Management Accounting and Financial Management - Coursework Example

Management Accounting and Financial Management - Executive Compensation - Executive Summary Marks and Spencer (M&S) is facing the challenge of being able to compete in the markets worldwide. To sustain its viability, the compensation committee which is composed of the HR, accounting, and finance manager should take it as a challenge to find new ways on how to compensate their chief executive well without the risk of being short-changed on his expected performance. As compared to the use of traditional pay scheme of “12% increase in the average pay across the board”, this report strongly advice that the top management of M&S should consider the need to practice and observe the application of binding votes. By doing so, this particular retailing company will be able to practice transparency and the deliver a fair and reasonable pay and compensation plan for its chief executive. Table of Contents Executive Summary ………………………………………………………………………… 2 Table of Contents …………………………………………………………………………… 3 1. Introduction …………………………………………………………………………. 4 1.1 About M&S ……………………………................………………………. 4 1.2 Corporate Culture …………………………………………………………. 5 1.3 People ………………………………………………………………..…… 5 2. Work Incentives and Reward Schemes Offered by M&S ……………...............…. 6 3. Discussion ………………………………………………………………………….. 6 4. Conclusion and Recommendations …………………………………………………. 11 References ………………………………………………………………………………. 13 - 15 1. Introduction In response to globalization and the need to win the loyalty and support of highly competitive chief executives, company policy with regards to the right formula used in the corporate salary and payment schemes becomes a very controversial issue today (BBC Today, 2011). Considering the case of M&S, this report will purposely discuss the most effective incentives and reward system that is applicable in terms of financially compensating the modern executives within global retailing industry. The main report aims to discuss the best and most effective incentives and reward system for its chief executives. To ensure that the board of directors will have a more idea about M&S, the type of industry, nature of business, corporate culture, people, and retailing industry expectations will first be tackled briefly before finally heading on to the main report. 1.1 About M&S Marks & Spencer (M&S), a British-owned retail company, was established by Michael Marks and Thomas Spencer back in 1884 (Marks & Spencer, 2013a). Despite the tight competition in the global market, M&S has maintained its reputation as one of the largest high-priced merchandise seller of food, wine and clothing not only in 766 store outlets across the United Kingdom but also in 418 international stores worldwide (Marks & Spencer, 2013d; BBC News, 1998). In general, M&S’ food products is not limited to the bottle of wines, chocolates, and candy bars we see at the store counter. This company also offers the public other food items such as personalized cakes for special occasions (Marks & Spencer, 2013b) and other food items like sandwiches, sushi, pasta, pizza, organic fruits and vegetables, and other food packages like gourmet dinner, Sunday lunch, family feast, lunch or finger buffet, and kid’s party among others (Marks & Sencer, 2013c). 1.2 Corporate Culture To give the customers the retail service, part of the M&S corporate cultural practices include: (1) the need to involve the customers; (2) protect the environment by reducing the rate of carbon emission and improve the overall operational efficiency; (3) the practice of recycling waste products; (4) protect the animal welfare and wisely use of natural resources; (5) the need to act fairly with the community members; and (6) continuous promotion of health and wellbeing (Marks & Spencer, 2013e). 1.3 People M&S is composed of highly diverse and well-experienced people particularly in terms of their knowledge and skills in finance, general merchandise, marketing, e-commerce, retailing, HR, etc. As of October, 2013, Marc Bolland is the acting chief executive of M&S (Marks & Spencer, 2013f). 2. Work Incentives and Reward Schemes Offered by M&S On top of the bonus scheme which is heavily linked to “team and company performance” scheme, M&S offers a highly competitive pay rates and “extra performance rewards” which is based on each employees’ individual performance (Marks & Spencer, 2013g). Other than fixed salary and bonuses, each of the M&S employee is entitled to 20% employee discount on all store purchases, pension or retirement plan, sharesave, perks which is composed of more than 1,500 discount deals on various products and services, and work-life balance initiatives (Marks & Spencer, 2013g). 3. Discussion The UK’s economy is still in the middle of struggling its way back to the levels of pre-recession. Despite the economic situation in UK, the “salary, benefits, and bonuses” given to the chief executives in some UK-based companies was reported to have increased by up to 50% in comparison to the previous year (BBC News, 2011a). In line with this, BBC News (2011a) reported that “directors’ bonus payments, on average, rose by 23% from £737,000 in 2010 to £906,000 in 2011”. As of 2012, the median pay given to chief executives was £856,000 (Neate, 2012). The cultural practice of extending huge amount of money for the pay of chief executives can create a long-term damaging effect on the part of M&S. The national average pay increase in UK is only 2% (Neate, 2012). Imposing a strict control or cut on the rewards and salaries given to the chief executives can make it more difficult and challenging on the part of the HR manager to recruit the best chief executive for M&S. However, allowing 23% increase in the rewards and compensation packages given to the chief executive will increase the risks of lowering employees’ living standards and health quality either by imposing unnecessary cut on their salaries and wages or a massive lay-off (McArdle, 2013; BBC News, 2011a). As a result, the overall work motivation, productivity rate, and morale of the rest of M&S employees could suffer (Bewley, 1998). Eventually, work dissatisfaction could negatively affect the quality of service each of the M&S employees would be extending to the customers. Michel Faulkender – Assistance Professor of Finance explained that the compensation given to chief executives is normally by “benchmarking with other firms that compete for talent” (Smith Business School, 2009, 0:28). Technically, the chief executives are not directly involved in the decision-making as to how much salary and compensation they should be getting from the company. Instead, it is the board members and the members of the compensation committee who decides on how much salary and rewards should be given to the chief executives (Smith Business School, 2009, 0:58). Even though the board members and members of the compensation committee are the ones who decides on how much salary and rewards should be given to the chief executives, there is still a risks wherein the chief executives are able to manipulate the amount of money they will receive as their pay and rewards. This idea is true since the chief executives are the once who choose who to include as the board of directors of the company (Smith Business School, 2009, 1:08). Since the board of directors together with the chief executives are among the few individuals who are able to create the development of a corrupt culture, the European corporate law behind the UK model of companies decided to shift their focus on investigating the shareholders and board of directors (Dine, 2008). Corporate governance is a system of authoritative direction which includes the specific role and responsibilities of the owners or the shareholders, the board of directors, and the Chief Executive Officer (CEO) (Colley et al., 2005). In most cases, the concept of corporate governance is normally applied each time there is a need to create a new business policy particularly regards to the actual structure of the board, the activism of the shareholders, and strategies on how to improve the business performance (Aguilera et al., 2008). To strengthen the corporate governance, the company’s executive and non-executive directors should work together when making important business decisions that are focused on the best interests of the company (Mallin, 2007, p. 125). Part of the duty of both professional accountants and finance managers is to protect not only the personal interests of the business owners but also the stakeholders and shareholders of the company. With this in mind, finance managers and accountants should strictly observe accounting practices that is in accordance to good corporate governance. Often times, this include financial and accounting issues with regards to the formula used in the computation of pay and reward compensation given to the chief executives. Few years ago, Faulkender mentioned that the need to compete for top talents within the airline industry encourages the compensation committee to come up with “attractive pay practices” for the chief executives (Smith Business School, 2009, 1:53). On the contrary, Rynes, Gerhart and Minette (2004) argued that most of the “human resources professionals appear to believe that employees are likely to over-report the importance of pay”. For instance, the study of Lucas et al. (2000) shows that introverts are less concerned with pay as compared to the extroverts. Furthermore, the study of Trank, Rynes and Bretz (2002) shows that people who are academically achievers are the ones who are happier and contented when it comes to the use of performance-based pay. In relation to the long-term financial growth and sustainability of M&S, there is an on-going debate in the field of accounting and finance as to how much salary, rewards, and remuneration packages should be awarded to the chief executives. In line with this, Robert Peston – a business editor stated that “a 12% increase in average pay across the board at the time when companies in general are not doing well shows that the system is bust” (BBC News, 2012). Today, there is a controversy between the use of “binding executive pay votes” as compared to the use of the tradition “pay plans” which is normally uses the formula of a “12% increase in the average pay across the board” (BBC News, 2012; BBC Today, 2012). The industry practice of increasing the average pay across the board at the rate of 12% is technically not feasible particularly when it comes to times wherein the UK economy is undergoing a serious financial recession (BBC Today, 2012). Therefore, Vince Cable – a business secretary strongly support the idea of requiring all companies in UK to observe the need to practice a “binding votes on executive pay every three years” (BBC News, 2012). The concept of binding votes encourages the shareholders to vote on the pay packages that will be given to the chief executive each year (BBC News, 2012). Aside from the practice of transparency, one of the benefits of incorporating the use of binding votes in the future development on executive pay and remuneration is that the shareholders are given the opportunity to put in internal pressure on HR, accounting, and finance managers for awarding excessive pay and remuneration packages to chief executives who are under performing and/or has failed to meet the business goals and objectives (Prizeman, 2012). 4. Conclusion and Recommendations To ensure that M&S will be able to maintain its competitiveness within the UK and international market, it is necessary to re-examine the rewards and incentive scheme given to the chief executive. At all times, the rewards and incentive scheme given to the chief executive should be well justified. To protect the long-term job security and living standards of M&S’ employees, the salary, rewards, and remuneration packages given to the chief executives should be directly linked to performance (BBC News, 2012; Smith Business School, 2009). Given that there is a strong relationship between outstanding performance and compensation, shareholders together with the members of the compensation committee should be less concern about “the absolute levels of pay” (Smith Business School, 2009, 5:46). Considering the huge differences between the increase in stock market prices and the “salary, benefits, and bonuses” given to the chief executives in some UK-based companies, this report strongly recommends the need to promote the practice of transparency especially when it comes to deciding on how to construct and execute pay for the chief executives (BBC News, 2012; Prizeman, 2012). Also related to corporate governance, the shareholders are highly encouraged to practice their rights to hold the directors accountable for awarding unjustified and “excessive remuneration packages” to the chief executives (BBC News, 2011a). Therefore, instead of using the traditional formula of a “12% increase in the average pay across the board” (BBC News, 2012; BBC Today, 2012), this report strongly recommends the need for M&S to practice and observe the application of binding votes when deciding for how much pay, rewards, and incentives should be awarded to the chief executives. In relation to the long-term business success and strategy used by M&S, rewards and compensation given to the chief executive should not only be fair but reasonable. In the process of allowing the shareholders and the politicians to exert the pressure on implementing pay freeze on chief executives’ salary and benefits (Neate, 2012), there is a higher chance wherein M&S can protect not only the long-term interests of its shareholders but also the ability of the company to sustain financial difficulty in times of economic recession. In the long-run, top management’s decision to apply the concept of binding votes when deciding on the chief executive pay will create more benefits on the part of the company. In the process of using a part of the executive pay in addition to the salary increase of all other low-rank employees, the top management of M&S will be able to effectively improve the living standards, health quality, work motivation, productivity rate, and morale of its employees. All these are necessary to ensure that the front-liners will be able to deliver high quality service to its customers. 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