Making managerial pay contingent on measures of managerial and/or firm performance motivates them to deliver good performance for shareholders. However, it also burdens them with greater risks than they may like. How do organisations balance these two considerations when choosing managerial pay and performance measures?
Obtain the remuneration report for a publicly listed company. Examine the compensation contract for the chief executive officer (CEO). Prepare a report which summarises your findings relating to the following issues:
(a)What amount is short-term in nature (salary and cash bonus) and what is based on long-term firm or managerial performance?
(b)What proportion of the CEO’s pay is performance based, and what proportion is not?
(c)What measures of accounting performance are used to determine the CEO’s bonus?
(d)Given the accounting firm performance measures in the contract, what accounting decisions could the CEO might make in order to maximise their bonus?
(e)Can agency theory provide an explanation for the various remuneration components? Justify your answer.
Bonus plans are used to reduce agency problems that exist between managers and shareholders. Discuss two (2) of these problems specific to the relationship between shareholders and managers and identify how bonus plans can be used to reduce the agency problems you have identified. In your answer you should provide examples of specific components that should be added to a bonus contract to address the issues identified.