Group Assignment - Bank executives might be in line for bigger base pays

Business Insider Australia

Chris Pash

Jul 18, 2017, 11:34 AM

"Senior executives at Australia's big banks might see their base pay improve significantly in reaction to the federal government's moves to restrict bonuses.

The federal budget in May announced a series of measures to increase responsibility and accountability among the big banks, including deferring the payment of bonuses.

Bank CEOs can end up being paid more than $10 million when bonuses, short and long term, are counted.

The government wants a minimum of 40% of an executive's variable remuneration, and 60% for CEO's, be held back for four years before being paid.

Shareholders of ASX-listed companies have been increasingly kicking back at the size of bonuses, and how they are calculated, as a component of executive pay.

There is a sense that CEOs and their acolytes somehow game the system anyway, conspiring to create easy targets so they can collect millions from a blue chip range of short and long term bonuses not available to the average worker or shareholder.

Last year there were more than 100 strikes, some as high as 84%, against remuneration reports at company annual general meetings.

The Commonwealth Bank in November had its senior executive pay plans knocked back by shareholders at its AGM, the first such strike for a major bank. If it happens a second time, the board of directors will be spilled.

For the banks, a new Banking Executive Accountability Regime (BEAR) is being created, essentially meaning the licensing of senior executives at the big banks. The details are being worked out now.

These senior executives will have to be registered with the financial regulator APRA and if they misbehave, they lose their licence and, possibly, any bonuses due.

This will increase the financial consequences, by preventing bonuses being paid for decisions whose impact may take a long time.

A consultation paper released by Treasury says a potential consequence of requiring variable remuneration to be deferred is that the banks might adjust pay structures, shifting the balance of payment to base remuneration.

"As a result, individuals may face reduced incentives to engage in, or create a culture of short-term excessive risk taking," the paper says.

"This raises the question as to whether a shift from variable to base pay is problematic and, if so, what, if anything, should be done to prevent this outcome."

The banks have been hit by series of scandals including charging for financial planning advise not given.

Plenty of planners have been deregistered and been dismissed but no senior executive has lost their job in the fall out.

"In recent years, there has been growing community concern regarding a number of examples of poor culture and behaviour in banks and the financial sector generally," the Treasury paper says.

"There have been too many instances where participants have been treated inappropriately by banks and related financial institutions."

The government drew on the findings of a House of Representatives committee inquiry to strengthen accountability and competition in the banking system.

The committee's report said: "The major banks have a poor compliance culture and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for."

Required:

1. Making managerial pay linked with firm's performance motivates them to deliver good performance for shareholders. However, it also burdens them with greater risk than they may like. Use Positive Accounting Theory with the help of relevant research literature to explain the risk taking behaviour of managers.

2. Explain the concept of earnings management. What are some of the factors that influence managers to perform earnings management activities? Explain using the relevant research literature.

3. One theory that explains the development of regulation is Public Interest Theory. Explain the theory and provide arguments with the help of research literature that Australian government's proposed increases in regulation of executive pay being in the public interest.

Attachment:- Assignment File.rar