Commonwealth Bank - Report to Shareholders 2003 - Notes to the Financial Statements
 

Notes to the Financial Statements

For the year ended 30 June 2003

The following table shows remuneration for the executive director and five highest paid other members of the senior executive team reporting directly to the Chief Executive Officer, who were officers of the Bank and the Group in the year ended 30 June 2003. The table does not include individuals who are not direct reports to the Chief Executive Officer, but whose incentive based remuneration in any given year is in excess of that received by a member of the senior executive team.

NOTE 6 Remuneration of Executives
Senior Executive Team 

Bonus in respect of this year(2)
Name & Position Base Pay(1) $ Paid in Cash $ Vested in CBA Shares $ Super-annuation(3) $ Other Compensation(4) $ Total Remuneration $

D V Murray
Chief Executive Officer
1,625,000 375,000 375,000 131,625 13,000 2,519,625

S I Grimshaw
Group Executive,
Investment & Insurance
Services
815,616 262,500 262,500 58,724 313,000 1,712,340

M A Katz
Group Executive, Premium
Financial Services
870,000 240,000 240,000 67,500 13,000 1,430,500

M J Ullmer
Group Executive,
Institutional & Business
Services
820,000 217,500 217,500 132,300 13,000 1,400,300

G L Mackrell
Group Executive,
International Financial
Services
540,000 185,000 185,000 66,802 13,000 989,802

A R Cosenza
Group Executive,
Office of CEO
560,000 160,000 160,000 40,320 13,000 933,320

           
Retired Executive            
P L Polson
Group Executive,
Investment & Insurance
Services(5)
240,411 63,519 1,204,795 1,508,725

(1)  Base pay reflects amounts paid in the year ending 30 June 2003 and is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles.

(2)  Bonuses paid are for the year ending 30 June 2003. The Group has a vesting (deferral) arrangement for most executives. 50% of the bonus payment is paid in cash and the remaining 50% is deferred and vested in the Bank’s shares. Half of the shares will vest after one year (in 2004) and half will vest after two years (in 2005). Generally shares are only received if the executive is still in the employ of the Bank on the relevant dates.

(3)  The Bank is currently not contributing to the Officers’ Superannuation Fund or to the Colonial Group Staff Superannuation Scheme. However, the notional cost of superannuation has been determined on an individual basis for each executive.

(4)  Other compensation includes, where applicable, car parking (including FBT), accommodation (including FBT), commencement payments, retirement allowances, contractual and other payments.

(5)  Retired 26 October 2002.

The following table shows the number of shares granted as well as the amortisation of unvested shares and options for the year ending 30 June 2003.

  Number of Shares
granted during
the year ending
30 June 2003(1)
Amortisation for the
year ending 30 June 2003
of unvested shares and
options allocated in fiscal
years 2001, 2002 and 2003
Name & Position No. Option
Grants(1)
$
Share
Grants(1)
$

D V Murray
Chief Executive Officer
110,000 412,347 667,973

S I Grimshaw
Group Executive, Investment & Insurance Services
39,000 65,189 232,565

M A Katz
Group Executive, Premium Financial Services
48,000 174,527 383,601

M J Ullmer
Group Executive, Institutional & Business Services
48,000 168,324 383,601

G L Mackrell
Group Executive, International Financial Services
29,500 89,830 220,910

A R Cosenza
Group Executive, Office of CEO
29,500 85,792 220,161

 
Retired Executive  
P L Polson
Group Executive, Investment & Insurance Services(2)
59,526 78,698

(1)  Since 2002/03, Shares only have been allocated under the Equity Reward Plan. Shares are purchased on-market at the current market price and the cost of the shares acquired is expensed against the Profit & Loss account over a 3 year period. No consideration is payable by the executive for the grant of shares and the vesting of the executive’s legal title to the executive is conditional on the Bank achieving the prescribed performance hurdle.

Option Grants previously awarded under the Equity Reward Plan were a right to subscribe for ordinary shares at an exercise price which was the Market Value (defined as the weighted average of the prices at which the Bank’s ordinary shares were traded on the ASX during the one week period before the Commencement Date) plus a premium representing the time value component of the value of options (based on the actual differences between the dividend and bond yields at the date of the vesting of the right to exercise the options). No options have been granted since 2001/02.

The prescribed performance hurdle for Options and Shares issued prior to 2002/03 was:

The Bank’s Total Shareholder Return (growth in share price plus dividends reinvested) over a minimum three year period, must equal or exceed the index of Total Shareholder Return achieved by a comparator group of companies, excluding the Bank.

If the performance hurdle is not reached within that three years, the Options and Shares may nevertheless be exercisable or vest as appropriate only where the hurdle is subsequently reached within five years from the Commencement Date. If the performance hurdle is not met within this period the Options will lapse and entitlement to Shares will be forfeited.

In relation to Reward Shares granted from 2002/03 onwards, a tiered vesting scale was introduced so that 50% of allocated shares vest if the Bank's Total Shareholder Return is equal to the median return of the comparator group, 75% vest at the 67th percentile and 100% when the Bank's return is in the top quartile with a linear relationship between the percentiles.

Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time.

Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%.

Options and Shares previously allocated under the Equity Reward Plan will continue until they vest upon the prescribed performance hurdles being met or they lapse.

The amortisation of Options and Shares disclosed above is calculated as follows:

Options – Calculated using the ‘fair value’ of all outstanding (i.e. currently unexercisable) Options granted in fiscal years 2001 and 2002 (plus second tranche of Options granted to the CEO in fiscal year 2000). The ‘fair value’ (as previously disclosed for US GAAP purposes) is derived using a Black-Scholes valuation discounted by 50% for the probability of not meeting the performance hurdle. The annualised equivalent of the ‘fair value’ in respect of each grant has been apportioned on a straight line basis over the period from the Commencement Date until the first possible vesting date – a period of 37 months (49 months in respect of the second tranche of Options granted to the CEO in fiscal year 2000). The first tranche of Options granted to the CEO in fiscal year 2000 as well as to other executives have not yet become exercisable but have passed the first possible vesting date and are not included in the values calculated.

Shares – Calculated using the market value at the Commencement Date of all outstanding (i.e. currently unvested) entitlements to Shares granted in fiscal years 2001, 2002 and 2003 discounted by 50% for the probability of not meeting the performance hurdle. The annualised equivalent of the ‘fair value’ in respect of each grant has been apportioned on a straight line basis over the period from the Commencement Date until the first possible vesting date – a period of 37 months.

(2)  Retired 26 October 2002.

Equity Reward Plan (ERP)

The Board has envisaged that up to a maximum of 500 employees would participate each year in the ERP.

Previous grants under the ERP were in two parts, comprising grants of options and grants of shares. Since 2001/02, no options have been issued under the ERP. In 2002/03 Reward Shares only were issued under this plan.

The exercise of previously granted options and the vesting of employee legal title to the shares is conditional on the Bank achieving a prescribed performance hurdle. The ERP performance hurdle is based on relative Total Shareholder Return (TSR) with the Bank’s TSR performance being measured against a comparator group of companies.

The prescribed performance hurdle for Options and Reward Shares issued prior to 2002/03 was:

A further change was introduced in relation to Reward Shares granted from 2002/03 onwards.

A tiered vesting scale was introduced so that 50% of the allocated shares vest if the Bank’s TSR is equal to the median return, 75% vest at the 67th percentile and 100% when the Bank’s return is in the top quartile.

Where the rating is at least at the 50th percentile on the third anniversary of the grant, the shares will vest at a time nominated by the executive, within the trading windows, over the next two years. The vesting percentage will be at least that achieved on the third anniversary of the grant and the executive will be able to delay vesting until a subsequent half yearly window prior to the fifth anniversary of the grant. The vesting percentage will be calculated by reference to the rating at that time.

Where the rating is below the 50th percentile on the third anniversary of grant, the shares can still vest if the rating reaches the 50th percentile prior to the fifth anniversary, but the maximum vesting will be 50%.

Shares acquired under the share component of the ERP are purchased on-market at the current market price. The cost of shares acquired is expensed against the Profit and Loss Account over a three year period, reflecting the minimum vesting period.

Executive options issued up to September 2001 are not currently recorded as an expense by the Group. If the options issued in 2001/02 were expensed to the Profit and Loss Account, the amount recorded by the Group would have been $6.0 million, based on 2,994,500 options being issued with a fair value of $2.01 and 12,500 options with a fair value of $1.53. (The fair value is determined using the Black-Scholes option pricing model and includes a 50% discount for probability of options not being exercised).

Details of options issued and shares acquired under ERP are as follows –

Options

Year of Grant Commencement
Date
Issue
Date
Options
Issued
Options
Outstanding(1)
Participants Exercise
Price
Exercise
Period

2000 13 Sep 2000 7 Feb 2001 577,500 427,500 23 $26.97(2) 14 Sep 2003 to
13 Sep 2010(3)
13 Sep 2000 31 Oct 2001 12,500 0 1 $26.97(2) 14 Sep 2003 to
13 Sep 2010(3)
2001 3 Sep 2001 31 Oct 2001 2,882,000 2,223,900 79 $30.12(2) 4 Sep 2004 to
3 Sep 2011(4)
3 Sep 2001 31 Jan 2002 12,500 12,500 1 $30.12(2) 4 Sep 2004 to
3 Sep 2011(4)
3 Sep 2001 15 Apr 2002 100,000 100,000 1 $30.12(2) 4 Sep 2004 to
3 Sep 2011(4)

(1)  Options outstanding as at the date of the report.

(2)  Will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting).

(3)  Performance Hurdle must be satisfied between 14 September 2003 and 13 September 2005, otherwise options will lapse.

(4)  Performance Hurdle must be satisfied between 4 September 2004 and 3 September 2006, otherwise options will lapse.

Shares  

 
Year of Grant Purchase
Date
Shares
Purchased
Shares
Allocated
Participants Vesting Period Average
Purchase
Price

2000 20 Feb 2001 361,100 361,100 61 14 Sept 2003 to 13 Sept 2005(3) $29.72
  31 Oct 2001 2,000 2,000 1 14 Sept 2003 to 13 Sept 2005(3) $29.25
2001 31 Oct 2001 652,100 661,500(1) 241 4 Sept 2004 to 3 Sept 2006(3) $29.25
2002 22 Nov 2002 357,500 545,500(2) 195 2 Sept 2005 to 1 Sept 2007(3) $28.26

(1)  In October 2001, 11,400 Reward Shares were re-allocated to participants receiving the 2001 grant as a result of Reward Shares forfeited from previous ERP grant.

(2)  In November 2002, 188,000 Reward Shares were re-allocated to participants receiving the 2002 grant as a result of Reward Shares forfeited from previous grants. The total number of Reward Shares allocated in 2002 represents fifty percent of the maximum entitlement that participants may receive. It is intended that Reward Shares required to meet obligations under ERP will be acquired by the Trust on-market during the three years prior to the first measurement point of the Performance Hurdle.

(3)  Performance Hurdle must be satisfied within the vesting period, otherwise shares will be forfeited.
During the vesting period, Reward Shares are held in Trust. Each participant on behalf of whom Reward Shares are held by the Trustee, have a right to receive dividends. Once the shares vest dividends are paid in relation to those accrued during the vesting period. The participant may also direct the Trustee on how the voting rights attached to the shares are to be exercised during the vesting period.

Executive Option Plan (EOP)

As previously notified to shareholders, this Plan was discontinued in 2000/01.

Under the EOP, the Bank granted options to purchase ordinary shares to those key executives who being able, by virtue of their responsibility, experience and skill to influence the generation of shareholder wealth, were declared by the Board of Directors to be eligible to participate in the Plan. Non-Executive Directors were not eligible to participate in the Plan.

Options cannot be exercised before each respective exercise period and the ability to exercise is conditional on the Bank achieving a prescribed performance hurdle.

The performance hurdle is the same TSR comparator hurdle as outlined above for the Equity Reward Plan (ERP) grants prior to 2002/03.

If the performance hurdle is not reached within that 3 years (4 years for the second tranche of options granted to the Chief Executive Officer on 24 August 1999), the options may nevertheless be exercisable only where the hurdle is subsequently reached within 5 years (6 years for the second tranche of options granted to the Chief Executive Officer on 24 August 1999) from the Grant Date.

The option plan did not grant rights to the option holders to participate in a share issue of any other body corporate.

Details of issues made under EOP are as follows –

Details of issues made under EOP
Commencement
Date
Issue
Date
Options
Issued
Options
Outstanding
Participants Exercise
Price(1)
Exercise
Period

12 Nov 1996 16 Dec 1996 2,100,000 25 $11.85 13 Nov 1999 to 12 Nov 2001
3 Nov 1997 11 Dec 1997 2,875,000 27 $15.53(2) 4 Nov 2000 to 3 Nov 2002
25 Aug 1998 30 Sep 1998 3,275,000 387,500 32 $19.58(2) 26 Aug 2001 to 25 Aug 2003
24 Aug 1999 24 Sep 1999 3,855,000 3,221,000 38 $23.84(3) 25 Aug 2002 to 24 Aug 2009
13 Sep 2000 13 Oct 2000 2,002,500 1,336,200 50 $26.97(3) 14 Sep 2003 to 13 Sep 2010

(1)  Market Value at the Commencement Date. Market Value is defined as the weighted average of the prices at which shares were traded on the ASX during the one week period before the Commencement Date.

(2)  Premium adjustment (based on the actual difference between the dividend and bond yields at the date of vesting) was nil.

(3)  Will be adjusted by the premium formula (based on the actual difference between the dividend and bond yields at the date of the vesting).

A summary of shares issued during the period 1 July 2002 to the date of the report as a result of options being exercised are:

Option Issue Date Shares Issued Price paid per Share Total Consideration Paid

30 Sep 1998 810,000 $19.58 $15,859,800

No amount is unpaid in respect of the shares issued upon exercise of the options during the above period. Under the Bank’s EOP and ERP an option holder generally has no right to participate in any new issue of securities of the Bank or of a related body corporate as a result of holding the option except that if there is a pro rata issue of shares to the Bank’s shareholders by way of bonus issue involving capitalisation (other than in place of dividends or by way of dividend reinvestment) an option holder is entitled to receive additional shares upon exercise of the options being the number of bonus shares that the option holder would have received if the options had been exercised and shares issued prior to the bonus issue.

Equity Participation Plan (EPP)

The EPP facilitates the voluntary sacrifice of both fixed salary and annual bonus to be applied in the acquisition of shares. The Plan also facilitates the mandatory sacrifice of annual performance bonuses. The costs associated with this plan are expensed. All shares acquired by employees under this Plan are purchased on-market at the then current market price.