Empirical Analysis Of Executive Compensation Accounting Essay

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The executive compensation of top executive paid by the company to top-level business, otherwise the general part contains information is about wages, bonuses, commissions, as well as restricted stock awards and benefits of the dollar value of the exercise of stock options. This also includes other areas such as insurance, payment of financial compensation, retirement plans, car costs, housing subsidies, loan assistance, tax rebates, loan forgiveness, relocation costs and severance payments and exercises available options, the contribution of the financial year.

The empirical analysis of executive compensation is based on three different measures of compensation which is cash compensation, total compensation and wages. Cash compensation for sum of salary and annual bonus, while the wage is only part of the measures of compensation is fixed. The total compensation is based on sum of wages, annual bonuses, restricted stock, phantom stock, performance plans and stock options valuation. For compensation long-term component of the company's valuation of choice may limit the interpretation of the results of company. The ultimate long-term compensation scheme from the amount received has implications of uncertainty from compensation, but the company is willing to target levels of performance and delivery targets for the amount of compensation grants intentions.

Executive's compensation schemes are implementation of objectives to ensure proper compensation planning to motivate executives, to achieve the company performance targets and to maximize shareholder wealth. Some companies providing compensation schemes aim to attract and retain management personnel, taking into account the wealth management performance and shareholder expectations arising from the additional compensation. Whereby the executive compensation schemes of the compensation package was worth millions of dollars to make headlines.

The practice of executive compensation should be a meaningful performance, the interests of managers should be with the company and its shareholders, as well as imprudent risk-taking and unreasonable shouldn't be reward. In addition, the establishment of the executive compensation schemes process should be transparent, to prevent bias and to enhance accountability.

Due to the recent corporate scandals, executive compensation acts are manipulation or abuses in intense public scrutiny and disclosure was flaws in the reporting in process. Involved in administrative compensation proceedings initiated a variety of companies such as Adelphia, Disney, Enron, HealthSouth and Tyco.

2.0 Factor of Executive's Compensation Schemes

Well-designed executive compensation schemes are those that put most effort to provide shareholders with a stable flow of dividend and maximize company's performance. However, recent corporate scandals around the globe shows that many executives had abused the schemes with serious disclosure flaws occurring that may have contributed to collapses in organization. The following illustrate the factor that may have contributed to executive abuse due to poorly designed Executive's compensation schemes:

2.1 Agency theory

Agency theory denotes the relationship between the principle and the agent was delegated performs work by public held corporate, toward shareholder represent the principal and CEO represents the agent. In order to align the interests of the CEO and the shareholder, the CEO should be provided with incentives to enhance the wealth of shareholder.

The power imbalance of agency theory between agents and principals because there is lack support for the basic theoretical arguments, for example of argument as performing services on benefit of shareholders for agents and boards assure that interest are aligned. Therefore the problem will be distribution of shareholder control and insufficient board monitoring of the executive's compensation schemes.

In effect, the agency theory have alluded to power of determining executive level which has not been directly operational and tested by researchers, therefore the reason is because there are not received specific consideration power due to limited assumption about human behavior in economic model.

2.2 Pay for performance

The pay for performance approach is to motivate proper executive behavior and standards-based approach also can provide a degree of standardization in the evaluation of staff. Otherwise, executive pay is a strategy necessary to determine that appropriate organizational structure are established design shareholder wealth creation./p>

Sometimes many boards have failed to design executive's compensation schemes that create a direct correlation among design the organization drives are sustainable growth of value creation,  enterprise performance and executive pay it is because there measures over namely, time, creation shareholder wealth and intrinsic value enterprise in the firm.

Nowadays many firms who are use absolute internal performance are measures set specific target to value creation of firm in the mid to long term. The goal of the management team are settled targets to easy hit when board are accept it, but there also will a problem of the business plan with related targets are proposed by the managers are recipients of rewards when their targets are hit.

2.3 Optimal contracting approach

Under the board's of optimal contracting approach are assumed to provide the design of compensation schemes to mangers with efficient incentives to maximize shareholder value, but when there is confirmation the mangers suffer form an agency problem and wouldn't automatically seek to maximize the value or return of shareholder.

The optimal contacting model has conflicts with existing practices due to limitations of political to test how generously executives can be served and the compensations schemes are not sufficiently high power.

For impose some constraints of market corporate control for capital and labor market of executive on director agreement the manager was approve, but those will forces are not strong of sufficiently and optimal contracting outcome has assure to fine-tuned. Therefore market corporate control has failed to impose airtight of constraints on executive compensation when the CEO of companies stronger to takeover protection will get pay packages on both larger and less sensitive to performance.

2.4 Board and ownership structures

Under the board and ownership structures shareholder choose CEO compensation as a function of performance to maximize firm value conditional on information environment and demand for a high-quality CEO. Assuming that observed board and ownership induce optimal CEO contracting with determinants the economic of the level on compensations such as the size of organization, modern-day firm performance, firm risk and the opportunity set of firm investment, should fully describe the equilibrium level of CEO compensation to changes in cross-section.

There is one to potential problem with inherent structural variable of board of directors and ownership, but not the rule of structure, agent, serve the acting for CEO of quality, CEO's position or potential trade enterprise control and face the complexity of the supply of CEO of the inherent behavior of CEO remuneration. The mode of CEO may happen in this problem dealt with by the compensation way neglected, or in the variable economic factor, economic factor, agent, and the measurement error in the form of the function.

For example, when the CEO is also a board chair it will may be more complex on position of CEO to requiring greater compensation. Alternatively if it is difficult to monitor the risk of the enterprise can choose to pay a larger incentive managers, risk-averse managers require a higher compensation, the compensation program through more risk pay.

2.5 Managerial power

Executive compensation is consistent with the acquisition of managerial strength improved by increasing the size of the company, handled the relationship between monitoring intensity factors associated with acquisitions and CEO compensation is influenced by the successful return.

A factor affecting executive compensation varies from one industry to the next level and from one other company in the same industry, different demand and supply executives in the industry. Because of those differences between companies in executive compensation for the difference in governance structures, internal politics, the size of the company's financial condition, etc.

Power management is considered a problem as rather negative portrait of a special CEO of large public companies, drawn by Bebchuk and Fried. This is the view that top executives in the modern enterprise can not be trusted and there are no external incentives naturally tend to pursue self-interest, to uphold and defend the interests of the company and shareholders.

2.6 Stock option

Complex forms of stock option measurement such as salaries, bonuses, allowances are relatively easy to measure in the traditional point of view of the stock market accounting. Moreover expensing options provided a level playing field to using cash bonuses and stock option for expense on the income statement of the firm.

Those against of the expensing options on the playing field level of market will infer the actual value of stock share promised to award stock option. The expensing would unfairly disadvantage and high technology firm with the lack cash of growth opportunities usually to motivate and retain high quality employees. In additional, the manipulation of accounting information is a broader problem of government, not the problem of compensation practices.

Many firms are abandoning stock option because the Wall Street Journal (July 9, 2003) announcement that "the golden age of stock option is over". Under that announcement the Microsoft would stop issuing stock options but instead award restricted stock to 50000 employees.

3.0 Disclosure

In the United States Securities and Exchange Commission (SEC) issued proposed changes to the compensation disclosure rules may be an effective agent season. These rules echo the executive compensation practices of the reformers often fail to reflect the interests of the shareholders, and sometimes was give rise to abnormal incentives between corporate management and other employees. According to the changes proposed are required enhanced disclosures including a risk analysis for the compensation schemes that pose material risk to company.

Prior to the adoption of the revised executive compensation disclosure rules by the SEC, an executive's retirement compensation was reluctant to disclose in the firm publicly but still had to be disclosed in publicly filed documents as way of less obviously. As a practice interest as a camouflage approach is for executive loans use, while in the 2002 of Sarbanes-Oxley Act prohibits such loans, prior to adoption of more than 1,500 largest U.S. of 75 percent on companies to borrow money to managers. It is not easily evident that the firms (rather than banks) lending to executives or providing favorable interest rate as a form of compensation was more efficient. However, the loans are useful for reducing the obvious of managers' compensation.

On the compensation arrangements is important to see a more transparent disclosure of executive pay. The disclosure of financial economists, market prices tend to be concentrated into the role of access to information. It is widely believed that information can only be reflected in stock prices, because it is known, entirely by the limited knowledge of market professionals. Therefore, transparency and disclosure can highlight a significant impact on CEO pay.

In addition, the SEC issued a new rule on options disclosure which required the disclosure of the grant date and the grant date fair value of option award. Alternative of options exercise price is less than the grant date closing market price this will information has to be disclosed. If the options grant date of the decision by the Board on various options from the date of award, this information should be publicly disclosed.

In the locked to each of directors may not be independent because of their influence within the power of staggered board of directors. For the proxy disclosure rules enacted by SEC require director interlocks to disclosure and the National Association of Corporate Directors (NACD, 1996) Blue Ribbon Commission criterion encourage that firms avoid gray directors and interlocked directors.

The corporate governance codes between regulators and promoters have become increasingly dependent on transparency to resolve a conflict of interest in executive compensation therefore the disclosure will be fulfillment by statute, corporate governance codes, or agency regulation. These are the underlying assumption is that if the investor compensation scheme, rather than the CEO to inform the management will be able to check and overreaction. In other words, companies are forced to disclose information to shareholder for reduce the costs of monitoring and reduce the agency costs connected to executive compensation schemes.

Moreover, the corporate governance directive also requires to disclosure all the shares held of the directors by senior management as well as options held with the company, thus due to the disclosure schemes are allows investors to evaluate executives and directors of investment company. However, corporate governance commentary directive of all shareholdings must be disclosure on the warrant bonds and convertible bonds, for example option attached with bonds an only if the bond as used a part of compensation scheme.

In additional, that disclosure was forced the investors has becomes aware the certain managers awarded on scandalous compensation packages. This will impose the cost of atrocities on managers and directors, thereby limiting the overall management power to a very imperfectly. From this view point, greater transparency decreases outrage costs and makes it stronger constraint on managerial power.

Information disclosure and corporate governance codes have a common specification, function and innovation, and thus encourage the majority of enterprises and the package to avoid exceptions. Thus, despite the disclosure of executive compensation are likely to seek a laudable goal, is to find ways to change the current governance structure in order to effectively achieve its purpose of disclosure.

Risk assessment of incentive-based compensation is another important area practice to current reform efforts, this disclosure of the compensation scheme in order to ensure that the company pay structure without compromising long-term strategic objectives, or have adverse systemic effects.

4.0 Recommendation

According to the manipulation and abuse of executive's compensation schemes, the following as recommendation to overcome those problem occurred. Of managerial executive pay is determined mainly by the size of the performance to a greater prestige, power and pay next to a larger scale of operations. Furthermore, the decoupling of pay for performance, executives can reduce risk by connecting pay to pay for the size of the company, the more stable factors.

As the agency theory of the executive compensation is open to abuse, executive efforts to reform to curb executive opportunism with monitoring and incentive alignment. Should be encouraged for example greater executive monitoring can be achieved as Chief Executive Officer (CEO) and Chief Financial Officer (CFO) with the Sarbanes-Oxley Act providing that the company must prove the accuracy of the periodic financial reporting. The company must be reimbursed bonuses and profits payout when the financial statements are reiterated that due to fraud.

For the ownership exposure as directors can counteract and reduce it of liquidating the equity position. In addition the directors can also use financial derivatives such as (put) options as risk management tools to reduce the ownership exposure, those can effective of director incentive plan was imposition to restrictions on sale of equity instruments awarded. The payoff plans also can provide director with substantial flexibility to reduce the ownership exposure.

The option and restricted share differ in sensitivity to firm performance and hence the risk level. Restricted shares are less risky and also provide greater reward to the director, but the options value of the firm performance will be decline.

Incentive compensation should be for the future enhancement of the performance measures and performance achievements of the past reinforcements. In order to achieve these objectives, companies should have a different amount of subsidy for the current or past performance, to connect the reward past performance accomplishments. That will similarly according to the gravy plan as provide incentive award to existing cash compensation.

As the power management and the rent extraction in executive compensation are plays an important role, corporate governance is the key factor to solve the problem of significant influence and can help to decrease. Transfer of management compensation from the contractor setting optimal results depends on market actors.

5.0 Conclusion

According to the above situation, recent corporate scandals around the globe is because Whether elite access to well-designed, but the inherent defects occurred in compensation and the abuse of executive shortcomings. These had induced the executive's compensation schemes to become poorly-designed, when disclosure flaws may have contributed to collapses in organization.

However, there also have appeared some ways to resolve the problem of inherent flaw was occurred such as improved corporate governance, more regulatory oversight and transparent disclosure rules that assure well-designed are continuous to motivate executives, to achieve the company and to maximize shareholder wealth.

Moreover, in the great CEO has positive impact in a huge success to spend their penny share. In the long run, there should be more regulations and restrictions to regulate CEO' compensations, as companies boards of director will be Closed exploited CEO to make big fortunes out of companies.

future research should focus on is the remuneration of executives on business impact of the policy, regardless of its quality of financial reporting can be modified in order to improve the practice of the compensation schemes. While executive pay is often a major factor in power is small to influence on level of testing to empirical studies to impact of executive compensation components.

The board and ownership variables are arising of component compensation, such as there show a negative correlation with firm operating and performance stock return and it will reflect the relative effectiveness of governance structures to control agency problem. As an opposed variable that was additional proxies for the firm demand for a high-quality CEO.

The evolving corporate governance practices, shareholder advocates in shaping the pressure will ensure that the executive compensation policies and programs play a greater role in the next generation of the Compensation Committee.

When executive compensation without the mistrust or other nastiest with attention to embrace the positive features of executive, therefore the level and structure of executive compensation to control and regulate the positive influence within the company to overcome the burden of regulation is required.