group report paper

Due DECEMBER 6

GROUP PAPER (REPORT):

Each student, as part of a group composed of 4-5 students, will be preparing a paper that reports about the popular topics of corporate governance. The paper will be composed of three parts. The first section will be about the comparison of executive compensation in the United States and in a G-20 country of your choice (United Kingdom, Germany, and Japan cannot be chosen). The second section will be about the comparison of issues related to the board of directors in the United States and in a G-20 country of your choice. The third section will be about the comparison of issues related to sustainability in the United States and once again in a G-20 country of your choice.

 

You are expected to report the recent scholarly findings of each topic (at least three articles published about each topic within the past five years in peer-reviewed academic journals such as

Academy of Management Journal

,

Strategic Management Journal

,

Academy of Management Review

, Journal of

Management,

The Academy of Management Perspectives

). The paper should be at least 15 pages long (with proper citations, references, etc.). Each group member will have a chance to evaluate his or her group members as

well (evaluation forms will be provided

Recommended Resources:

Academy of Management Journal
Strategic Management Journal
Academy of Management Review

Journal of Management

The Academy of Management Perspectives
 
 

Part 1: Comparison of executive compensation in the United States and in Australia 

 
 

Part 2: Comparison of issues related to the board of directors in the United States and in Australia

 
 

Part 3: Comparison of issues related to sustainability in the United States and Australia

2

Comparison of Executive Compensation between U.S and Australia

Introduction

Regulatory bodies in Australia and the United States (US) share various features. Nevertheless, there are significant differences between them in terms of regulatory structuring and capital market. As much as institutional investment is popular in the US, a dispersed share ownership model persists (Hill et al. 2010). Australia, on the other hand, similarly experiences high institutional investment levels, but corporate sector listed companies significantly use the block-holder ownership model. Such stakeholder differences have significant effects on the executive pay framework. However, historically, market mechanism have been central to determining pay in both Australia and the US, with little legislative intervention. A comparative analysis between the United States and Australia will allow for a better understanding of the optimal managerial power and contracting models in executive pays between the two countries.

Comparison of Executive Compensation between U.S and Australia

As much as the regulatory regimes of Australia and the US share various features, significantinstitutional differences exist between them in terms of regulatory structures, tax, and capital market (Hill et al. 2010). The issue of executive compensation efficiency has been widely debated and studies in theUnited States, with some arguing that it is skewed given the shareholder-manager imbalance in power experienced within companies, while others noting that it is effective and determined at arm’s length. While one model possess significant explanatory power in the US, this is not the case for Australia. The base salaries of Australia’sexecutives are significantly higher in comparison to those of US executives, while the latter are mostly compensated with stock options and restricted stock as compared to Australians (Hill et al. 2010). Interestingly, the employment contracts of US executives last longer as compared to those of Australians. Moreover, the US contracts are more likely to have SERPs, do not compete clauses, tax gross ups, change-in-control provisions, and arbitration provisions than Australian contracts (Hill et al. 2010). The Australian contracts, on the other hand are more likely to incorporate performance hurdles that an executives must attain for them to receiverestricted stock and options (Le et al. 2020). Most of the Australian contracts also restrict executive hedging of stock options and restricted stock.

Executive Compensation in the U.S.

As much as there are significant differences in the amounts of compensation for executives across the globe, there are basic components that are included in most packages. Standard compensation arrangements include a salary, long-term incentive plans (LTIs), annual bonuses, restricted stock grants, and restricted option grants (Hill et al. 2011). Like the rest of the workforce, executives also receive retirement and terminationpayments and contributions to pension plans. In 2012, the average ChiefExecutive Officer (CEO) compensation among the top 350 firms in the US was close to $14.1 million, while the average received by CEOs in the public companies was $10-12 million (Mishel &Sabadish, 2013). Between 1978 and 2012, there was an 875% increase in CEO compensation in the US as measured by options realized. This increase was more than twice that of stock market growth and higher than the 5.4% increase observed in the compensation of typical workers(Mishel & Sabadish, 2013). On the other hand, in comparing the difference in CEO compensation between 1978 and 2018, the amount had grown by 1,007.5%. Contrary to this, the average compensation of the typical worker only experienced an 11.9% growth within the same period.

Such is importantconsidering the fact that increased growth in executive compensationsignificantlycontributes to inequality. Such an increase in CEO pay is attributed to their power to set salaries as opposed to their skill-set or contributions to productivity. There are various factors that informed such an increase in executive pay in the United States. Research has established that the United States CEO compensation presents a global benchmark, as it allows for increased CEO competitiveness. One of the approaches that are embraced in the US involve using stock options in the company as a formof compensation. The stock options have played a significant role towards the increase in average pay of CEOs. Such financial options include financial contracts thatprovides the executive with a right and not an obligation to procure a given amount of shares within the company in the future at the current market price. As such, if the prices of thecompany’s stockrises, the executives benefit significantly as they are able to purchase the shares at a cheaper price. In cases where the share prices of the company fall, the executives will still not lose out as the contract is not binding, hence they can simply walk away. Such is a major motivator for CEOs to perform better and reflect the company’s productivity through the share prices.

By influencing the share prices to rise through increased productivity, CEOs are able to increase their income through stock options. The idea behind the use of stock options to compensate executives is to create an incentive for taking risk with the intention of increasing the stock price and their pay. The increased stock price also benefits shareholders. Nevertheless, such may also create an incentive for CEOs to take excess risk in view of facilitating an increase in stock price. As much as the choice of riskier initiatives further improves the CEO’s compensation, the same CEO’s receive protection from the insurance provided by stockoptions in case the strategies embraced fail. On the contrary, shareholders are not protected from risk by any measure, an aspect that leaves them to suffer the implications of failed policies. The use of such forms of compensation as stock options have made the US executive compensation a more compensation-based model, with the executivesgiven the opportunity to influence the amount of pay that they receive.

Executive Compensation in Australia

As much as Australia is closer in proximity to Asian as compared to Europe, in cultural and business practices are more informed by Western cultural and business norms. Nevertheless there are areas thatsignificantlydiffer when it comes to the business environment. One such factor involves their financial regulation model referred to as “twin peaks”(Le et al., 2020). This model has allowed the government to establish a single regulatory body referred to as the Australian Prudential Authority (APRA) that regulates financial issues across all sectors, as well as another regulatory body referred to as the Australian Securities and Investments Commission (ASIC), which ensures consumer protection and regulates business conduct (Hill et al. 2010).

The model presents various controls for executivecompensation, which combine “soft law”principles and“black letter law.” The black letter or hard law includes a set of rules that are prescribed for organizationswith lessconsideration given to conceptual factors. On the other hand, the soft law principles present more of a “if not, why not,” or “comply or explain” type of directives (Hill et al., 2010). While US executives havelong terms of office, Australian executives, such as CEOs, can be given any of the three possible contracts, including the indefinite term, maximum term, and the pure fixed term (Le, Shan, & Taylor, 2020). Neverthelessorganizations are significantly warned against giving theirexecutives prolonged terms such as the pure fixed term since they may experiencedissensionwith the decisions made by the executive or their conduct later.

Another area that significantlydistinguishes the compensation of Australianexecutives from that of US executives is that of the base salary, with the formerreceiving higher base salaries as compared to the latter (Hill et al. 2011). Such a findings could be largelyattribute to the fact that executive pay in Australia is regulated by APRA, who set the salaries based mainly on the skill set and responsibilities of the CEOs(Hill et al. 2011). Hence, Australian CEOs have higher base salaries that US CEOs as their salaries are determined based on their experience and credentials (Le et al., 2020). On the contrary, the performance-based structure in the US pays little attention to the credentials of an executive and provides them with an opportunity to influence their pay withy their performance. Unlike the US executive contracts, Australian executive contracts are less likely to include perks, stock options, and restricted stocks, among other benefits(Le et al., 2020). Consequently, the ability of the US executives to influence their pay through the pother benefits that they are provide with such as stock options is a significant incentive for increased productivity and performance (Hill et al. 2011). US CEOs generally earn more than Australian CEOs, in consideration of total compensation, despite Australian CEOs receiving a higher base salary. Wilkins (2013) noted that in 2012, Australian CEOs had an average base pay of $2 million, a figure that increased to $4.7 million upon inclusion of options and bonuses. On the other hand, some CEOs in the US earn as much as $12 million as a result of the options that they are provided with, including the stock options that they can benefit from by positivelyinfluencingstock prices through increasedproductivity measures.

Conclusion

Various similarities exist between the employment contracts for executives in Australia and US. Nevertheless, there are major differences in the contract features between the two countries, ranging from compensation mediums to others terms of contract, including restrictions on executive actions and length. The differences in the regulatory and legal environments tend to explain some of these differences. The systems tend to explain things like the shorter contract lengths and reduced change-in-control provisions in Australian contracts. Other distinctions include choices between performance-based compensation forms, which vary at national, industrial, and firm levels. US executives are provided with prolonged contracts as compared to their Australian counterparts. On the other hand, Australian CEOs have a higher base pay than US CEOs as the former’s pay is determined by a regulatory body. While the US CEOs have a lower base pay average, they are significantlycompensated through other benefits such as stock options, among others. The compensation models adopted by each country have significant implications for the performance of the organizations. In this case, the performance-based approach adopted by the US increases productivity and performance of the executives as they are more motivated to increase the share price and their pay. On the other hand, the model adopted by Australia is less likely to motivate executives to take risks since their compensation is not affected by the performance of the organization.

References

Hill, J. G., Masulis, R. W., & Thomas, R. S. (2011). Comparing CEO employment contract provisions: Differences between Australia and the United States. Vand. L. Rev., 64, 557.

Le, C. H., Shan, Y., & Taylor, S. (2020). Executive Compensation and Financial Performance Measures: Evidence from Significant Financial Institutions. Australian Accounting Review, 30(3), 159-177.

Mishel, L., & Sabadish, N. (2013). CEO pay in 2012 was extraordinarily high relative to typical workers and other high earners. Economic Policy Institute, 367, 1-11.

Mishel, L., & Wolfe, J. (2019). CEO compensation has grown 940% since 1978. Economic Policy Institute, 14.

Wilkins, G. (2013, September 20). CEOs take home 70 times average salary. Retrieved from The Sydney Morning Herald: https://www.smh.com.au/business/ceos-take-home-70-times-average-salary-20130919-2u2kl.html