Impact of Company Performance on Pay Incentives of Executives - Research Paper Example

Impact of Company Performance on Pay Incentives of Executives Table of Contents Table of Contents Background of the Project 2 Preliminary Review ofthe Literature 3 Research Objectives and Questions 5 Research Plan 6 Research Design 6 Data Collection 7 Sampling Methods 8 Data Analysis 9 Limitations 9 Ethical Considerations 10 Timetable and Special Resources Required 11 References 12 Background of the Project Pay represents the most contentious and important element in employment. This is of equal interest to the employee, employer and the government. Many individuals are motivated to work because of the rewards in the form of payment. The norm of a majority of the companies is that with good performance, the pay incentives, and bonuses of executives increase. Poor performance of the business results to a reduction in bonuses that these executives receive. However, the recent economic scene is characterised by a lot of volatile conditions. Companies are increasingly recording lower performance due to the financial crisis in most parts of Europe. The reduction in the profits of the various companies is a result of external economic forces. Internal factors may also affect the performance of a company and subsequently the amount of bonuses and incentives paid to executives. I chose this topic of study due to the conflicting objectives that may arise in an organisation in matters of pay determination. These conflicting objectives may be classified in two broad headings. Equity is the first. Equity may take several forms. This includes distribution through narrowing of inequalities. Thus, there arises a challenge in an organisation when the employees feel that the executives have high compensation that fails to match the value of their work. The second objective is efficiency. This objective is closely related to equity as both concepts are not antithetic. The challenge arises in an organisation since the efficiency objectives are reflected in the attempts to link a section of wages to productivity and profit. The problem, however, is the fact that a huge part of the resultant profits can be directly attributed to the efforts of the employees and not the executives (Thomas & Hill, 2012). I chose the topic on personal reasons because I felt that the conflicting objectives need to be addressed so that there is reconciliation between the executives and the employees. Thus, the payments in the form of bonuses to executives can be justified on their efforts in performance and profit of the organisation. In addition, I wanted to satiate my curiosity which was sparked by the disparity in the bonus levels existing between the executives and the employees with a high focus on the former as they take the lion’s share of the same. Preliminary Review of the Literature Research carried out on the subject area includes a study by Zingheim et al (2009). In the study, the scholars investigated the compensation, reward and retention practices in fast growing companies. A study by Ferrarini et al (2010) on the remuneration of executives across the European Union in 300 FTSE companies showed the relationship between the executive bonuses, performance of the companies and shareholder interests. Gregg et al (2011) investigates the relationship between performance of a company, bonuses of executives and the financial crisis that hit Europe. In the study, the researchers’ focus on financial institutions in their research as the executive bonuses was to blame for the global financial crisis. Cooper et al (2009) investigates the relationship between the incentive compensation of chief executive officers and performance of the stock price in the future with regards to the present performance. In his study, he investigates the ultimate result of increasing the incentives for the executive based on current performance arguing that the company’s performance will drop as a result of the increment in bonuses. Silva (2010) studies the importance of performance pay such as incentives to an organisation. The case studies used by the researcher in the preliminary literature review are studies done in recent times. These recent studies are valid sources of information as the researchers carried out their studies in reliable companies thereby obtaining authentic data. The research methodologies used the past studies includes surveys, interviews and questionnaires in the obtaining of information. Sampling of various companies was considered by the researchers in their studies. Cooper et al (2009) finds out that the companies which pay their chief executive officer abnormal incentives record reduced performance over time in contrast to those companies that do not pay their chief executive officer abnormal incentives. Gregg et al (2011) finds out that the executive pay in the population they studied has been growing over the years. The striking data shows that the bonus for the executives is increasing at a faster rate as compared to the pay for the other employees. In their study, they also document the growth in bonus pay for the firms. In their study, the variables they considered were the average pay of the highest director and the total pay of the board members. The findings showed that the average pay of the highest director increased on a much faster rate than the total pay of the board. The researchers concluded that the executives received incentives above the rate of inflation and other employees regardless of the performance of their companies. Ferrarini et al (2010) found out that only 58 percent of the companies that they studied engaged in the disclosure of the executive bonuses. There were lower levels of disclosure as concerns matters of remuneration and performance. Only 30 percent of the companies provided sufficient information on the relationship between performance and remuneration. A majority of the companies paid the executives bonuses regardless of considering the relationship and impact of these incentives on the company. The performance of the company was not put into consideration when paying the executives their incentives. In the survey by Zingheim et al (2009), the researcher found out that the executive leaders of the surveyed companies adopted compensation rewards in form of bonuses that were aimed at retaining and matching the changing talent-management needs. Silva (2010) concludes that incentives and pay form the greatest motivation for work. From her study and findings she states that with good performance, the incentives to executives and other employees in an organisation should also be increased. Kohn (2009) finds out that the religious belief that rewards influence performance is wrong. In his study, he reviews the astonishing findings of Janet Spence from the University of Texas who discovered the surprising phenomenon. From reading the literature related to the topic of study, I found out that there is a knowledge gap existent in the relationship between incentive/reward and performance with much study focused on the merits of rewards on performance leaving out the demerits of the same. A recommendation for future study has been made by Cooper et al (2009). This study, for instance, fails to address the exact impact of incentives on performance. The researchers suggest that further research is necessary as their conclusion was that managerial compensation does not necessarily translate to future returns for shareholders. The rationale for my research is that an investigation on the impact of a company’s performance on the pay incentives of executives seeks to find out if the variance in payment of bonuses to executives based on performance is a justified cause. In the study, I seek to investigate and assess the impact that this varied payment of bonuses to executives based on the company’s performance has on the company’s well being. Research Objectives and Questions The research objectives of the study are listed below: 1. To find out the impact of performance of a company on the bonuses paid to executives. 2. To find out the relationship between incentives and future performance of an organisation. 3. To find out the impact of increasing bonuses of executives to a company’s future performance. 4. To investigate the effects of a high disparity between the incentives paid to executives and the salaries paid to employees. The following research questions were derived from the research objectives: 1. How does the performance of an organisation impact the bonuses paid to executives? 2. What is the relationship between incentives and future performance of a company? 3. How does increasing the amount of bonuses paid to executives impact the future performance of a company? 4. What are the effects of a great disparity between the incentives paid to executives and the salaries of employees in an organisation? Research Plan Research Design When carrying out the research, the researcher seeks to achieve the research objectives by being keen, analytical and maintaining objectivity when carrying out the research study. The researcher plans to investigative research methods in the study. The researcher will use a descriptive research design in carrying out the research study. This design complements one of the major goals of science which is description (Hale, 2012). The other goals are prediction and description. A descriptive research will allow the researcher describe the characteristics of the phenomenon and population of study (Hale, 2012). The methods of choice in completing the research study will be through the use of case studies and survey methods. Case study will enable the researcher obtain an in-depth study of the population. They lead to testable hypothesis that can allow a researcher study rare phenomena. Through the survey method, the participants of the study will answer a set of questions that the researcher will administer in the form questionnaires and interviews (Hale, 2012). The researcher shall then describe the responses obtained. The researcher shall ensure the validity of the survey by constructing the questions properly. The written questions shall be clear and easy to comprehend without any form of ambiguity. Data Collection The researcher will obtain information for the study from both primary and secondary sources of data. The researcher shall use surveys and interviews to obtain primary data for the study. In this regard, the researcher shall interact with the desired participants of the study when obtaining the information to gain more insight on the topic of study. The researcher will obtain information on the topic from related literature through the use of books, academic journals and case studies from previous research. This secondary data shall be used to validate the information collected from the primary data sources (Jackson, 2009). In addition, this information shall be used to supplement the information obtained from the primary research. The researcher will consider the design of the questionnaire by including a combination of open-ended, close-ended, rating-scale and partially open-ended questions. The open-ended questions will allow a greater variety of responses from the participants (Hale, 2012). The close-ended questions will provide a basis of statistically analyzing the primary data obtained (Hale, 2012). The rating scale questions also provide a statistical basis of analyzing the information obtained. Before engaging in the actual research, the researcher will circulate copies of the questionnaire among friends and carry out a couple of interviews with the friends. This is important as it will allow the researcher to revise and edit the demographic questionnaire and skeletal interview script accordingly. This is also an important step as it builds confidence in the researcher and enables the researcher to polish up their interviewing skills before engaging in the actual interviews. Sampling Methods The population of study is comprised of individuals who are executives of several companies that the researcher intends to study. Based on the sensitive nature of the job and position of the participant, the researcher intends to use snowball sampling as the method of obtaining the required respondents. This non-probability sampling technique is the most suitable method of sampling for the study. The researcher shall identify a few participants who are executives in different companies and ask these individuals to participate in the interviews and fill the questionnaires. These participants will then recommend other executives to the researcher who will participate in the study. The proposed sample size is a population of executives from 5 companies. Data Analysis The data obtained from the primary and secondary research shall be presented in tables and analyzed by use of graphs. The graphical representation of the quantitative data will enable the researcher to describe the different variables of the research study. The qualitative data obtained from the research will be documented and analyzed in prose writing. Descriptions of the different variables and phenomena of the study will be performed by the analysis of the qualitative data obtained in the study. The study will not need the use of special software in the presentation and analysis of data. A simple application such as Microsoft Excel will be used in the display of the data in the form of charts and bar graphs. Limitations All research studies have their own constraints and limitations (Kothari, 2004). In this study, the research was faced by a number of limitations. For instance, the researcher may face challenges in the obtaining of secondary sources of data. This is because little previous research has been done on the topic. To address this, the researcher plans to search for the secondary data extensively through the internet in various libraries and databases containing the various literatures. Due to the research design, the researcher will only be able to describe the different variables and phenomena without drawing conclusions on the relationship existing between the different variables. The researcher expects to spend a lot of time and money in the location of the different participants of the study. To reduce the cost incurred and time spent on the study, the researcher shall obtain the telephone numbers and email addresses of the participants from directories and communicate with them through the said avenues before making trips to their locations. The availability of each of the executive members from the various companies may also pose a challenge due to the nature and schedule of the executives. To deal with this, the researcher plans to interview a majority of the executive board members who will be available at the time of study. In addition, the researcher will book the interview appointments in advance and keep the interview process brief with minimal, direct, and accurate questions. Ethical Considerations According to Ozerdem & Bowd (2010), research studies need to be carried out with various principles and moral guidelines. This is what research ethics comprises. Ethical issues should always be considered by researchers when carrying out their research studies (Babbie, 2001). The researcher will adhere to these standards when carrying out the study. These objectives will be achieved by a number of ways. For example, the researcher will make formal calls and write emails to the selected participants of the study. In these, the researcher will inform these respondents of the aim of the study and seek their consent of participation in the study. Once the respondents agree to participate in the study, the researcher will send to the participants’ letters of introduction with detailed explanation and information about the study. The researcher will use a consent form in which the participants of the study will be expected to fill before engaging in the interview or answering the questionnaires. The researcher will maintain confidentiality of the personal information of the respondents when reporting the findings of the study. The sources used in the study whether personal or company will not be correlated to any specific observation. Comments made by the sources will not be jointly associated with the respondents unless with prior consent from the source. The data collected from the study will be handled with high levels of confidentiality with each participant accorded with the full privilege of anonymity. Timetable and Special Resources Required Good preparation is the key to success in any research study Babbie (2001). The researcher will prepare well for the research by planning for the research beforehand. The researcher will engage in a preliminary survey of the populations’ companies before engaging in the actual research study. This will enable the researcher get acquainted with the population before the actual study takes place. During this period, the researcher will also obtain the needed tools for study and ensure that they are fully prepared for the study. This exercise will take an approximate of one week to complete. The actual research study is intended to take three to four weeks. The researcher shall make visits to the companies’ premises during this time to obtain the information. After collection of the information, the researcher will spend two weeks in the analysis and documentation of the findings of the study. References Babbie, E. (2001). The Practice of Social Research: 9th Edition. Belmont, CA: Wadsworth Thomson. Bhattacharya, D. K. (2006). Research methodology. New Delhi: Excel Books. Cooper, M.J., Gulen, H., and Raghavendra, P.R. (2009). Performance for pay? The relationship between CEO incentive compensation and future stock price performance. Retrieved from: http://online.wsj.com/public/resources/documents/CEOperformance122509.pdf Ferrarini, G., Moloney, N. (2010). Executive Remuneration in Crisis: A Critical Assessment of Reforms in Europe. Retrieved from: http://orizzontideldirittocommerciale.it/media/10886/ferrarini_executive.pdf Gregg, P., Jewell, S. and Tonks, I. (2012). Executive Pay and Performance: Did Bankers bonuses cause the crisis? International Review of Finance. Retrieved from: http://centaur.reading.ac.uk/24831/1/IRFpaperJuly11.pdf Hale, J. (2012). The 3 Basic Types of Descriptive Research Methods. Retrieved from: http://psychcentral.com/blog/archives/2011/09/27/the-3-basic-types-of-descriptive-research methods/ Jackson, S.L. (2009).  Research Methods and Statistics:  A Critical Thinking Approach 3rd edition.  Belmont, CA: Wadsworth. Kohn, A. (2009). Challenging Behaviorist Dogma: Myths About Money and Motivation. Retrieved from: http://www.alfiekohn.org/business.htm Kothari, C. R. (2004). Research methodology: Methods and techniques. New Delhi: New Age International (P) Ltd. Ozerdem, A., & Bowd, R. (2010). Participatory research methodologies: Development and post- disaster/conflict reconstruction. Farnham, England: Ashgate. Silva, S. (2010). An introduction to performance and Skill-based pay systems. International Labour Organisation, ACT/EMP Publications. Retrieved from: http://www.ilo.org/public/english/dialogue/actemp/downloads/publications/srspaysy.pdf Thomas, R. S., & Hill, J. G. (2012). Research handbook on executive pay. Cheltenham, Edward Elgar Publishing. Retrieved from: http://public.eblib.com/EBLPublic/PublicView.do?ptiID=950413. Zingheim, P., Schuster, J. R., Dertien, M. G. (2009). Compensation, Reward and Retention Practices in Fast-Growth Companies. Retrieved from: http://ww.schuster-zingheim.com/Compensation_Reward_and_Retention_Practices_in_Fast-Growth_Companies.pdf Read More