The Compensation of Employees and Executives - Report Example

Table of Contents Introduction 2 Motivation to improve Remuneration Disclosure 2 Literature Review 3 Analysis 4 Consequences of Voluntary Remuneration Disclosure 8 Literature Review 8 Analysis 10 Share Based Payment 11 Literature Review 12 Analysis 13 Conclusion 14 References 16 Introduction Compensation of employees and executives hold an important aspect in the financial statement as it has a large effect and bearing on the total cost. Organizations to ensure effectiveness have looked to ensure that the compensation which is made to the executives is completely provided so that it will help the user of the financial statement to understand the different parameters based on which the executive is compensated. This report looks towards analyzing the manner in which an executive has to be compensated and looks towards providing the principle of complete disclosure with regard to executive compensation. The report also looks to present the voluntary remuneration disclosure principle and the method of share based payment for compensating the executives. This will thereby help to understand the manner in which executives compensation have undergone changes and will help to bring forward the required stature which will provide the manner in which the executive compensation has to be determined and the manner in which the interest of the shareholders will be protected Motivation to improve Remuneration Disclosure Remuneration disclosure is an area which is slowly gaining prominence as directors are looking to benefitting themselves by providing excessive pay and at the same time not disclosing the same to the shareholders. Disclosure of remuneration will also provide the investors information regarding the incentives that the executives get and helps to set a path which will provide maximum information (Burns & Kedia, 2006). This will thereby assist in proper risk disclosure, company’s prospect and share price movements as proper disclosure will help to understand the steps that have been taken by the management to ensure clarity in their dealings. This has thereby increased the importance of remuneration disclosure and is discussed as below Literature Review Different studies conducted in the same direction highlights the importance of ensuring that proper disclosure principle is applied while looking to determine the remuneration of executives. It requires proper disclosure so that complete information is provided to the user. A study conducted in the same direction by Davidson, Jiraporn, Kim & Nemec, (2004) states that government and other bodies should make it mandatory to ensure that the financial statement of corporations provide complete disclosure regarding remuneration. To ensure that complete and correct information is provided the organization can use different theories and agents like the Agency theory, Stakeholder Theory and so on so that complete information is provided to the shareholders. This has been backed by Bergstresser & Philippon, (2006) which states that the level of discretion in the hand of the corporate management regarding disclosure and omission of information is very high (Bergstresser & Philippon, 2006). Corporate entities look to conceal information especially those related to executives remuneration with the objective of ensuring that the executives are provided more pays than they actually deserve. This results in the misuse of funds and the management instead of looking towards the shareholders act against the shareholders and look to carry out the different duties in a manner which raises concern regarding their future performance. Harris & Bromiley, (2007) has stressed that the increase in activities where complete information regarding the different compensation which the executives take is not provided results in the misuse of funds as people based on their whims and requirements compensate themselves more. This is on the premise that the shareholders instead of being compensated for the risk have to face the extra risk. This theory states that having proper use of different theories which looks to ensure that complete disclosure principle is applied will help to reduce such acts and will improve the validity and reliability of the information which is provided. Providing proper dislcosure will help the financial statement to provide different benefits like relevance, reliability, comparability, verifiability, timeliness, and understandability which will thereby ensure that the process of using financial statement provides better disclosure and helps the user of the financial statements to take better decisions (Beest, Braam & Boelens, 2009). Analysis To deal with the motivation of proper disclosure regarding the remuneration of executives and others within the organization it is imperative that the organization focuses on using different theories and principles which will help them to abide with the legal requirements and ensure that proper disclosure principle are adhered to. The different theories and principles which will help to provide proper disclosure regarding to remuneration is as Positive Accounting Theory: Positive Accounting Theory helps to understand the manner in which the future predictions can be developed and present accounting practices can be identified. Using the positive accounting theory will help to understand the manner in which the different techniques are used in the present accounting concepts (Watts & Zimmerman, 1986). For example, this theory will help to understand the manner in which conventional historic cost approach is being used while identifying the share price as the relevance and accuracy of the actual share prices is better reflected. Positive Accounting Theory which is being used since the 1950’s is relevant in case of identifying the share prices through historical cost will help to understand the manner in which the current accounting practices has its relevance in this theory. This thereby differentiates this theory from other theory as it concentrates on explore the present accounting system that the business uses. Positive Accounting Theory ensures that a connection is developed between financial accounting, firms and market so it will help in developing a framework through which rational economic decisions are taken (Watts & Zimmerman, 1990). This will ensure that using the historical cost model to find out the manner in which the share prices have changed will fit in the research as it will help to understand the manner in which the share prices changes thereby justifying the applicability of the theory in finding out the fluctuations in the share prices (Whittington, 1987). This will thereby ensure that complete information regarding the remuneration is provided and will act as a guide through which correct information will be provided in the financial statement. Stakeholder Theory: Organization needs to work towards “maximizing the return of stakeholders”. Stakeholders also include society and environment at large. So, organization should work and see that they preserve the environment by taking necessary steps to reduce polluting the environment. This will indirectly have an effect on the society as people will find a pleasant environment to live in. Using the theory will ensure that the corporate entities provide proper disclosure regarding the remuneration and the different incentives which the executives get. This will thereby ensure that the shareholders are aware of the actual remuneration that has been provided to the executives and will help to maximize the disclosure principle Theory of Corporate Governance: It requires that organization should reduce the “principal agent problem” so that the society benefits at a large. The organization should establish accountability for individuals who perform their duties in a wrong way and which has an impact on the society. This requires that the corporate entity provides complete disclosure regarding the compensation and incentives which the executives get (Beiner, Drobetz, Schmid & Zimmermann, 2004). In addition to it the reason and the different contribution should be clearly provided so that the user of the financial statement and the shareholder are able to gather the required information based on which decisions within the organization has been taken Stewardship Theory: Here the managers will have to be responsible for their performance. Managers need to take steps that they disclose everything that will have an effect on the society and see that they disclose all information that could have an impact on the environment and the stake holders and society at large. This will thereby ensure that managers or the management on the whole look to provide complete disclosure regarding the manner compensation of executives will be determined. This will also have a bearing on the managers as organization which doesn’t provide complete disclosure will be dealt severely and it will be the duty of the managers to provide complete disclosure. Legitimacy Theory: Managers need to disclose what their policies are having an impact on the society. They need to “explain corporate environmental disclosure from the societal perspective”. Managers need to explain “the social activities that are associated with their firm and how many of those the firm adheres to”. They have to justify this by strategies that they are following for the accomplishment of those. This will ensure that the organization provides complete disclosure regarding the compensation that the executives receive. Further, it will also help to understand the different directives and manner in which the organization works according to the principles of the disclosure and provide maximum information so that the society on the whole benefits. Agency Theory: This theory requires that the organization hires agent on behalf of the organization so that they monitor and supervise the manner in which work is being carried out within the organization. This will help to provide complete information to the shareholders as agents who are compensated will work for the shareholders and provide complete disclosure regarding the manner in which compensation for the executives is determined. This will also help to bring forward any such activities which results in the misuse of funds and will thereby direct the shareholders to bring about the required change through which proper disclosure with regard to remuneration is provided within the organization. This thereby shows that using the different theories and models will help to ensure that organization understands the importance of proper disclosure and take all the required steps which looks to provide complete disclosure regarding the remuneration of executives. This will multiply the effectiveness of financial reports as it will adhere to the IASB requirements and will ensure that relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement increases. These models will also act as a binding on the management as they will have to follow the different principles are requirements which have been provided and not adhering to those would mean that the shareholders gather the relevant information and will result in creating a situation where the executives will have to suffer. Consequences of Voluntary Remuneration Disclosure The remuneration report of different corporate entities have witnessed changes as they look to adapt to the requirements of the remuneration disclosure and provide complete information so that the shareholders are assisted in decision making. There is no guide that determines the manner in which voluntary remuneration disclosure has to be provided but instead it has become mandatory for organizations so that the shareholders are able to take correct decisions. This will help to ensure that the remuneration of the executives is clearly provided and will help to improve the relevance of decision making as it will provide maximum information to the users. Literature Review The disclosure of remuneration which has to be done voluntarily requires to be accessed against two benchmarks as highlighted in a research. The research states that the remuneration has to be measured against transparency and simplicity. For the financials to be transparent it is imperative that the executives provide the remuneration voluntarily. This will also require that the remuneration provides all declaration pertaining to incentives and other perks that the executive receives (Heron & Lie, 2007). This has been supported by a study which says that providing a remuneration report which is simple will aid to the benefit of the shareholders as it will help them to understand the manner in which the organization is performing and will provide important directives based on which better decisions will be possible. This will thereby help to improve the relevance of the financial statement as it will look to provide information based on relevance, reliability, comparability, verifiability, timeliness, and understandability. Organizations which are able to provide better readability and presentation of remuneration of the executives which have been voluntarily provided by the executives helps to develop the linkage between the performance of the company and the disbursement of incentives and perks. The voluntary remuneration disclosure further requires that the executive to act in a fair manner discloses all the material facts. A study supports the same as it states that executives who look to disclose the remuneration requirements themselves are able to present the correct picture and look to be ethical in their business doing (Jensen & Meckling, 1976). This helps to win the confidence of the shareholders and provides a required directives through which the overall process and effectiveness of decision making is enhanced. The voluntary remuneration disclosure requires that the executives provide complete description of the remuneration based on different areas like short and long term incentives, contractual agreement and the association of incentive with performance (Hill, 2006). This will help to provide the required fundamentals and will help to understand the manner in which the principle of full disclosure of executives’ remuneration benefits the organization. Analysis The analysis of voluntary compensation disclosure by the executives will help to facilitate in decision making as it will provide the required guidelines which IASB has provided and will provide relevance, reliability, comparability, verifiability, timeliness, and understandability to the financial data. The information provided will help the user to take better decisions and reduce the risk and is as follows Relevance: The information of voluntarily disclosing the compensation will increase the relevance of the financial information as the user based on it will be able to find out the relevant information through which decisions will be better. The relevance of the information will increase as the user will be able to understand the different factors based on which the compensation has been determined and will thereby improve the process of decision making Reliability: The reliability of the financial information will improve as the user will be able to find all relevant information pertaining to their decision making. This will also help the user to rely on the financial information which has been supplied as it will contain all kind of information. This will thereby ensure that the decisions taken based on it is better and will ensure better results (Raheja, 2005). Comparability: The process will provide an opportunity to compare the performance of the organization as it will help the user to compare the different parameters based on which the compensation has been determined. This will thereby act as a framework through which the user will be able to understand the financials better and will thereby ensure that the user benefits Verifiability: The decisions made by the user based on the financials can be verified as it will provide an opportunity to find out the new projects and developments that the executives have done and the compensation has been determined based on it. This will thereby help to verify the information and increase the business decisions which are taken (Bebchuk & Fried, 2005). Timeliness: The process will also ensure that all the information is provided on time as financial statement has to be prepared by a particular date. This will help the user to have all the information and will thereby ensure that the decisions are better and will reduce the risk (Yermack, 1995). Understandability: Complete disclosure done voluntarily will ensure that the organization ensure better understanding as it will look to provide the different parameters based on which the compensation and incentives have been decided. This will thereby increase the relevance and ensure that the financials are better understood (Veron, 2009). Thus, the overall analysis will help to improve the relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement and will ensure that decisions taken are better. Share Based Payment The manner in which executives are compensated has undergone a lot of changes and the modern economy is witnessing a mode of payment which is share based payment. This mode of payment doesn’t have any impact on the organization as the executives who are compensated and provided with shares options which they can sell or keep it depending on their requirements (Khan, Dharwadkar & Brandes, 2005). Instead this method helps to ensure that the executives are provided a different mode to be compensated and requires proper monitoring to ensure that the executives are compensated correctly. Literature Review Studies conducted in the direction states that organization using share based payment look to provide incentive to the executives based on their performance and looks to compensating the same in the form of shares (Balsam & Miharjo, 2007). This method looks to endorse shares in favor of the executives which look to provide a proportion of share holding to the executives. This method will thereby look to ensure that the executive remain fair and correct in decision making and since has a certain percentage of shares endorsed in which name, so will look to take decisions which will have a positive impact on the overall development of the organization. Another research supports the finding as it states that developing a way through which the executives are compensated through share endorsement reduces the chances of failure as the executives know that their performance is being monitored and being able to deliver correct results will ensure that the decisions which are taken will provide them long term returns. This also helps the shareholders to understand the different underlying reasons based on which an executive is compensated and thereby will be able to understand the performance of the organization in a better manner (Burns & Kedia, 2008). Since, executive remuneration is a controversial topic and has resulted in the failure of many organizations because of the fact that executives were compensated without any contribution has raised alarms (Chauvin & Shenoy, 2001). This mechanism of compensating executives through share endorsement helps to establish the required structure through which the compensation of executives are measured and provides the required framework which helps to gauge the manner in which different factors have contributed towards the compensation of an executive. Analysis Organizations working on the concept of share based endorsement to compensate the employees for their performance has to ensure that the performance is properly measured and performance alone stands as a parameter based on which the executive is compensated. The organization should establish accountability for individuals who perform their duties in a wrong way and which has an impact on the society (Palmrose & Scholtz, 2004). This requires that the corporate entity provides complete disclosure regarding the compensation and incentives which the executives get. In addition to it the reason and the different contribution should be clearly provided so that the user of the financial statement and the shareholder are able to gather the required information based on which decisions within the organization have been taken. This will thereby ensure that executives act fairly and work for the shareholders. The process will also require proper monitoring of the work especially of those of the executives and others so that the underlying reason based on which they are compensated can be accurately ascertained. This will require that the process of monitoring is strengthened and every information which has a bearing on the shareholder is collected. The method also requires that while looking to compensating the employees through shares care has to be taken that not a single executive or a group of executives has got a large proportion of share which will increase their voting rights and provide the required power to influence decisions (Bolton, Scheinkman & Xiong, 2006). This will act as a hindrance and when executives look to dominate the decisions which are taken within the organization will give rise to situations where they don’t act fairly. The process of disbursement of shares for the executives should also be clearly stated and the different amount of shareholding that the executives have should be clearly provided in the financial report. This is based on the premise that providing complete information will ensure that the user of the financial statement is able to understand the complete position of the organization in a batter manner and will be thereby in a position to take decisions which will be correct and fair (Hanlon, Shevlin & Rajgopal, 2003). This requires that the corporate entity provides complete disclosure regarding the compensation and incentives which the executives get. In addition to it the reason and the different contribution should be clearly provided so that the user of the financial statement and the shareholder are able to gather the required information based on which decisions within the organization have been taken. This will thereby help to improve the effectiveness of share based payment and will provide the required directives through which overall development and efficiency in the system takes place thereby ensuring that the stakeholders are able to take better decisions. Conclusion The report thereby highlights the manner in which changes have been witnessed in the manner executives remuneration is determined and the different steps and direction that has to be taken by the management to ensure that better information to the shareholders is provided. Different reforms and legislation developed in the direction shows that the management has to ensure proper compliance with the requirements of the executive compensation and needs to provide complete disclosure regarding the manner in which the executive is compensated. This has to be aided by the fact that the different component which makes up the executive compensation has to be provided. This has to be matched by the fact that the management has to look towards complete disclosure and ensure that the executives voluntarily provide complete details. This will help to ensure that the organization is able to work on the concept of corporate governance and provide maximum information to the shareholders. The use of share based payment has to a certain extent determined the manner in which the compensation of executives is determined and has also highlighted the manner in which performance is linked with executive compensation. This method has helped to provide the required directives through which the overall effectiveness has multiplied and has ensured that the executives are compensated in the correct manner. This will thereby ensure that the executives’ compensation is clearly provided in the financial statement and helps to work according to the principle of complete disclosure so that the shareholders are able to take correct decisions based on it. 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