Director’ Remuneration and Performance in the Big Four Australian Banks

Table of Contents

Abstract

List of Figures

List of Tables

CHAPTER 1: INTRODUCTION
1.1 Introduction
1.2 History of the Australian Banking Industry
1.3 History of the ‘Big Four’ Banks
1.4 Important Concepts
1.5 Significance of Research
1.6 Overview of the Research

CHAPTER 2: CRITICAL REVIEW OF LITERATURE
2.1 Introduction
2.2 Theories Underpinning the Research
2.3 Remuneration and Firm Performance
2.4 Remuneration and Firm Performance (Australian banking)
2.5 Australian Government Initiatives
2.6 Conclusion

CHAPTER 3: RESEARCH DESIGN AND DATA COLLECTION
3.1 Introduction
3.2 Research Design
3.3 Hypothesis Development and Conceptual Framework
3.4 Data Collection
3.5 Conclusion

CHAPTER 4: DATA ANALYSIS
4.1 Introduction
4.2 Descriptive Analysis of Director Remuneration
4.3 Breakdown of Directors’ Remuneration
4.4 Descriptive Analysis of Non-Financial Data
4.4 Conclusion

CHAPTER 5: RESULTS AND DISCUSSION
5.1 Introduction
5.2 Current Model Analysis
5.3 Sensitivity Analysis
5.4 Discussion

CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS
6.1 Introduction
6.2 Recommendations
6.3 Limitations of Research and Areas of Further Research

References

Appendix
Appendix 1: Branch Closures in the Big Four Banks (2010 & 2011)
Appendix 2: Branch Closures in the Big Four Banks (2009)
Appendix 3: Branch Closures in the Big Four Banks (2007 &2006)
Appendix 4: Job Cuts in the Big Four Banks (2012)
Appendix5: Job Cuts in the Big Four Banks (2011a)
Appendix 6: Job Cuts in the Big Four Banks (2011b)
Appendix 7: Job Cuts in the Big Four Banks (2010)
Appendix 8: Job Cuts in the Big Four Banks (2009 & 2008)

Abstract

A substantial and influential literature demonstrates conflicting evidence that director remuneration is either positively or negatively correlated with corporate performance. In some instances, studies suggested to have no link between director remuneration and corporate performance. Research interest in this topic has been further fuelled with the collapse of many multinational companies such as Lehmann Brothers, Meryll Lynch during the recent global financial crisis. Prior Australian studies, also present a mixed opinion on the link between director remuneration and firm performance. In this research, a re-examination of the link between director remuneration and firm performance in the big four Australian banks is being conducted. Various literature sources such as government reports, journal articles and newspaper articles have been reviewed to acknowledge pervious research findings and help identify a sizeable gap.

This research uses both financial data and non-financial data in analysing the various hypothesis presented. Financial data is retrieved from databases such as Aspect Fin Analysis and banks’ annual report. In terms of non-financial data, this paper retrieves them from various newspaper articles discussing job cut and branch closures.

Overall this research has found that there exists no relationship between director remuneration and firm performance in the big four banks for the period pre, during or post Global Financial Crisis. These findings also hold true with a one year lag and lead and goes on to suggest that the relationship between the variables (director remuneration and performance) does not forge a link in the long term as well.

List of Figures

Figure 1: Total Executive Director Remuneration awarded (2006-2011)

Figure 2: Total Non-executive Director Remuneration Awarded (2006 -2011)

Figure 3: Overall Composition of Executive Director Remuneration (2006-11)

Figure 4: Overall Composition of Non-Executive Director Remuneration (2006-11)

List of Tables

Table 1: Correlation between director remuneration and performance (Current Year Model)

Table 2: Correlation between director remuneration and performance (Lagged Year Model)

Table 3: Correlation between director remuneration and performance (Lead Year Model)

CHAPTER 1: INTRODUCTION

1.1 Introduction

In the last decade, senior management remuneration has grown at an alarming rate of 12% per annum (Productivity Commission, 2009). Despite the high growth in the senior management remuneration, the world witnessed one of the biggest financial crisis in the entire human civilization i.e. Global Financial Crisis (GFC). The GFC created havoc around the world and there was a loss of 8 million jobs throughout the OECD countries (Rudd, 2009). For the first time in sixty years advanced economies around the world were contracting (Rudd, 2009). Shareholders around the world lost $32 trillion in the companies they had invested (Rudd, 2009) while for the same period senior executives in many companies around the world were paid excessively (Irvine, 2009).

Numerous corporate collapses such as Lehman Brothers and Meryll Lynch has questioned the excessive levels of remuneration awarded to Senior Management. For instance, the CEO of Lehmann Brothers was compensated with a salary of $484 million between 2000 to 2008 and despite this, Lehman Brothers filed for bankruptcy in 2008 (Ross, 2008).

This research is a study conducted on the big four Australian banks. Australia was chosen as the preferred location because it was one of the few countries that was least affected by the global financial crisis (Christine and Kevin, 2010). The big four Australian banks constitute an oligopoly commanding a combined 90% market share of Australia’s commercial banking sector (Lee, 2012). These institutions are the Commonwealth Bank of Australia (CBA), National Australia Bank Ltd (NAB), Westpac Banking Corporation (Westpac), and Australia and New Zealand Banking Group Limited (ANZ). Another rationale for choosing the big four banks, despite the GFC inflicting severe losses on organisations around the world (Rudd, 2009); is that all these four Australian banks reported profits during the GFC. Hence, this research investigates the relationship between firm performance and director remuneration in the banking sector of a country that was among the least affected by the GFC.

The Australian banking industry has long been plagued by director fraud (Cannon, 1967) through numerous scandals such as; the Centennial Land Bank debacle in 1892 wherein one of its directors Mr. Illingworth, stole ₤300000 from the banks’ capital and fled (Cannon 1967); the Land Credit Bank debacle in 1891 wherein one of its directors committed suicide as a result of losses suffered from speculating with the bank’s funds (Cannon, 1967)..

After the global financial crisis, the reputation of many senior banking executives in the UK and United States was badly damaged (Kehoe, 2012). However, the Australian banking sector escaped the global financial crisis and as a result Australian bankers are seen as multi-skilled in many areas such as credit management, risk management and wealth management (Kehoe, 2012). Henceforth, an investigation into the remuneration awarded to the directors of Australian banks may help design future guidelines on setting director remuneration of global banking sectors.

According to the Australian Stock Exchange (ASX), Australia is ranked as the thirteenth largest economy in the world. A research finding on the big four banks would imply that these findings will hold true for 90% of the banking sector of one of the largest economies in the world.

The banks face an enormous amount of public scrutiny from the media. In this year (2012) alone there were many articles like those by McMahon and Drill (2012), Kehoe (2012) and Murdoch (2012) published in The Age and The Australian on the big four banks. Some like Kehoe (2012) have appreciated the executives of the big four banks while others like McMahon and Drill (2012) have further criticized the excessive remuneration awarded to executives. These researches further fuelled research interest into the relationship between director remuneration and firm performance in the big four banks.

It is also evident that the high remuneration awarded to senior management is occurring at the same time when the big four banks are experiencing a decline in their corporate social responsibility. Over the years there have been many branch closures (Boreham and David 1998; Jones 2004; Kirby 1996), and job cuts (Lleydon and Walsh 2009; Murdoch 2011; Tandon 2010; Murdoch and Hepworth 2012; Murdoch 2012) to sustain growth levels. Thus the banks are forced to act socially irresponsible solely to preserve their performance levels (Murdoch 2012; Gerber 2012; Westpac to cut costs in 'new reality' 2011). Hence this decline in corporate social responsibility and its effects on the society further inflate criticisms laid on the high remuneration received by the directors.

1.2 History of the Australian Banking Industry

The Australian commercial banking industry began operating in 1817 under the banner ‘Bank of New South Wales’, with the first savings bank being opened in 1819 under the banner ‘New South Wales Savings Bank’. In the mid 1830s, many English banks such as Bank of Australasia and Union Bank of Australia opened up for operations in Australia (Marwick, 1985) {, 1985, Banking in Australia} . The English Banks brought with themselves huge amount of capital which helped establish foreign exchange market and encouraged interest rate competition thus laying the foundations for modern day banking.

In the 1850s, the discovery of gold in Victoria led to Australian banks trading gold directly, as gold trading was very profitable during this time. From 1850 to 1890 many new banks started operating in Australia. However, in the 1890s the Australian banking industry faced a major crisis as a result of the real estate crash (Marwick 1985). Many banks went bankrupt as they incurred huge losses by speculating on land prices and thus closed down. This called for more stringent supervision (Marwick 1985) and since the start of the nineteenth century until the early 1980s the banks were highly regulated by the Australian government. By the 1960s the banks had been allowed to venture into more diversified activities such as credit cards, travel services, etc. This allowed banks to earn more income and in 1982, through the Campbell Report the banking industry was further deregulated. The Campbell committee also approved selected foreign banks to operate in Australia.

In short, over the past few decades, there has been a number of significant changes such as: changes in regulations surrounding the industry, e.g. deregulation of the banking sector through Campbell Committee Report; new entrants into the industry, i.e. foreign banks such as Hong Kong and Shanghai Banking Corporation (HSBC), Standard Chartered Bank; numerous mergers between banks to gain market share, for example the Bank of Australasia and Union Bank of Australasia; a new regulator (APRA) was created to regulate the banking industry; and finally, a sharp increase in remuneration awarded to senior management (Productivity Commission, 2009).

It is expected that the Australian banking industry will record revenues of $208.6 billion in 2012-13 (Lee, 2012). For the next five years the big four banks are expected to grow at a rate of 8.1% and the revenue for 2017-18 is forecasted to be $308.4 billion (Lee, 2012). However, in the coming years, competition in the banking sector is expected to reduce profit margins and it is also believed that the contraction of the retail and manufacturing sectors may impede revenue growth (Lee, 2012).

1.3 History of the ‘Big Four’ Banks

An insight into each of the big four banks is provided below. In particular, this section briefly describes; the operation history of each of the big four banks in Australia; the various business activities conducted by the big four banks; and the recent expansion strategies implemented by these big four banks.

Australia and New Zealand Bank (ANZ)

ANZ group started its operations in 1835 under the name Bank of Australasia and three years later, in 1838 it started operating in Melbourne. Today ANZ operates in 32 countries such as Australia, New Zealand, USA and Asia Pacific Region. As a result of a series of mergers ANZ transferred its operations from England to Australia in 1976. In 1951 the bank merged with Union Bank of Australasia to form the Australia and New Zealand Banking Group. Similar to its counterparts i.e. the other big four banks, ANZ provides a wide range of banking services such as personal business and institutional business (ANZ Bank, 2012).

Commonwealth Bank of Australia (CBA)

The Commonwealth Bank was founded in 1911 through the Commonwealth Act and commenced business in 1912. It was the first Australian bank to obtain a federal bank guarantee on all its deposits. As a result of growing demand for financial services in the Asia-Pacific region, in 2005 Commonwealth Bank started to expand into the Asia-Pacific region. It focused its expansion particularly into China, India, Indonesia, and Vietnam. It also formed overseas joint ventures with Chinese banks such as Oilu Bank and Bank of Hangzhou. Today the Commonwealth Bank is one of the largest banks in Australia employing over 52,000 people (Commonwealth Bank, 2012).

Western Pacific Banking Corporation (Westpac)

Westpac is the pioneer of the Australian banking industry and the oldest Australian bank. It started in 1817 under the name Bank of New South Wales and later renamed itself Westpac Banking Corporation after its merger with Commercial Bank of Australia. Interestingly in 1827 when Westpac functioned as the Bank of New South Wales it suffered huge losses as a result of a major fraud conducted by its chief executive. However, towards the second half of the nineteenth century the bank capitalised on the gold boom and started performing well and by 1961 it had 37 functioning branches. Since acquiring the Commercial Bank of Australia in 1982, Westpac has been expanding rapidly, with its latest merger being with St.George Bank in 2008 ( Westpac, 2012).

National Australia Bank (NAB)

National Bank of Australasia also known as NAB started operations in 1858. Similar to the other big four banks, The National Bank of Australasia also merged with numerous other banks such as Commercial Banking Company of Sydney Ltd in 1981, Colonial bank of Australasia in 1918 and Bank of Queensland in 1922. NAB commenced its savings bank operations in 1962 and diversified into non-banking financial areas between 1954 and 1973. It became a listed entity in 1962 ( NAB, 2012).

1.4 Important Concepts

In this section, important concepts used in this research such as the different forms of ‘director remuneration’ and the various ‘firm performance’ measures are defined. This would ensure proper interpretation of the research findings.

Remuneration of Directors

In this research, the term ‘director remuneration’ refers to the forms of remuneration awarded to directors in the big four banks. The director remuneration is classified into short-term incentives, equity-related pay, post-employment benefits and other remuneration. ‘Short-term incentives’ consist of cash benefits, share benefits in lieu of shares, shares vested within the year. ‘Equity related pay’ mainly consists of rewarding directors through stocks and options in the company. ‘Post-employment benefits’ mainly consist of superannuation while ‘other remuneration’ includes long-term accrued leave and irregular forms of payments such as termination payments. The director remuneration data of the big four banks have been collected for the years 2006 to 2011. They were collected from total of thirty-six annual reports of the big four banks.

The directors can be broadly classified as executive directors and non-executive directors. The Executive Director is responsible for the day to day operations of the business. The Executive Director is also responsible for implementing strategic plans to propel the firm’s performance. In contrast, the non-executive director does not engage in the day-to-day management of the organization, however, is involved in supervising the executive director and offering recommendations on running the firm. In order to serve the purpose of this research, remuneration data of both the executive and non-executive directors are jointly classified as “director remuneration”.

Performances measures

The term performance refers to the various financial performance measures employed. Financial performance can be analysed using many dimensions such as: Net profit after tax (NPAT); Price earnings ratio (PER); Price per book value (P/BV); Earnings per share (EPS); Dividend yield; and Total assets. Financial ratios such as Return on Equity and the Return on Assets may also be used to assess financial performance (Venkatraman and Ramanujam, 1986). Financial data has been sourced from databases like Aspect Fin Analysis and the annual reports of the big four banks.

The financial performance measures analysed comprise of both market-based performance and accounting based performance. Market-based and accounting-based firm performances have been collected from Aspect Fin Analysis.

Accounting-based measures

Many different accounting measures can be used to determine Firm Performance. The most commonly used accounting measures are return on equity (ROE) and net profit (Attaway 2000). There have been mixed views on the relationship between return on equity and executive remuneration. Murthy and Salter (1975) found that there is no link between executive compensation and return on equity while Veliyath and Bishop (1995) discovered a positive link (firms with higher ROE gave their CEOs more compensation). Profitability measures such as net profit exhibits the most basic and fundamental valuation of a firm (Jensen and Murphy, 1990). In some studies, i.e., Jensen and Murphy (1990), net profits have been related to executive remuneration while studies such as Miller (1995) suggest otherwise.

Accounting performance measures can be subject to manipulation by senior executives and may mislead shareholders (Deegan, 2010). Accounting measures are only available after a period of time (i.e., quarterly, half-yearly, etc). Accounting measures also disregard dividend policy, additional income and changes in economic policy. Therefore, there is a probability that accounting measures may be highly misleading (Azim and Chua, 2010). Accounting measures are mainly used to encourage managers to focus on profit maximization (Smith and Hilton, 2009). Hence many companies use accounting-based measures to increase profits thus improving firm performance.

The accounting-based performances incorporated into this research are Return on equity (RoE), Return on asset (RoA), Total asset and Net profit after tax (NPAT).

RoE is chosen because it is less susceptible to manipulation by directors as they don’t possess control over share price movements. RoA and Total assets are used as performance measures because the values of the assets depict the company’s financial strength. A relationship between remuneration and the company’s assets demonstrates the ability of director’s remuneration to improve a firm’s financial strength. In particular, Return on Assets (RoA) demonstrates the efficiency in employing an organisation’s assets while Total Assets shows the total amount of assets held by the banks i.e. the financial strength. Finally, net profit showcases the fundamental valuation of the big four banks.

Market-based firm performance measures

Market-based firm performance measures, in general, are regarded as one of the best type of performance measures (Copeland, Koller and Murrin, 2000). Furthermore, market-based measures like share price performance can also be classified as a function of shareholder returns (Murphy, 1985) i.e. as a function of how much value shareholders are gaining. It is more appropriate to use shareholder returns as a measure of firm performance because shareholders are considered to be owners/principals and firm performance should be measured as a function of the owner’s return. Studies by Lewellen and Huntsman (1970) and Kerr and Bettis (1987) have demonstrated theoretically that stock performance is related to firm performance, which, in turn is one of the main determinants of executive remuneration.

One of the biggest drawbacks of market-based performance is that it can exclusively be used for listed companies because Market-based performance such as Price Earnings Ratio or share price performance can only be calculated for listed companies. This drawback does not affect this research because the big four banks are listed entities and their market-based data is also readily available on Aspect Fin Analysis.

The market-based performance guides used in this research are: Price Earnings Ratio (PER), Price per Book Value (P/BV), Earnings per share (EPS) and Dividend Yield (DY).

Price Earnings Ratio (PER) is employed because it compares current market price to the earnings per share; Price/Book Value (P/BV) is used because it runs a comparison between market value and book value. Therefore, Price Earnings Ratio and Price per Book Value are used to analyse the effect of director remuneration on share price.

Earnings per share (EPS) illustrate the percentage of a company’s profit allocated to shareholders while Dividend Yield (DY) depicts the percentage of dividend paid out relative to share price. Hence EPS and dividend yield are employed as performance measures to assess remuneration with reference to shareholder returns.

1.5 Significance of Research

The banking sector of any country is the most vital component of any economy because banks create money for the economy and ensure financial stability (HeteŞ & Miru, 2010). This research focuses on one of the most vital sections of the Australian economy and may aid the Australian Government in finding discrepancies in the remuneration practices of its banking system.

In the current economic climate, the big four banks in Australia are cutting jobs to sustain growth (Murdoch, 2012). However, according to their (banks’) annual reports, the directors of these banks still receive millions of dollars in terms of remuneration. This research will illustrate if the excessive remuneration is justified in terms of improved firm performance.

The research is conducted for three contrasting economic phases; before/pre, during and post/after global financial crisis. The pre-global financial crisis (2006-07) period was characterized by economies expanding around the world while during (2008-2009) the GFC these economies rapidly contracted. The post-GFC (2010-2011) is a period characterized by rebuilding of economies around the world. These phases of recent economic history have been chosen to demonstrate that the research findings will hold true in different economic conditions and vice versa.

The literature sources for this research comprise of, but are not limited to; journal articles from British Accounting Review, Contemporary Accounting Research, Accounting Research Journal; news articles from leading media s such as The Financial Review, The Age, Herald Sun. Australian government research reports, including the Productivity Commission Report (2009), Executive Remuneration-Information Paper (2010), and CAMAC Report (2011). Web sites of published professional agencies such as the Australian Shareholders Association and Australian Institute of Company Directors are also accessed. All these different forms of documentation have been thoroughly analysed and acknowledged to assist in identifying a clear gap in the knowledge.

This research will examine: “What is the relationship between director remuneration and firm performance in the big four banks in the pre-, post- and during the global financial crisis?”

1.6 Overview of the Research

This chapter has discussed the purpose of the research, its significance. Chapter 2 follows it with a critical review of the important literature surrounding the topic. This makes it possible to acknowledge previous research findings which will assist us in identifying the gap and contributing to knowledge effectively.

Chapter 3 overviews the research methodology, data types and sources, justification of control variables employed. This research uses linear regression for analysing the financial data.

Chapter 4 looks at the various trends for remuneration data and also provides a detailed descriptive description of the remuneration data. Apart from this Chapter 4 also provides a detailed analysis of the non-financial data (newspaper articles) and their relevance to this research.

Chapter 5 presents the results of the financial data. The discussion section of this chapter examines the extent of the contribution to knowledge of this research. The research findings and their implications are also analysed.

Finally, Chapter 6 posits a broad view of the research topic and makes recommendations where required. Furthermore, the limitations of this research are discussed. Areas of future research are also included here as a guide to future researchers indicating specific fields in this subject area that need attention.

CHAPTER 2: CRITICAL REVIEW OF LITERATURE

2.1 Introduction

This literature review will outline the important theories that form the basis of the research: the roles of both international and Australian media in the research topic; different views expressed by different groups of researchers; previous Australian research studies that are closely related to this topic; relevant Australian government reports; Australian legislation affecting to the topic; and the publications of other professional agencies.

2.2 Theories Underpinning the Research

The two theories underpinning this research are Agency Theory and Performance Evaluation Theory. Agency Theory focuses on linking senior management remuneration with firm performance. On the other hand Performance Evaluation Theory focuses on how remuneration patterns of rival firms in an industry affect the remuneration pattern of particular firms.

Agency Theory

The theory that best explains the purpose and design of senior management remuneration is agency theory. This theory states that there exists a conflict of interest between management and shareholders, a situation referred to as the “agency problem” (Jensen and Meckling, 1976). Conflicts may arise due to what is known as a horizon problem, i.e. differences in time horizons as perceived by management and shareholders (Deegan, 2010). For instance, shareholders may be interested in the long-term performance of the firm while management has a short-term focus on how the firm is doing.

Another important aspect of the agency theory is asymmetric symmetry. This is where the agent or the management is assumed to have more information and hence may use this superior information to their advantage. They may use this information to increase their own personal wealth. This behaviour may cause losses to shareholders as they do not have superior information about the organisation. Even in the big four banks, executive and non-executive directors would have more precise information about future plans and they may use this to increase their personal wealth as well.

Shareholders want management to act in a way that increases their wealth while managers may choose to act in ways that increase their own wealth (Deegan, 2010). So in order to align the interests of the management with the interests of shareholders, agency theory proposes various methods. One such method is to design the structure of senior executive pay in a way that it is aligned to firm performance. This forms the central theme of this study and executives may be compensated in many different forms such as salaries, bonuses, stocks and termination payments. Companies tend to remunerate their executives with compensation methods that best suit their organization’s goals. This phenomenon can be observed in high risk Australian companies preferring to compensate their executives with share options because they feel share options will motivate risk averse executives to take up riskier projects in order to generate higher returns (Marion and Gul, 2006).

Sometimes, powerful groups of shareholders may be able to influence managers to act in their (powerful shareholders) best interests (Jensen and Meckling, 1976). As a result, many small shareholders may be affected if their opinions are not taken seriously by corporations.

Performance evaluation theory

Another theory that underpins senior management remuneration is Performance Evaluation Theory (Aggarwal and Samwick 1999). This theory takes into account that interaction of shareholders and managers occurs in an environment surrounded by rival firms and it states that performance levels of rival firms affect executives’ remuneration. Performance evaluation theory places a positive effect on one’s own firm performance and a negative effect on the rival firms firm’s functioning. As a result, an executive would be paid higher if he or she generates more shareholder returns than executives of rival firms. This theory is highly applicable for this research because the big four banks constitute a highly competitive oligopoly. It is worthwhile investigating how the executive remuneration of one bank is affected by the shareholder returns of rival banks (Aggarwal and Samwick, 1999).

2.3 Remuneration and Firm Performance

There was immense criticism on the excessive senior management remuneration levels of companies that filed for bankruptcy during the GFC (Ross, 2008). Meanwhile in the Australian media, opinions are mixed regarding senior management remuneration. For instance, Irvine (2009) criticized excessive executive remuneration while others such as Kehoe (2012) applauded and justified them. On the basis of this, two opposing schools of thought were formed. The first school of thought suggests that there is no link between senior management remuneration and firm performance in Australia and across the world (Izan et al. 1998; Defina et al. 1994; Bebchuk and Fried 2004). This is an alarming sign for economies and governments globally. If senior management remuneration is not related to firm performance then executives of many firms are acting in their own self-interest and not contributing to a firm’s economic growth. This will reduce productivity and performance in many industries and thus contribute to an economic decline.

In the Australian context, some authors argue that executive remuneration is not linked to firm performance. A study conducted by O’Neill and Iob (1999) in Australia on the behalf of the Hays Group, suggests that there is no significant relationship between executive remuneration and business performance. This report is highly regarded because it was published by a firm that operates as a market leader in the senior executive recruitment industry. The above studies suggest that executives do not have an underlying interest in the firm’s performance, but are rather interested in their own personal gain.

The second school of thought suggests that there is a link between senior management remuneration and firm performance (Doucouliagos, Haman & Askary 2007; O’Neill and Iob 1999; Merhebi, Swan & Zhou 1999; Azim and Chua 2010). This is an important finding because when executives are remunerated based on firm performance; they are motivated to increase the firm’s value. This, in turn, increases productivity across industries, thus contributing to an economic boom. The economic boom creates more jobs which has a positive effect on the society as a whole. This is demonstrated by Hill (1996) who stated that the United States performed economically and financially better than Europe and Japan in the past few decades because American corporations remunerated CEO’ based on their performance.

Many companies throughout Australia have also linked their performance to executive remuneration. For instance a study by Merhebi, Swan and Zhou (1999) established that executive remuneration is positively linked to firm performance across 757 firms in Australia. However the biggest evidence to support this school of thought (remuneration is positively linked to performance) are the findings of Azim and Chua (2010), who demonstrated that there existed a positive relationship between director remuneration and firm performance in the top 200 Australian in terms of market capitalization during the global financial crisis. This provides strong evidence for the statement that director remuneration is positively linked to firm performance in Australia. Some researchers have also examined this theory with a lag (i.e. current remuneration is linked to performance of previous/forthcoming years (Doucouliagos, Haman & Askary (2007). The lagged relationship also suggests the existence of a long-term relationship between remuneration and firm performance.