Executive Pay In Australia Essay

Length: 4 pages Sources: 5 Subject: Economics Type: Essay Paper: #68862340 Related Topics: Executive Compensation, Australia, Accounting Theory, Publicly Traded Company
Excerpt from Essay :

Remuneration & Other Subjects

The authors of this report have been asked to assess a number of subjects surrounding remuneration of employees and the overall corporate/social ethics involved in the same in Australia. There are also some tangential and related subjects that will also be spoken of. In total, there are five broad-based questions. The first question speaks about risk aversion, profit/wealth maximization, wealth management, different stances that different people and personnel take vis-a-vis risk and financial reporting manipulation. The second question references the horizon problem. This second question looks at the different motivations and perspectives that different people in an investment and accounting situation might take. Managers have their axe to grind and stakeholders typically have a different one. How bonuses for investment managers figure in will also be explored. Finally, there will be a review for the fifth question that pertains to the

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While some people including investors and analysts just like to stir the pot, there are indeed some valid concerns relating to the ethics, motivations, decisions and biases of investors, stakeholders and others involved in the accounting and/or investing within an organization.

Question I - Risk Aversion

The underlying assumption of accounting theory, which is used to explain and predict behaviours, is that all individuals will act to further their own self-interest (Rankin et.al 2012). According to Kolb (2010), agency theory indicates that managers as agents, are assigned the task of day-to-day operation of a company by the shareholders as principals. However, a conflict arises as the self-interest of these two parties are not aligned. Classical economic theory suggests a higher risk strategy can result in higher rewards than those achievable from low risk approach. Shareholders are desirable of the higher returns, and typically, shareholders diversify their risk by having shares in multiple companies, and likely have other sources of income (Rankin 2012). Shareholders seek to maximize their personal wealth, which equates to a maximization of share price and dividends paid which increases with higher risk strategies (Kolb 2010).

In contrast, managers are likely to follow a risk averse strategy as their current salary and career prospects are tied to their current employment situation (Ferrarini & Moloney 2004). Managers are also likely to only focus on the short-term earnings that impact their current employment (Kolb 2010). To counter this risk aversion,…

Sources Used in Documents:

One way to counter the horizon problem is through use of equity instruments as a component of executive remuneration. Equity ownership and share options encourage managers to care not only about the short-term but also about the future (Conyon & Florou 2006). If a manager has shares and share options that cannot be exercised until after a period of time post-retirement, then they will be unlikely to engage in short-term firm value destroying actions (Conyon & Florou, 2006). As previously discussed, it is often the accounting measure of earnings which drives the calculation of bonuses paid to managers. Managers can manipulate accounting information in a manner such that a company will display short-term profitability. This could be achieved directly, through a reduction in spending on research and development or indirectly through reduced depreciation as a result of lower capital expenditure (Conyon & Florou 2006). It could be argued that as a result of this, there must be a reduced reliance on accounting information to drive the calculation of bonus plans that are designed to address the horizon problem. Managers, in particular CEOs and CFOs, have the greatest ability to manipulate this information. Bonus plans based on share payments and share options then force the manager to make decisions that result in an appropriate balance of both short-term performance as well as long-term growth and viability. Conyon & Florou (2006) suggest that this may even act as a substitute, allowing for reduced monitoring of executive activity.

Question III -- Non-Salary Components

Just as with regular employees, the facets of compensation relating to non-cash compensation is a major part of how executives are paid (IRS, 2014). There are multiple purposes and reasons for why these non-cash components are included. These include the fact that it is normal industry standard to offer certain benefits (e.g. health insurance, pension, etc.) (Jakobson, 2012). Cash compensation can vary widely with an obvious example being bonuses that are tied to the market, a company's performance and so forth (Thurm, 2013). However, non-cash compensation is very similar in that it manifests in a number of different ways. One reason to make heavy use of non-cash compensation is to skirt laws that relate to cash compensation such as regulations relating to bonuses, commissions, base salary and so forth (Holmberg, 2014). However, putting the kibosh on non-cash compensation such as stock and other similar items could cause a brain-drain situation for publicly traded companies (AP, 2009). Private


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