Accounting Practices Essay

Question:

Write a report on the accounting practices related to the determination of the compensation packages and audit.

Answer:

Introduction

This report is on the discussion regarding the accounting practices related to the determination of the compensation packages and audit. The report is divided in to two parts. In the first part, the report focuses on the compensation package and relates the discussion with the case study of Strong Built Construction Company. On the other side, the second part of the report focuses mainly on two previous research papers and makes the discussion based on finding of those two research papers. At the end of the study, an overall conclusion is given.

Elements of compensation packages

A package of compensation in an organization includes some key elements. In case of the organization that is Strong Built Construction Company, the key elements of the compensation packages of the employees are as under:

Basic Salary: It is the most important element of a compensation package within a company. It is the compensation, which Strong Built Construction Company provides its employees for their daily efforts. This portion of the compensation package depends on the ability, experience and skills of the employees (Taylor, 2016).

Incentives: Another key element of the compensation package of the employees of Strong Built is incentive. The company generally pays the incentive for long-term basis. This element of the compensation package plays a vital role in motivating the employees.

Employee benefits: This element of compensation package includes different insurance plans for the employees like, health insurance, disability insurance or life insurance and at the same time, it also includes the catastrophic expenses. Along with these, different types of pension and savings plans are also included (Tornikoski, Suutari & Festing, 2014).

Annual bonus: This element of compensation package is given by the company on the basis of the annual profit or income earned by the company. This is another motivational factor for the employees.

Assumptions of traditional agency theory and its influences on compensation

As per the traditional agency theory, there are mainly two key assumptions based on which the traditional agency theory has been built. These two key assumptions are as under:

  • The interests of the principals are morally acceptable for all the time
  • In order to fulfill the own interests, the managers of the organizations must act unethically

These above-mentioned two key assumptions of traditional agency theory have great influence on the approaches to the compensation of the company. The assumptions of the traditional agency theory clearly indicate that there is a conflict between the interests of the principal or the shareholders and the agents or the managers or employees (Foss & Stea, 2014). These assumptions actually influence both the parties (shareholders and managers) in increasing the level of compensation. In case of Strong Built Construction Company, the managers want to build such a compensation approach in which their annual bonus will be higher, when the company is earning good amount of profit (Pepper & Gore, 2015). However, on the other side, the shareholders or principals or owners of the company wants to pay less annual bonus so that their portion of profit becomes high.

Difference and relationship between extrinsic and intrinsic motivations

The main difference between the extrinsic motivation and intrinsic motivation is that in case of extrinsic motivation, individuals are motivated by the external factors like, medal, grades, money or trophy (Taylor, 2016). There is no guarantee that the extrinsic motivation gives actual fun or enjoyment to the individuals. Sometimes, the individuals are motivated by extrinsic motivational factors just to achieve an outcome that is considered as higher achievement by the society.

On the other side, in case of the intrinsic motivation, the individuals are motivated by the internal factors like, interests and will of self-development. This type of motivation provides the actual enjoyment or fun to the individuals (Tornikoski, Suutari & Festing, 2014).

However, the relationship between these two motivations is that in both types of motivations, the individuals achieve something that helps in improvements of the individuals. Both of the motivations help to achieve something at a higher level. Therefore, if an individual tries to achieve something by focusing on both the extrinsic and intrinsic motivational factors, then he or she can achieve the goal properly and happily.

Influence of employee’s attitude to risks on the desire of compensation package

The attitude of the employee towards the risk actually has a great influence on his or her compensation package. In an organization like Strong Built Construction Company, there may be some employees are, those can take risk, some are risk aviator and some can take the risk to a moderate level. Therefore, in case of the risk taker employees, the compensation package is generally high because these employees take challenges and responsibilities (Bolton, Mehran and Shapiro, 2015). There are some activities, on which the future of the company depends but these are risky. Now, in case of risky decision, the company pays more benefits or extra payments to the employees because by taking more risk, the company can gain more profits or income, which increases the compensation package. On the other side, if the employees do not take risk, then there is no question of getting higher payment or extra benefits.

Influence of time of receiving the financial benefits on the employee’s desire for benefits

The time of receiving the financial benefits also influences the employees’ desire for getting the benefits (Hermanson et al. 2012). For example, if the Strong Built Construction Company pays the incentives to the managers or employees in long-term basis, then the employees will desire to get higher amount of money at a time. On the other side, if the company pays the incentives on year-to-year basis, then the employees’ will desire to get more compensation in each year due to the addition of incentive. However, in that case the total amount of incentive will be less.

Role of fairness consideration in determination of compensation

The consideration of fairness plays a vital role at the time of determining the compensation for the employees. In case of Strong Built Construction Company, the company must keep in mind that at the time of determining the compensation of the employees, it must be fair to each of the employees. The employees belong from same organizational position, must have same basic pay level. However, the company must consider the experience of the employee (Taylor, 2016). If an employee is more experienced than the others are, then that employee must get higher compensation than others must. At the same time, determination of the compensation also depends on the fairness of the employees towards the company. If the company identifies any unfair attitude of the employee, then it can deduct the money from the employee’s compensation (O'Reilly et al. 2014).

Reason of providing benefits at the time of compensation determination

An executive compensation committee is the authority, which acts on behalf of the board’s responsibilities of providing or designing the compensation package for the employees (Tornikoski, Suutari & Festing, 2014). However, this particular committee may provide the benefits to the employees of the organization at the time of determining the compensation for the employees. The executive compensation committee generally does this in order to motivate the employees to improve their level of performance. At the same time, if the committee identifies the performance of any employee above the standard level, then also the committee may provide benefits at the time of determining the compensation package.

Structure of executive compensation committee for best outcomes

As per the rules and guidelines provided by NYSE, all the companies those are listed on the stock exchange are required to form an executive compensation committee (Hermanson et al. 2012). However, in order to structure the executive compensation committee, at first, the company needs to consider the board of directors. The executive compensation committee includes the Chief Executive Director of the company along with the other executive officers. At the time of structuring the executive compensation committee, it must be kept in mind that no non-executive director should be included within the committee (Ims, Pedersen & Zsolnai, 2014). This is because, the non-executive directors have their personal interests within the company.

Conclusion and Recommendations

From the above discussion, it can be said that there are mainly four key elements of a compensation package of a company. These elements are – basic pay, annual bonus, long-term incentives and employee benefits. There is a conflict between the interests of the shareholders and managers of the company. On the other side, there are two types of motivations like, intrinsic motivation and extrinsic motivation and these two differ from each other. However, both of these two motivations help to improve the performance of the individuals. In case of the compensation package of the employee, the time, fairness and employee’s attitude towards risk have vital influence.

On the other side, the executive compensation committee decides the compensation package of the employees. Therefore, from these, it can be identified how the Strong Built Construction Company can determine the compensation of its employees for increasing the satisfaction and work motivation of the employees. The recommendations for Strong Built Compensation Committee are as under:

  • The company must focus on the extrinsic and intrinsic motivation of the employees. However, these two motivational factors may change based on the nature of the employee.
  • The company may include more elements to the compensation package of the employees. This will increase the value of the compensation package. Hence the job satisfaction and work motivation will come.
  • The company must fix the time for paying the financial benefits to the employees. Either the company may provide the financial benefits in each month or in long-term basis, but it must be fixed.

Reference List:

Bolton, P., Mehran, H. and Shapiro, J., (2015). Executive compensation and risk taking. Review of Finance, 49

Foss, N & Stea, D. (2014). Putting a realistic theory of mind into agency theory: implications for reward design and management in principal?€ђagent relations', European Management Review, 101-16.

Hermanson, DR, Tompkins, JG, Veliyath, R & Ye, ZS. (2012). The compensation committee process, Contemporary Accounting Research, 666-709.

Ims, KJ, Pedersen, LJT & Zsolnai, L. (2014). How economic incentives may destroy social, ecological and existential values: the case of executive compensation, Journal of Business Ethics, 353-60.

O'Reilly, CA, Doerr, B, Caldwell, DF & Chatman, JA. (2014). Narcissistic CEOs and executive compensation, The Leadership Quarterly, 218-31.

Pepper, A & Gore, J. (2015). Behavioral agency theory new foundations for theorizing about executive compensation, Journal of Management, 1045-68.

Taylor, S. (2016). 9. Compensation policy and employee turnover. Research Handbook on Employee Turnover, 166.

Tornikoski, C., Suutari, V., & Festing, M. (2014). Compensation package of international assignees. The Routledge Companion to International Human Resource Management, 289.

How to cite this essay: