Introduction
A company’s remuneration policy for the executives is of crucial importance, as it seeks to find a balance between providing incentives for the personnel and controlling its expenses. According to ASX Corporate Governance Council (2019), a remuneration policy needs to “attract, retain and motivate high-quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite” (p. 29). The company must have a clear compensation framework for the executives, as compensation practices have a significant effect on the company’s performance.
ASX Corporate Governance Council provides a clear framework for corporate governance practices by providing eight principles of corporate governance. ASX believes that adherence to these recommendations can lead to good governance outcomes; however, it acknowledges the fact that some companies may employ different practices based on their size, complexity, and history (ASX, 2019). Principle 8 of the framework developed by ASX provides three specific recommendations for listed companies to ensure that companies pay director remunerations sufficient for high motivation, retention, and alignment with key values of the company and its shareholders (ASX, 2019). A summary of the analysis of AMP’s adherence to the recommendations is provided in Appendix A.
A literature review suggests that there is a strong correlation between firm performance and executive compensation. In particular, recent research demonstrated that variable incentives for executives based on the company’s performance had a positive impact on the company’s performance (Dias et al., 2020). At the same time, the larger the fixed part of the compensation, the lower the company’s performance (Dias et al., 2020). At the same time, Elsayed and Elbardan (2018) report that the executive compensation rate has a larger impact on firm performance rather than a pay-for-performance framework, even though these approaches are both effective.
Kartadjumena and Rodgers (2019) suggest that executive compensation has a positive impact on the company’s performance in terms of sustainability and climate concerns. However, the financial performance may suffer due to the improvement of environmental practices (Kartadjumena & Rodgers, 2019). Cieślak (2019) reports that there is a link between the pay-for-performance practices for executive compensation and firms’ performance; however, it is much smaller in family-controlled companies.
In summary, the literature review revealed that recent studies suggest that there is a strong correlation between compensation practices and the performance of firms. At the same time, the literature review suggests that to maximize the performance of firms, the companies should base the compensation of the executives on performance indicators and avoid conflicts of interest while creating the remuneration practices, such as the inclusion of executives or their relatives in the remuneration committee.
The literature review also suggests that there is a positive effect of the two-strike rules on the pay-performance link. Borthwick et al. (2018) suggested that the market responded favorably to the introduction of two-strike rules in Australia. The introduction of the rule lets the shareholders express their dissent, which is positively correlated with executives’ pay and negatively correlated with the firms’ performance. However, Alhassun (2020) suggested that the introduction of the Say-on-Pay policy hurt pay-for-performance, as stakeholders are more concerned about how much the executives are paid rather than how they are paid.
Norman et al. (2021) suggest that the companies were less willing to increase the payment of executives above the industry average as they were afraid that shareholders vote against the compensation practices for executives. However, Liang et al. (2020) suggest that the link between the two-strike rule and the pay-performance link weakens only after the first strike. Therefore, it may be stated that there is significant evidence that there is initial evidence that there is a link between pay-for-performance practices and the two-strike rule.
AMP’s Practices
The analysis of the AMP report reveals that the updated practices had a significant impact on the conflicts between executives and shareholders. First, the analysis shows that the company adheres to the majority of recommendations cited by the ASX Corporate Governance Council, which is expected to have a positive impact on governance outcomes (ASX, 2019). Second, the company strengthened the link between pay and performance, which is positively viewed by the shareholders (Borthwick et al., 2018; Liang et al., 2020). Third, the company decreased the compensation of the executives, which is favorably viewed by the shareholders, especially if the remuneration level was above the industry average (Alhassun, 2020; Norman et al., 2021). The decrease in payment was rationalized to underline the pay-performance link.
Finally, APM managed to retain some of the incentive payments for executives to ensure that the person remains motivated, which is crucial, according to ASX (2019). The rationale for preserving some of the payments was clearly outlined in the annual report, which ensures that all the stakeholders understand the reason for these payments. The preservation of these payments is crucial, as there is a direct link between the company’s performance and the compensation of executives (Cieślak, 2019; Dias et al., 2020; Elsayed & Elbardan, 2018; Kartadjumena & Rodgers, 2019). Thus, there is significant evidence that AMP managed to resolve the conflict between shareholders and executives.
Earnings management is a crucial practice that can help the company to meet shareholders’ expectations, manage the share prices, and convey private information. Earnings can be managed by applying accounting judgment or by conducting real earning management. The review of AMP’s accounting practices revealed that the company uses critical judgment and estimates to report a large group of items, including impairment of financial assets (AMP, 2021a). It appears that the company reported very low impairment to report Impairment of goodwill and other intangibles in the Other operating expenses.
Research conducted by Hassine and Jilani (2017) demonstrates that managers often tend to overstate losses from the impairment of goodwill to meet the expectations of the shareholders. Cao et al. (2018) state that companies may also use impairment reversals to avoid earning declines. AMP’s Impairment of goodwill and other intangibles in 2019 was $1,839 million, while, in 2020, it was only $5 million (AMP, 2021a). This may be treated as evidence that the company manipulated the expense to ensure that the earnings did not decline in 2020 when the global economy experienced a downturn. The company may have understated the actual loss in 2020 or overstated the value in 2019 or both.
At the same time, AMP used real actions to manage the earnings in hand with using accounting tools. In particular, the company decreased its total assets from $147,684 million to $32,164 million in 2020 (AMP, 2021a). The company is reported to have sold the Australian and New Zealand wealth protection and mature businesses and gained $129 million in revenues from the deal (AMP, 2021a). As a result, the company increased its revenues, which positively affected the profitability of the company.
Additionally, the decision helped to increase returns on assets by diminishing total assets and increasing profits. According to Campa et al. (2019), companies often use asset disposal as a method of controlling earnings. Firms with high levels of accruals were found to use asset sales to avoid reporting losses (Campa et al., 2019). This applies to AMP (2021), as the company separated from Resolution Life, AMP’s subsidiary, to ensure that the company reported profits rather than losses. This was crucial, as AMP had to report a $1,831 loss in 2019, which was significant (AMP, 2021a). In summary, AMP used both real actions and accounting methods to manage its earnings in 2020.
Event on AMP’s Cumulative Abnormal Returns
Cumulative abnormal returns (CARs) are often used to assess the effect of an event on the perceived risks of the stakeholders. On April 1, 2021, AMP reported the appointment of a new CEO, Alexis George (Johnston & Roberts, 2021). This CAR 1, CAR 2, and CAR 5 around the event were -0.71%, -0.76%, and -0.56%. This demonstrated the reaction of the stakeholders to the appointment of the new CEO was negative. Bash and Alsaifi (2019) report that negative CARs are a sign of increased fear of uncertainty. Indeed, the appointment of a new CEO may be associated with a high degree of uncertainty, as the selected policies may be significantly different from the ones utilized by the previous CEO. Additionally, it would appear suspicious that the company decided to appoint a new CEO after reporting profits during the year of economic downturn. However, the effect of the appointment of the new CEO was very low, as CAR 1, CAR 2, and CAR 5 were very close to zero.
Event on Competitors’ Cumulative Abnormal Returns
The effect of the event was also assessed using the CARs of the AMP’s major competitors, including ANZ, Westpac, and Suncorp. The results of the calculations are provided in Appendix 2. The analysis revealed that the event boosted the CARs of all three AMP’s competitors under analysis. This may have been because investors saw AMP’s decision as a source of risk due to uncertainty (Bash and Alsaifi, 2019). Therefore, some of the investors decided to redistribute their portfolios and invested in the companies with less uncertainty. The effect of the event on the competitors’ CARs was comparatively high in comparison with the effect on AMP’s CARs. However, the effect decreased ten days after the event, as demonstrated by CAR 10 for the competitors. This may be the result of seeing that no drastic changes occurred after the appointment of a new CEO.
Reference List
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