The usage of accounting numbers in management compensation contracts - Assignment Example

(4 marks) b) Find a company (other than Qantas) which uses accounting numbers in their management compensation contracts. Identify the company and given an example of an accounting number that they use in their management compensation contracts. [NOTE: the company must be an Australian company, currently listed on the stock exchange. You must not refer to any financial statements before 2012. Any references to financial statements should clearly indicate the number of the page referred to.] (2 marks) c) On the 25th May, 2012, Hastie Group Ltd (http://www.

hastiegroup.com.au) advised the market that an employee “deliberately caused … irregularities in Hastie's accounts in the 2008?09 financial year”, leading to a $20 million dollar adjustment to its full?year profit. Hastie’s announcement to the market indicated that “some current and former senior management may have participated in the irregularities and failed to apply the required standards of financial supervision and review.” If Hastie’s executives had received bonuses based on this incorrect figure, do you believe they should have to return this money to the company?

Why or why not? (4 marks) Answers a. A management compensation contracts is a type of contract that is designed to connect the shareholder’s goals with those of the executives or CEO. . In order to diminish the costs, contracts are utilized in the alignment of the stakeholder’s interests as well as actions of the two parties by relying on accounting numbers that provide incentive in maximizing shareholders value (Beatty, Ramesh and Weber, 2002, Pp. 218-227). The strong demand for accounting numbers assist in conceptualizing purpose of accounting information the evaluation as well as making decisions on issues of allocating scarce resources.

Therefore, there are accounting oriented measures that are formulated to enable manage compensation contracts. These measures are utilized as a cost effective approaches in providing financial incentives allowing management in earning higher remuneration amounts in order to reach targets that have been set by accounting numbers to maximize shareholder interest. For instance, a management compensation contract stating that a director responsible for performance bonuses is supposed to rely on accounting numbers like equity ratios or net profits in order to direct a director’s compensation.

This gives the management an incentive of making decisions liable to increase the shareholders value and at the same time trying to avoid NPV investments as well as reducing the consumption. Therefore, it is appropriate to conclude that accounting numbers utilized in compensation contracts assist in reducing agency costs as well as benefit the shareholders. b. The Woolworths Ltd Annual Report 2012 shows clearly that management is compensated by utilizing Sort Term Incentives Plans (STP) as well as the long Term Incentive Plans which constitute 40% of the remuneration offered to the Executive Directors.

The STIP is based on accounting numbers like the