration can also be justified on account of the corresponding
movement in stock price which is a key source of capital appreciation for the shareholders.
It is apparent from the above graph that the stock of the company from 2013 onwards has
outperformed the ASX 200 index which highlights the superior returns for shareholders.
Key performance parameters
Based on the incentive structure designed for the key executives, it is apparent that the STI
and LTI are performance linked. In the light of these incentives, the various performance
yardsticks are as highlighted below.
Financial Performance Measures
 EBITDA growth (70% of the STI is linked to the fulfilment of the target in this regards)
 Total Shareholder Return (TSR) and comparison in this regard with ASX Accumulation
Index (Known as ‘Relative TSR’) – Useful for determination of LTI for executives
 CAGR in Return on Invested Capital (ROIC) - Useful for determination of LTI for
executives

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 CAGR in EPS or Earnings per share - Useful for determination of LTI for executives
Non-Financial Performance Measures
The 30% of the STI are linked to the performance of the executives in terms of following
non-financial performance measures.
Based on the above analysis, it is apparent that the financial measures are the key indicators
of the performance as only 30% of the STI are driven by non-financial measures. Also, it is
noteworthy that the exact weightage and importance of the financial measures for LTI tends
to vary with each issue of the rights and options. As a result, it would be natural to expect that
the maximum focus of the executives would be on the financial performance measures with
only little importance on the non-financial measures.