Reference no: EM133068215

Question - Former Westpac CEO Brian Hartzer takes $2.8m hit as executives count Austrac cost Long-term incentives also lapsed, making it five years since the troubled bank's top executives have been paid an LTI.

Westpac's annual report, released on Monday, confirmed that Mr Hartzer only received his contractual entitlements after he was ousted a year ago in response to Austrac's statement of claim. His 2020 entitlements included $3m in fixed pay, offset by $2.8 in lapsed share rights and $21.5m in lapsed CEO performance share rights.

While some executives received a short-term incentive in 2019, there was a clean slate last year on the recommendation of chief executive Peter King, reflecting the bank's $1.3bn penalty for more than 23m transgressions of anti-money laundering legislation.

Remuneration committee chairman Craig Dunn said the chief executive and board felt it was "fundamental" that collective accountability for the financial crime outcomes in Westpac's businesses, which had led to Austrac's action, be recognised.

Mr Dunn said the board had cut $20.1m from group pay, including cancellation of the short-term incentive for senior management personnel.

"Remuneration consequences were applied to 38 individuals, reflecting the level of direct management responsibility or accountability and the level of culpability for the compliance failures," Mr Dunn said. "In addition, as the issues took place over many years, a number of relevant individuals had since left Westpac's employment. "For most of these former employees, a remuneration adjustment was not possible as they did not have unvested deferred variable reward on foot."

In other outcomes, Mr Dunn said Mr King's total remuneration target was 10.7 per cent lower than for Mr Hartzer, whose targeted remuneration was lowered by 23 per cent in October 2019.

Mr King's total pay last year was $3.6m, including $2.3m in fixed pay. The variable reward pool for the bank was slashed by $139m, on top of a significant reduction in 2019.The short-term incentive was also cut for general managers in 2020.

Westpac suffered a second consecutive strike on its remuneration report in 2019, and will be hoping that the consequences doled out to its executives in 2020 will avoid a third consecutive strike.

Mr Dunn said Westpac had reviewed the bank's executive pay structure and would implement the agreed changes in 2022. In addition to complying with the standard proposed by the Australian Prudential Regulation Authority, the key objective was to place greater emphasis on rewarding long-term, rather than short term, performance.

"The need to focus on the longer term outcomes was highlighted in the royal commission and aligns with feedback from shareholders and regulators," Mr Dunn said. "It is also important that the new structure assists in attracting and retaining executive talent to deliver on Westpac's strategy in an intensely competitive international market."

Westpac will consult with shareholders on the review next year.

Required -

I. Explain Mr Hartzer's remuneration contract using Agency theory. (Maximum words 350).

II. Discuss the shareholders' 'strikes' on the remuneration report using an appropriate theory learnt in ACC30008. (Maximum words 250).

III. Apart from the above theories, what other theories from ACC30008 can be applied to the discussion, including the 'pay cut' reported in the article. (Maximum words 400).