Executive Compensation
Accounting Theory Assignment
Executive Compensation
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Introduction
Executive compensation together with corporate governance systems has received an increasing amount of attention- from the press, corporations, financial academics and also the government. An executive compensation plan is a major application of the agency theory study and, thus, an agency contract between the shareholders and CEO’s of the business, which attempt to align the interests of the owners and the managers by basing the CEO’s or executive’s compensation on some performance measure of the managers expended effort in operating the organization. Over the last decade scandals such as the Enron and WorldCom have raised many issues and discussion as what went wrong? How did CEO’s walk out with so much money” and are executives overpaid and greedy?
Executive compensation plans are present in our daily work lives since they set “parameters” for compensation for executive remuneration. Most plans usually encompass net income and share prices; some plans only include net income. The most common forms of compensation are bonus, shares, salary, and stock options.
This papers focus is on the effects of performance measures in motivating manager interests. The incentive plan involves a mix of incentive, risk and decision horizon considerations. Executive compensation plans are important to accountants. Because they introduce a second major role of financial report: the role to motivate and monitor manager effort. If net income is informative and reflective of manager effort it improves the operation of the managerial labour markets and motivates productivity. Our main focus are addressed below:
Theory of executive compensation
-Discuss compensation committees -Net income -Persistent earnings -Share price -Sensitivity to earnings and share price
Incentive Contracts
-Are they necessary? -Discuss no and yes for necessary -How do incentive plans align
Executive Compensation
[pic]
Introduction
Executive compensation together with corporate governance systems has received an increasing amount of attention- from the press, corporations, financial academics and also the government. An executive compensation plan is a major application of the agency theory study and, thus, an agency contract between the shareholders and CEO’s of the business, which attempt to align the interests of the owners and the managers by basing the CEO’s or executive’s compensation on some performance measure of the managers expended effort in operating the organization. Over the last decade scandals such as the Enron and WorldCom have raised many issues and discussion as what went wrong? How did CEO’s walk out with so much money” and are executives overpaid and greedy?
Executive compensation plans are present in our daily work lives since they set “parameters” for compensation for executive remuneration. Most plans usually encompass net income and share prices; some plans only include net income. The most common forms of compensation are bonus, shares, salary, and stock options.
This papers focus is on the effects of performance measures in motivating manager interests. The incentive plan involves a mix of incentive, risk and decision horizon considerations. Executive compensation plans are important to accountants. Because they introduce a second major role of financial report: the role to motivate and monitor manager effort. If net income is informative and reflective of manager effort it improves the operation of the managerial labour markets and motivates productivity. Our main focus are addressed below:
Theory of executive compensation
-Discuss compensation committees -Net income -Persistent earnings -Share price -Sensitivity to earnings and share price
Incentive Contracts
-Are they necessary? -Discuss no and yes for necessary -How do incentive plans align
References: Aggarwal, Rajesh K, and Andrew A.Samwick. “The Other Side of the Trade off: The Impact of Risk on Executive Compensation.” Journal of Political Economy (February1999), vol.107 (1): 65–105 Brian J http://www2.bmo.com/bmo/files/annual%20reports/3/1/ExecCompReport.pdf Charlie Rose – “WorldCom update / Business and Ethics”, 2007 video http://noolmusic.com/google_videos/charlie_rose___worldcom_update_business_and_ethics.php Kay, Ira, “Myths and Realties of Executive Pay”, Cambridge University Press, 2007, P. 154-159 Meulbroek, Lisa K Murphy, Kevin J. “Executive Compensation.” in Handbook of Labor Economics, Ed. O. Ashenfelter and D.Card (NorthHolland: Elsevier: 1999), vol.3, chap.28, pp.2485–2563. William R. Scott, Financial Accounting Theory, Fourth Edition (Scarborough, Ontario: Prentice Hall Canada Inc., 2007) -----------------------