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In the present case, Bill Strong is the Chief Executive Officer (CEO) of the company named Strong Built Construction Company. Susan Bold has been recently appointed as the Chief Financial Officer of the company. The company is running smooth under the guidance of Bill Strong and has been attaining revenues on the continuous basis. The employee survey of the company revealed that Bill Strong has a strong believe on the approach of conventional agency theory toward the executive compensation which helps to motivate the employees but Susan Bold has a different opinion which explains that intrinsic considerations should be taken into account to compensate to employees for their motivation. In this report, the information has been collected to justify their views towards their theories for the compensation of employees.
You are Susan’s assistant and you have been asked to prepare a report that is backed by scholarly literature addressing the following issues regarding approaches to compensation:
A. Elements of compensation packages
In order to attract the executives and to retain them in the company, it is always important to the company to keep them motivated towards the work and the organization. In order to motivate them the company is required to offer them an attractive executive compensation packages. Some of the key elements of the compensation package are;
1. Base Salary is the first and foremost part of any compensation package. The expectations of the executive should be understood and what the company policies are should be taken into account.
2. Health insurance is also one of the attractions for the employees to keep the employees motivated towards their job.
3. Short term incentives can be in the form of cash or the stock option.
4. Long term incentives are the major motivational approach to the employees which includes the long term benefits. These can be in the form of stock option and an ownership position. (Kuo,2012)
B. Assumptions of traditional agency theory and their influence on approaches to compensation.
The traditional agency theory is the theory focuses on the compensation given to the executive in the form of salary and perquisites for keeping them attracted towards the job and motivated towards the work. In this way the organizations retain their valuable executives in the company. The theory explains the relationship between the agent and the principal in the organization. The theory specifies that there are two stakeholders of the company. In the organizations the shareholders are the principles and the agents are the management of the company. It is assumed that both the shareholders as well as the management of the company have their self-interest. Managers in their self-interest may not focus on the interests of the shareholders in the company. The agency theory focuses on the mechanism which can be practiced for solving these conflicts in the interests of the management and the shareholders. The theory influences the approaches to compensation by compensating the managers on the changes in the prices of the stocks of the company. In this way the management will work for the betterment of the shareholders indirectly. And on the other hand the shareholders can keep a check on the performance of the management.(Cuevas-Rodriguez,2012)
C. The difference between extrinsic and intrinsic motivation and the relationship between the two motivators.
There are several factors that motivate the employees of the company to retain at their position and work with dedication. The companies need to understand the need of the employees and according to their position should choose the correct approach to keep the employees motivated towards the work. There are two motivators which are commonly known as the extrinsic and intrinsic motivation factors. They are;
Intrinsic motivation:Intrinsic motivation is the intangible rewards given by the companies to the employees. They are in the form of appreciation, involving the employees in the decision making process, promoting the employees on a higher position, etc. these the rewards which are not monetary but have a psychological impact on the employees and they get the feeling of being valued in the organization.
Extrinsic motivation:Extrinsic motivation is the tangible rewards which are given to the employees by the companies. They are in the form of increase in the basic pay, bonus, paid leaves etc. the extrinsic rewards are the monetary benefits motivates the employees towards the organization.
The two motivators although are different from each other. They have a relationship from the point of view of the benefits they offer to the company in the form of the retention of the valuable employees in the organization. Both are the approaches toward the motivation of the employees. The company can choose between the extrinsic and intrinsic motivators according to the company’s policies and the positions of the employees. (Reiss,2015)
D. The employees’ attitude to risk may influence their desired compensation package.
There are several factors that influence the desire of the employees towards the compensation packages they get. One of the major factors that influence their desire is the attitude of the employees towards the risk. The employees, who have the high risk for their security in the organization as well as the financial stability risk, have the desire for the attractive compensation packages. The employees with these risks are more towards the extrinsic rewards in their package. And the employees who on a good position in the company have a risk to hold that position and desire to have intrinsic rewards in their compensation package. (Landsberg,2012)
E. The time period when employee receives a financial benefit influences their desire for the benefit.
The time period when the employee receives the financial benefit does influence their desire for the benefit when the employees have a need for the financial benefit at particular time. When the financial benefits in the form of salary in advance is received by the employee when the employee is not in need of that benefit at that point of time then it will affect the desire of the employee for that financial benefit. At the same time, if the employee is in the need of the financial benefit but if he has arrears in receiving the benefits then it will influence his desire (Risher,2013).
F. The role of fairness considerations on determining compensation.
The fairness considerations at the time of determination of the compensation to the employees play an important role. The compensation package decided for the employees should be based on the fair recognition of their performances. The determination should not be biased. The fair treatment to all the employees creates an environment of trust among the organization and compensations given to the employees on their achievements motivate them towards the work. The compensation should be based on the skills, performance and capabilities of the employees and should be equal benchmarks for all the employees (Risher,2013). There should not be any kind of unfair distribution of the benefits for similar compensation packages. These unfair practices lead the employees to lose the attraction towards the company and affect their retention in the organization. On the other hand, a fair determination of the compensation package will make the employees to work for the betterment of the company and help in achieving the goals and objectives of the company.
G. Benefits of the executive compensation committee.
The executive compensation is a set of financial and non-monetary rewards to the executives who hold a reputed position in the company. These executives are the valuable assets of the company and their compensation is considered to be an important part to keep them motivated towards the organization. For this reason, the companies establish a separate committee known as the executive compensation committee to determine the compensation packages for the executives considering their position in the company. The benefits which are derived from the compensation committee are, to have a separate department of experts to take necessary decisions regarding the executive’s compensation (Risher,2013)
H. Structure of an executive compensation committee to achieve reasonable compensation while retaining executives.
The executive compensation committee is formed with the board of directors of the company. The committee should have at least two board members and they should be the independent directors. The independent directors will be able to determine the compensation package of the executives which will be reasonable as per the policies of the company as well as the expectations of the executives. The committee should make sure that the compensation is reasonable and not in excess than required. The committee meetings should be as often as it may deem fit. One or more sub committees may also be established for the support of the compensation committee. The committee will be reporting to the board at regular intervals about the determinations of the executives’ compensation. The committee is responsible for the determination of the revenues of the senior executives of the company including the CEO, CFO and other executive who hold an important position in the company. (Brisker,2013)
I. Recommendations for determination of compensation that enhance the job satisfaction and work motivation.
Keeping in view the above discussions, we can conclude that the extrinsic and intrinsic rewards play an important role in motivating the employees towards the company. The compensation packages should be designed according to the desire of the employees. With the above discussions, the recommendations can be made for the development of the separate executive compensation committee in the company to have a team of experts for determination of reasonable compensation which are not in excess of the required compensation (Risher,2013).
Paper by Gold, Gronewod and Pott 2012
a. The aim of the research paper.
In the paper by Gold, Gronewold and Pott, the emphasis is given on the audit expectation gap. The auditor’s expectation gap refers to the different views about the responsibilities of the auditors. There are different perceptions about the responsibilities of the auditors from the general financial users’ point of view and from the auditors’ point of view. As per the paper, the German financial users and the auditors read the audit report which included the amended explanations as per ISA700 and the audit expectation gap was noticed between the auditors and the other financial users (Gold,A.,Gronewold,U.&Pott,2012).
b. The 2*3 design showing the six groups and different information received by each group.
The 2*3 design refers to the full factorial method. The two comprises the audit report as per the IAS700 and the audit report which is unqualified. The three comprises the auditors, students and the financial analysts. (Gold,A.,Gronewold,U.&Pott,2012)
Users of financial statements
Audit report as per IAS 700
Unqualified Audit report
Roles and responsibilities of auditors were identified. Role of auditors in internal control and detection of fraud was explained.
Roles and responsibilities were not clearly identified.
Role of auditors in internal control and fraud detection was not explained.
The students of accounts can be benefited to understand the auditing function.
The understanding about the audit report was not clear for the students.
The Audit report helped the financial analysts to understand the financial positions of the organizations.
The unqualified audit report did not clearly show the financial position of the organizations.
c. Purpose of manipulation checks.
Manipulation refers to the kind of influence on others that result in the change in the opinions and perceptions of others. Manipulation check is the process to keep a check on the effects of manipulation on others. As per the paper, the manipulation check was undertaken to check the manipulation of the explanations which were present in the audit report against the explanations which were absent from the audit report. The experiment which took place involved two questions which were asked to the participants. The questions were;
1. Whether the presented audit report explains about the responsibilities of the auditors and the management? The answers which were received depicted the manipulation. And another question which was asked to the participants was;
2. Whether the presented audit report explains the scope and principles of the work of the auditors? The answers of this question also indicated the successful manipulation check. (Marett,2015)
Paper by Agyei, Aye and Owusu-Yeboah (2013) along with the study of Okafor and Otalor (2013)
a. The research aim
The main aim of the research in the given study is in concern to the problems and the existence of the expectation gap that occurs in relation to the auditors in Ghana. The research aimed on the importance of the auditors in the internal control of the companies and in the process of prevention and detection of frauds in the organizations. The research included the role and responsibilities of the auditors and the management in the detection of fraud, to check that the financial statements of the company are true and depicting the true financial position of the company as a part of better internal control procedure. Through the report it was recommended to the auditors in Ghana to set rules and regulations to fulfill the expectation gap (Pourheydari,2015).
b. The study as per Okafor-Otalor the factors that cause the audit expectation gap has been explained as:
1. It is identified in the research study that the complicated nature of the functions of audit is one of the factors in establishing the audit expectation gap.
2. There are factors that hamper the performance of the auditors; they are the reliability of the information, performance assessment, and risk measurement.
3. Another factor which contributes in the audit expectation gap is the self-regulatory framework of the audit profession (Pourheydari,2015).
The study as per Agyei, Aye and Owusu-Yeboah the factors that cause the audit expectation gap have been explained as:
1.Concepts of reliability, accuracy and adequacy are the factors for the audit expectation gap. As these terms are not defined in the accounting and auditing standards.
2. The study also includes the factors like the self-regulation framework, the time gap in the response to the changing environment, complicated roles of the auditors etc.
3. The most important factor considered in this study is the failure on the part of public to understand the role of the audit.Hence, it can be concluded that the approach of Agyei, Aye and Owusu-Yeboah is superior in context of the factors affecting the expectation gap. Because this approach includes all the factors that were included in the study of Okafor-Otalor. (Pourheydari,2015)
c. The research participants who were selected by the Agyei, Aye and Owusu-Yeboah were the users of the financial statements in Ghana. The techniques which were used in this research were the purposive and the convenience techniques. This technique was used to select a group of people as respondents which represented the users of the financial statements. In this study the participants were the auditors and the stockbrokers who were given the questionnaire to respond.
And the research participants who were selected in the study as per Okafor-Otalor were the teachers of the accounts, accountants of various companies and the students of accounts from three different universities (Pourheydari,2015).
The approach which was found to be more rigorous was that of Agyei, Aye and Owusu-Yeboah. The approach used the primary source for the data collection which helped to provide the relevant information. The research participants which were considered in the research study were found to be more authentic as they represented the users of the financial statements.
d. In the study of Okafor-Otalor, the respondents were the accountants in the private sectors, teachers of accounts and the accounts students. The 130 questionnaire were attempted by only 94 participants who constituted 72% of the response rate.
In the study of Agyei, Aye and Owusu-Yeboah, the respondents were the auditors and the stockbrokers. Out of the fifty questionnaires, the auditors returned the thirty questionnaire and the stockbrokers returned the thirty five questionnaire. Hence, the percentage of the response rate was 65% and in that only twenty were used for each of the groups.
Among the two approaches, the approach of Okafor-Otalor is superior in terms of the percentage of the response rates it got (Ruhnke,2014).
e.The analysis of the data in the study Okafor-Otalor was according to the statistical analysis. The method which was employed for the analysis of the data was the Analysis of Variance for the purpose of comparison in the means of population and the variations in the population. The econometric analysis was conducted for determination of the strength of the relationship in the variables after using the regression analysis (Ruhnke,2014).
The analysis of the data in the study of Agyei, Aye and Owusu-Yeboah as not been given exactly in the study. The data collection source was the primary data and analysis of the data was according to the questionnaire responded by the respondents.
As per the analysis methods adopted by the two studies, the approach of the Okafor –Otalor is superior because it depicts the clear view on the analysis which took place in the research conducted.(Ruhnke,2014)
f. The flaws that were found in the study of Agyei, Aye and Owusu-Yeboah were that the analysis of the data was not described clearly. It was not showing the procedure that was adopted to analyze the data. Another flaw that was found in the study was that out of hundred questionnaires only 65 were responded and in that also only twenty were used for each of the groups.
The flaws that were found in the Okafor-Otalor, was the selection of the research participants was not found to be appropriate to represent the users of the financial statements.
The report focused on the importance of the compensations packages offered to the executives of the company. There are two types of motivations that the compensation packages may include. They are the extrinsic and the intrinsic rewards. The extrinsic rewards are the tangible reward which is monetary in nature and the intrinsic rewards are the intangible rewards which are the non-financial rewards in the form of promotions etc. These rewards act as the motivation factors for the employees and help the company to retain their valuable employees in the company.
The report also consisted of the research studies which were the Gold, Gronewold and Pott, Agyei, Aye and Owusu-Yeboah and Okafor-Otalor. These studies focused on the aspects of the audit expectation gap which is the gap in the perceptions of the responsibilities of the auditors, from the point of view of the general users of the financial statements and the auditors. The research method, research participants as well as the research response are discussed of each study to identify the superior study among them.
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