Analysis Of Remuneration Methods At Saracen Mineral Holdings And Newcrest Mining

Remuneration at Saracen Mineral Holdings Limited

The paper is mainly purposed for analyzing and comparing methods of remuneration used by Saracen Mineral Holdings Limited and Newcrest Mining Ltd. In this report, an analysis of how well the approaches of each company worked in encouraging higher performance by the executive teams is given. In addition, this report considers whether or not this performance translated to higher performance of the companies. The paper focusses on performance and remuneration measures for the two companies.

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  1. Remuneration Committee and Its Membership

In accordance with the Saracen Mineral Holdings Limited 2018 annual report of, the company’s remuneration committee for the financial year 2018 was composed of the following directors and members:

  1. Geoffrey Clifford (Non-Executive Chairman)
  2. Raleigh Finlayson (Managing Director-Executive)
  • Mark Connelly (Non-Executive Director)
  1. Martin Reed (Non-Executive Director)
  2. Samantha Tough
  3. Roric Smith

The company’s Key Management Personnel (KMP) for the year were:

  1. Craig Bradshaw
  2. Gerard (Gerry) Kaczmarek
  • Morgan Ball
  1. Daniel Howe
  2. William (Troy) Irvin

According to the 2018 annual report of Newcrest Mining Ltd, the company had the following directors in its remuneration committee:

  1. Sandeep Biswas, CEO.
  2. Gerard Bond, CFO.
  • Melanie Allibon, EGM.
  1. Craig Jetson, EGM.
  2. Craig Jones, EGM.
  3. Ian Kemish, EGM.
  • Francesca Lee, EGM.
  • Michael Nossal, CDO.
  1. Philip Stephenson, EGM.
  2. Bonikro, EGM.
  1. Allocation of Executive Remuneration (Fixed pay/STIs/LTIs)

For Saracen Mineral Holdings Limited, the base or fixed salary for the Managing Director and other executives for financial year 2018 was $700,000. The maximum STI that could be received by the Executive during financial year 2018 ranged between 25% and 40% of Total Fixed Remuneration and the maximum LTI was 40% of TFR. The TFR consists of base pay and benefits, which include superannuation. The STI includes cash payments which are a specified target of FR percentage, while the LTI are mainly composed of performance rights (Horngren 2009, pp. 89).

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For Newcrest Mining Ltd, the outcomes of STI of executives during the fiscal year ending 2018 were kept in the range of fifty-seven percent (57%) to sixty-nine percent (69%) of their potential maximum allowed (Kuppapally 2008, pp. 74).

  1. Mix of Performance Measures Used

Saracen Mineral Holdings Limited uses operating as well as non-operating Key Performance Indicators (KPI) as a performance measure of determining or forming a basis as to which the company assesses the levels of future remuneration for its executive teams and Key Management Personnel (KMP). The company mostly aligns its set KPIs of KMP to the intrinsic business performance of the group. For instance, the company evaluates performance against the annual budget and safety as well as health measures. The remuneration committee has the right to assess remuneration of the executive team depending upon the outcomes of their reviews on annual performance of each executive and KMP, in addition to other relevant factors (Gopal 2009, pp. 35).

Newcrest Mining Ltd used several performance measures. For instance, the company uses outcomes based on ROCE, comparative cost reduction and TSR as well, for its Long term Incentives (LTI). However, the company uses results that are determined by a combination of business performance as well as personal measures for its Short-Term Incentives (STI). The company rewards its executive team for their contributions in increasing the shareholder value through achieving or exceeding their individual as well as company objectives. Through its LTIs, the company encourages its executive team to put more focus and attention on key drivers of performance underpinning the strategies and objectives of the company to deliver a long term growth in the value of their shareholders. Performance conditions of Newcrest Mining Ltd are comprised of a combination of individual measures and business measures. A fixed threshold, target and maximum targets are developed by the company for every measure for purposes of driving high levels of business performance as well as performance per every person. The yearly budget is usually used by a company for basing its target performance that the board of remuneration establishes (Weygandt, Kimmel and Kieso 2015, pp. 85).

Remuneration at Newcrest Mining Ltd

During the fiscal year 2018, the important elements of the measures of individual performance for the executive team were established by the board of Remuneration for aligning it with the company’s strategic objectives. The personal performance measures were selected for recognizing the significant role played by the CEO in respect to individually advancing the company’s strategic goals of improving as well as enhancing the safety and sustainability performance of the Company, its operational performance, value and cash generation as well as progressing its initiatives of growth. The measures of personal performance for other Executive team members such as the KMP during the fiscal year 2018 focused much on areas of their responsibility that in the case executives of operations comprised of safety, saving of costs production and efficiency of operations.  The company generally aligned its non-financial targets to its main values, such as safety and key strategic goals as well as objectives of growth (DRURY 2013, pp. 62).

  1. Company Performance (Total Shareholder Value) Versus Executive Pay

For Saracen Mineral Holdings Limited, the group’s main objective is aligning the remuneration of its executive team to its strategic objectives of business and goals, as well as creating and maximizing the shareholder wealth. According to its annual report for the financial year 2017, the Group’s basic Earnings per share (EPS) increased from 3.26 cents in 2017 financial year to 3.52 cents during the financial year 2018. However, the share price dropped from 1.44 cents to 1.17 during the financial years 2017 and 2018 respectively (Saracen Mineral Holdings 2017, pp. 75).

The company’s TSR is calculated independently and it is placed at 192%, which is at the seventy-fifth (75th) percentile of the identified peer groups used as benchmarks. This can be attributed to vesting of third Tranche and fourth tranche performance rights of class A. The company’s ore reserves increased significantly by approximately 27.9% over the period from 2014 to 2017. This is highly attributed to Tranche 3 and Tranche 4 performance rights of class B, which were vested. Furthermore, the company’s share price is calculated to have recognized an increase of 185% over this period from 2014 to 2018. This is due to issuance of Tranche 3 and Tranche 4 performance rights of class C to its executive team and KMP (Saracen Mineral Holdings 2018, pp. 29).

For Newcrest mining Ltd, the remuneration of its executive team and Key Management Personnel (KMP) was highly correlated. The key operational and financial outcomes for the company for the financial year 2018 are also discussed. For instance, the company realized a profit of $308 million and there was a key improvement in its margin of EBITDA. The company also recognized free cash flows amounting to $739 million, and experienced significant reduction in its net debt. Additionally, the ratio of its net debt to EBITDA increased to 1.1 times. Furthermore, there was a significant reduction in the company’s gearing to 16% (Newcrest Mining Ltd 2018, pp. 78).

  1. Research Commentary on the Company’s Performance
    1. Saracen Mineral Holdings Limited

Performance Measures

The earnings of Saracen Mineral Holdings Limited from December 31, 2017 amounting to AU$59.49 million has increased by approximately 81% in comparison to the previous financial year 2017. Additionally, this particular growth rate of one year exceeds the annual growth rate of the company for the last five years, which is approximately 21%. This is an indication that the Saracen Mineral Holdings Limited is growing at an accelerated rate (Macintosh & Quattrone 2010, pp. 34).

Over the fiscal years, Saracen Mineral Holdings Limited has improved its bottom line at a more rate than its revenue through successful control of its costs and expenses. This led to a significant expansion of its margin and profitability over the years. Reviewing its growth from an industry perspective, the Australian mining industry has grown its average revenues by double figures (18%), during the previous one year. However, this growth rate was 8.70% during the last five fiscal years (Macintosh & Quattrone 2010, pp. 34). This is illustrated below.

However, in terms of returns on investments, the company has not made a good investment of its equity. Due to this, the company had a ROE of 17.21%, which is below the acceptable minimum ratio of 20%. However, Saracen Mineral Holdings Limited had a ROA of 13%, which exceeds that of the Australian mining industry (9.64%). Furthermore, the company had a Return on capital of 18.4%, which is a significant increase from the previous three years from 1.3% (Collier 2015, pp. 73).

  1. Newcrest Mining Ltd

The latest profits of Newcrest Mining Ltd for the last one year amounted to $308 million, which is a drop of 7.23% from the previous financial year. The annualized value of Newcrest for the last five years is ($679 Million). This is an indication that the company experienced a significant drop in its earnings from the previous fiscal years (Abraham, Glynn and Murphy 2008, pp. 25). However, from a long term perspective, the earnings of the company have been increasing at an average rate as shown below.

  1. Summary of Findings
    1. Saracen Mineral Holdings Limited

In accordance with its 2018 fiscal year annual report, the group company recognized a net profit amounting to $28.4 million, before tax. This was an improvement of ten percent from its previous fiscal year. This financial performance was inclusive of write downs involving non-cash items amounting to approximately three million that related to disposal of one of its subsidiaries, Red October. The revenue from sales during the year 2018 amounted to approximately 423 million, which was an increment of fifty-three percent from that pf the preceding fiscal year. The production of Gold also increased by forty-five percent from approximately 188655 ounces during the preceding year. The sales of Gold during the fiscal year 2018 were approximately 266,555 ounces, which was recognized as a significant increase from the previous fiscal year (Macintosh & Quattrone 2010, pp. 35).

Financial Performance

The gross revenue recognized by the group from its operations in mining during the fiscal year 2018 was approximately fifty-one million dollars, after making deductions amounting to approximately fourteen million dollars and seventy-four of depreciation expense as well as amortization expense amounting to approximately thirty-three million for the financial year then ended (Saracen Mineral Holdings 2018, pp. 29).

  1. Newcrest Mining Ltd

Short term incentive (STI) outcomes for Executive team and KMP of Newcrest Mining Ltd during the fiscal year 2018 was between fifty-seven percent and sixty-nine percent of the potential maximum limit. Just like its previous fiscal years, there are significant adjustments made by the board of remuneration regarding the STI outcomes of the business due to impacts of prices of commodities, exchange rates of foreign currency as well as other important items that highly depended on the decision of the board as they were considered to have be out of their control. With regard to the 2018 fiscal year, the adjustments were for these items that were not controllable by the company’s management were made. There were adjustments that were also made to the measure of the company’s cash flows with regard to the LTI (Newcrest Mining Ltd 2018, pp. 75).

Three of the nine executive team members of Newcrest Mining Ltd were granted an improvement in their TFR during the fiscal year 2018. The CEO of the company was also granted an improvement in TFR, and this was considered part of annual review on his pay, resulting from benchmarks acquired from its peers in the industry. However, there were no salary increments granted to non-executive managers or directors (Bhimani & Horngren 2008, pp. 15).

The Remuneration Board of Newcrest Mining Ltd is highly committed to making sure that the remuneration frameworks of the company are aligned to its strategy and performance. It also ensures that high calibre staff are attracted, rewarded and retained, as well as driving acceptable personal performance as well as Group performance as regards the financial interests of both the firm and its stockholders (Collier 2015, pp. 74).

Analysis and Comparison of Remuneration Methods Used

  1. Remuneration Methods of Saracen Mineral Holdings Limited

According to its 2018 financial year annual report, Saracen Mineral Holdings has a remuneration target positioning which is set at the 50th percentile against the market. The company’s STI is set at a maximum of twenty-five percent (25%) for its Chief Executive Officer (CEO), and at forty-two percent (42%) for other Key Management Personnel (KMP) of the company. The company achieved a hundred percent (100%) of its Long Term Incentive (LTI) targets that had been set for the past three financial years (Saracen Mineral Holdings 2017, pp. 29).

Return on Investments

The company mainly uses performance linked approaches of remuneration such as Long Term Incentives and Short Term Incentives. For instance, in its Long Term Incentive remuneration approach, Saracen Mineral Holdings rewards its executive employees and key management personnel using performance payments and equity payments, for exceedingly meeting their set targets and objectives. The company also uses other short term incentives such as cash payments for remunerating its staff (Hilton & Platt 2013, pp. 23). These incentives are meant for rewarding the key management personnel of the company in order to motivate them in achieving their individual as well as group targets, thus enhancing achievement of organizational success (Bussin 2014, pp. 14).

The performance linked remuneration approach used by Saracen Mineral Holdings in rewarding its executive teams motivated them to achieve higher performance, which led to improved performance of the group company in general (Gitman, Juchau & Flanagan 2015, pp. 10). The company achieved a Total Shareholder Return (TSR) of 832%, which gave it the first place in its peer group. This is primarily attributed to its attractive remuneration methods and incentives (Saracen Mineral Holdings Limited 2018, pp. 29).

According to the 2018 financial annual report for the company, Saracen Mineral Holdings Limited recognized an increase of $2,497,000 in the financial year ending 2018. This was a percentage increase of 9.65% (Saracen Mineral Holdings Limited 2018, pp. 76). Although the company does not have a history of dividends paid to its shareholders during the financial year ended 2018, its share price is currently at $1.855, which is a competitive price as compared to its peers in the industry. These significant improvements in the profits, share price and dividends paid by the company can be associated with competitive rewards and remuneration incentives given to its executive team for upon achievement of organizational excellence (Saracen Mineral Holdings Limited 2018, pp. 2).

Regarding its business growth, Saracen Mineral Holdings Limited has been focusing mainly on increasing generation of profits and cash (Hill, Jones & Schilling 2014, pp. 9). The company has recorded an improved and expanded production that has made an active contribution in led to realization of more revenue through its positive gold price environment, as well as its declining costs. This enormous business growth has been significantly attributed to great motivation resulting from the attractive remuneration packages rewarded to its executive team and Key Management Personnel (KMP) (Parrino, Kidwell & Bates 2011, pp. 12).

  1. Remuneration Approach of Newcrest Mining Ltd

The remuneration method of Newcrest Mining Ltd is quite similar to that of Saracen Mineral Holdings. However, there are significant differences in the trends of the approaches used in the two companies. For instance, the Short Term Incentive (STI) outcomes of executives for Newcrest Mining Ltd during the financial year ending 2018 were kept in the range of fifty-seven percent (57%) to sixty-nine percent (69%) of their potential maximum allowed. Additionally, during the year 2017, the company increased the Total Fixed Remuneration (TFR) to three of its nine executive team members. According to the remuneration report of the company, the Chief Executive Officer (CEO) received Increased TFR that resulted from annual review of his salary, which was consequential to remuneration benchmarks of his salary against the market practices for this role (Newcrest Mining Ltd. 2018, pp. 74).

Earnings

This remuneration approach for Newcrest Mining Ltd is believed to have encouraged its executive teams in achieving higher performance. For instance, the company achieved Total Shareholder Return (TSR) of one third of its Long Term Incentive grants. Additionally, the company has maintained positive free cash flows in all its operating sites during the financial year ending 2018. This indicates that the company has an improved overall performance (Newcrest Mining Ltd. 2018, pp. 74).

During the financial year 2018, Newcrest Mining Ltd achieved various interesting and encouraging financial results such as key improvements in its performance of safety and generation of cash flows which are consistent as well as various achievements regarding its operations, especially in relation to Cadia and Lihir. From its financial statements, it can be noted that the company recognized significant amounts of free cash flows from all of its key operations (Abraham, Glynn and Murphy 2008, pp. 23).

Conclusion (Overall Findings)

From the above discussion, it can be concluded that the remuneration methods or approaches used by Newcrest Mining Ltd and Saracen Mineral Holdings Limited are quite similar but slightly different. For instance, the Short Term Incentive (STI) outcomes of executives for Newcrest Mining Ltd during the financial year ending 2017 were kept in the range of fifty-seven percent (57%) to sixty-nine percent (69%) of their potential maximum allowed. On the other hand, Saracen Mineral Holdings has a remuneration target positioning which is set at the 50th percentile against the market. The company’s STI is set at a maximum of twenty-five percent (25%) for its Chief Executive Officer (CEO), and at forty-two percent (42%) for other Key Management Personnel (KMP) of the company.

The above comparison indicates that Saracen Mineral Holdings Limited has a better performance that Newcrest Mining Ltd. The company has produced the best results in terms of shareholder returns and the best results in the short term as well as in the long term. For instance, it has experienced significant improvements in its bottom line at a more rate than its revenue through successful control of its costs and expenses. This has resulted into a significant expansion of its margin and profitability over the years. A review of the company’s growth from an industry perspective indicates that is among the best and overvalued companies in the Australian mining industry.

References

Abraham, A., Glynn, J.J. and Murphy, M., 2008. Accounting for managers. Cengage Learning EMEA, pp. 85-87.

Bhimani, A. and Horngren, C.T., 2008. Management and cost accounting (Vol. 1). Pearson Education, pp. 25-27.

Bussin, M., 2014. Remuneration and Talent Management: Strategic compensation approaches for attracting, retaining and engaging talent. Knowres Publishing, pp. 15-23.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons, pp. 33-35.

DRURY, C.M., 2013. Management and cost accounting. Springer, pp. 54-55.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU, pp. 20-32.

Gopal, C.R., 2009. Accounting for managers. New Age International, pp. 102.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning, pp. 52.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education, pp. 47-54.

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Kuppapally, J.J., 2008. Accounting for managers. PHI Learning Pvt. Ltd, pp. 96.

Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An organizational and sociological approach. John Wiley & Sons, pp. 23-56.

Newcrest Mining Ltd., 2018. Newcrest Mining Limited annual report 2018, pp. 41-79.

Parrino, R., Kidwell, D.S. and Bates, T., 2011. Fundamentals of corporate finance. John Wiley & Sons, pp. 32-58.

Saracen Mineral Holdings, 2018. Saracen Mineral Holdings Limited annual report 2018, pp. 30-100.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons, pp. 23-45.