The separation of the proprietors and the direction of the company have introduced the bureau theory in an organisation. The directors ( the agent ) of the company are moving on behalf of the stockholders ( the proprietor ) in the day-to-day operation in the organisation, and they are compensated with an in agreement sum of wage. However, the prostration of several well-known organisations such as Enron in United States has created uncertainty on the issue of executive compensation by the society peculiarly the investors and stakeholders of an organisation.
Recently, the intelligence sing the failure of several well-established fiscal establishments around the universe has farther increase the popularity of subject sing executive compensation. Although confronting the possibility of bankruptcy, media reported that these fiscal establishments are still paying high executive wage for unproductive executives. This state of affairs caused the populace to lost assurance on the trustiness of the compensation schemes particularly to the investors.
Executive compensation is the wage received by the executives for their service in the corporation. By and large, executive compensation is given in several signifiers such as base wage, one-year fillip, stock options, restricted stock grant and long term inducement program. Level of executive wage may change from house to another depending on several factors.
The research revealed that the chief factor that influences the executive wage is the size of the house which straight affect the house ‘s ability to pay and occupation complexness. Other than stated above, the handiness of the human capital of executives besides plays a critical function in the finding of the compensation bundles provided by the corporation. Primary intent of the wages of wage to the executives is to increase motive of the executives who responsible in set uping the way of company development and profitableness ( Matsumura and Jae, 2005 ) . Correctly allocated wage besides utile to pull and retain the right individual into the organisation.
However, recent juncture shows that the bing executive compensation bundles in corporations are unable to show the intended intent. The compensation bundles are designed for the intent of involvement alliance between the directors and the stockholders. Yet, these bundles designed have non able to carry through the intended intent. Assorted fortunes have arisen that basically change this aim into status that is wholly against to the stockholders.
This can be illustrated by the function of stock options granted by the executives is ab initio average to aline involvement of directors and the stockholders by actuating the directors to move on behalf of the stockholders by maximising the house value. Nevertheless, some executives serve on their ain involvement instead than stockholder. Highly remunerated executives are non exhibit the expected public presentation ( Perel, 2003 ) . Furthermore, proviso of such compensation has caused the executives to pull out rent from the company and reassign the wealth from the stockholders to the executives themselves.
This issue has attracted the attending of the investors every bit good as the regulators in covering such affair. The viability of the executive compensation revelation to the 3rd parties is questionable. Investors and other parties are concern to the extent of revelation on whether sufficient and appropriate information has been disclosed as the information will impact their economic determination devising. Disclosure demands associating to executives compensation has going more important in the society in order to protect the public involvement.
Executive compensation is moving as an instrument to aline the involvement of the stockholders and the directors of an organisation. Agency theorists believe that the compensation designed to be long-run oriented is associate to the future public presentation of the company. When the executives are compensated with long-run inducements, they will be motivated to increase the value of the house in order to guarantee they obtain the inducements as promised. However, premise made by the bureau theoreticians is non to the full practiced by the executives in the world.
The compensation provided to the executive frequently has no relation to the public presentation of the company. Furthermore, the wage to the executives is non affected even the house is executing ill. This can be proven in the instance of Washington Mutual Bank. Media reported that the new main executive officer of the bank was paid 18 million US dollar for three hebdomads of office hr. However, the truth is the bank is confronting illiquidity place and being charged into bankruptcy. Yet, the executive is still compensated with high wage.
Furthermore, executives have managerial power to command on their compensation in some organisation ( Efendi, et.al. , 2007 ) . This can be shown in the instance of American Insurance Group ( A.I.G. ) . The compensation of the group executives are overseen and control by A.I.G. ‘s former main executives, Maurice R. Greenberg. The ability of the executives to command over their ain compensation strategies allows them to pull out wealth of the company ‘s proprietors to themselves. This clearly exhibit that the stockholders ‘ involvement is leave unprotected.
The aim of wage for public presentation is to counterbalance the persons in the organisation in conformity to their public presentation contributed to the company. Persons with higher public presentation are likely to be compensated with higher compensation and therefore actuate them to accomplish better public presentation. Better public presentation by the employees in the organisation has direct influence on the public presentation of the company which can increase the satisfaction of the clients, better repute of the company, higher gross revenues coevals and therefore increase the value of the company every bit good as the wealth of the stockholders.
On the contrary, the wage for public presentation inducement has subsequently become inconsistent with the initial purpose that aims to actuate the directors or executives to move in the involvement of the stockholders ( Crocker and Slemrod, 2007 ) . For the intent of demoing better public presentation, the executives tend to pull strings and hide the true public presentation of the company from the populace particularly the proprietors in order to obtain high wage and other inducements from the company. They attempt to maximise the short term benefits available to them in disbursal of the stockholders. Due to the absence of a monitoring mechanism on the executives ‘ behavior in the organisation, this has caused the wealth of the stockholders channelled to the executive themselves.
In add-on, the executives besides alter the timing of the company ‘s information revelation to accomplish the mark demand for entitlement of the fillip or inducements. For illustration, when the stockholders promised the executive for a certain sum of fillip when the portion monetary value of the company accomplish a given mark, the executive will let go of insider information or intelligence sing the company to 3rd parties.
The timing of the information released to the populace can straight increase the portion monetary value of the company therefore indirectly fulfils the demands requested. Besides that, the executives besides may conspire with the prediction analyst on the future net incomes of the company to supply a lower prognosis on the company ‘s fiscal public presentation ( Matsumura and Jae, 2005 ) . Lower future net incomes prognosis provided by the analyst enables the executives to accomplish the mark requested by the stockholders effortlessly.
Share option is the portions of a company offer to the employees of a company at a monetary value lower than the market monetary value or at no cost imposed on them. Share option to the executives is besides average to aline their involvement to the stockholders and actuate them to increase the steadfast value and therefore benefits the stockholders. Furthermore, the figure of portion options hold by the executives has consequence on the deceitful fiscal coverage by the executives. Higher value of the portion options hold by the executives tends to cut down the falsified coverage on the fiscal position of the company when the main executive officer is besides the board ‘s president and compensated with portion options and frailty versa.
The executive ownership of the company ‘s portion implied that the executive become portion of the proprietors of the company. For illustration, in the event of settlement, voluntary settlement is likely to protect the involvement of the stockholders compared to mandatory settlement. Percentage of portion options hold by the executives positively influences the determination on the type of weaving up of the company ( Mehran et.al. , 1998 ) . When company ‘s executive posses higher per centum of shareholdings in a company, voluntary weaving up is more desirable compared to compulsory weaving up as voluntary weaving up is more favorable to involvement protection of the stockholders.
However, allowing portion options to the executive may non necessary achieve the aim as expected. The function of portion option in cut downing deceitful coverage has opposed by Harris and Bromiley ( 2007 ) where the proportion of the portion option can besides hold negative influence on the deceit on the fiscal statements. Executives with higher sum of portions options will probably to supply a falsified study of the fiscal statements.
In order to delight the stockholders with the favorable company ‘s public presentation and fiscal place, executives may utilize fabricated fiscal statements for this intent. In fact, the company ‘s fiscal public presentation might be wholly different from what was reported by the executives. Meanwhile, the executives may hold already sold all the portions on their manus before the information about the existent fiscal place of the company being released to the populace. The failure of corporate administration in company may do such affair to happen more easy and gnaw the involvement of the proprietors.
Furthermore, directors with portion options tend to utilize insider information to derive net income ( Matsumura and Jae, 2005 ) . The directors that act as the agent for the stockholders in the day-to-day direction of the company have caused the stockholders to hold limited information about the company ‘s operation. This has give advantage to the executives to hold more information compared to the stockholders, and therefore, happening of the information dissymmetry. The executives are likely to cognize the inside informations about the event go oning in the company that may do the motion in the company ‘s portion monetary value in progress. Their ability to cognize the intelligence in progress compared to the stockholders has enabled them to bask maximized net income while the investors may non be able to derive from the intelligence.
Difference between the wage of the executive and the top direction squad has the motivational consequence to promote competition among them ( Carpenter and Sanders, 2002 ) . The directors of the house are likely to better their accomplishments and expertness in order to vie with each other. Better equipped knowledge direction is able to increase the efficiency and effectivity if the company ‘s operation and hence addition the public presentation of the company. This can besides cut down the cost of supervising on the public presentation of the executive and the direction squad. Furthermore, if the executive and the direction squad are better compensated via long term compensation, this can advance cooperation among them. This is due to the executive and the direction squad are sharing similar challenges to accomplish their end in order to obtain the compensation promised.
However, imbalanced inducements given to the executives and the direction squad may make dissatisfaction among them ( Devers et.al. , 2007 ) . If the executive is better compensated compared to the direction squad, this will do the direction squad to be covetous and experience uneasy because their function in an organisation is every bit of import in order to accomplish high public presentation for the house. This consequence can foster enlarge the job face by the house if the executive of the house required the cognition of the direction squad in the operation of the company such as in a high-technology house. The wealth of the stockholders will be greatly affected when the public presentation of the house is cut downing by the public presentation of the employees.
In the United States of America, the Securities and Exchange Commission ( SEC ) has encouraged the revelation of the executive compensation of the listed companies to be more crystalline ( Kin, 2003 ) . This is due to increased revelation of the compensation schemes granted by the executives can cut down the information dissymmetry. Disclosure of the compensation information can increase the assurance of the investors towards the company ‘s policy and hence addition the creditability of the company.
Importance of executive compensation strategies revelation has become greater in order to protect the involvement of the stockholders and other stakeholders. In the corporate universe, revelation of executive compensation strategies acts as an instrument to increase the creditability of the executives ( Gordon, 2006 ) . By unwraping the executives ‘ wage, this has enabled the administration of the executives to be easier and efficaciously executed. This can heighten the cognition of the stockholders about their direction wage and to take action in the event of inappropriate compensated granted by the executives.
The extent of revelation of the executives ‘ wage has increased dramatically since the regulative organic structures make alterations on the revelation demands ( Liu and Taylor, 2008 ) . However, the revelation of the compensation is chiefly focused in the wage received by the executives when they are still serving in the company. Benefits that received by the executives post-employment such as pension and expiration payments to the executives are still disclosed with the minimum information. The true compensation may shack in the concluding compensation received by the executives. Large sum of the compensation paid to the executives when they are retired or terminated may go a load to the fiscal place of a company.
Furthermore, some constituents in the executive compensation are non to the full disclosed in the coverage of the company ‘s fiscal place ( Rashind, 2005 ) . Example is the fringe benefits consumed by the executives. Some directors tend to utilize the company ‘s resources for ain benefits in disbursal of the company. Due to the nature of the fact that value of fringe benefits consumed by the executives unable to value accurately, the executives have a leaning to mistreat the value to be disclosed ( Gordon, 2006 ) . In add-on, they may assume that the disbursals incurred to be portion of the professional costs to conceal off from the eyes of public. The failure of a company to unwrap such disbursals may non able to supply true position on the compensation given to the executives and may impact the economical determination with respect to the company true public presentation.
Administration mechanism in an organisation plays an of import function to guarantee that sensible compensation is offered to the executives. Good pattern of corporate administration can go an effectual tool to supervise the composing of the compensation strategy rewarded to the executives. The being of independent wage commission in the board of managers is likely to guarantee the rightness of the compensation strategy designed ( Liu and Taylor, 2008 ) . The wage commission has the function to plan the compensation bundles provided to the executives. In add-on, the commission besides has the responsible to maintain the stockholders ever informed about the policies with respects to the design of compensation.
Yet, the information disclosed to the stockholders may non accurate when the composing of the wage commission has the influence of the executives ( Matsumura and Jae, 2005 ) . For case, the commission may be elected or nominated by the executives. The independency of the commission is questionable every bit good as the rightness of executive compensation revelation. The state of affairs becomes worse when the board of managers besides become protagonists of the executives ( Perel, 2003 ) . The board may non able to dispute the place of the executives and influenced by the executives on the revelation demand. This has significantly influence the stockholders when the information provided sing the compensation is non stand for the existent sum disbursal in the compensation.
The prostration of many well-known organisations around the universe has increased the concern of society particularly among the investors and regulative environment about the causes of the corporate failures. Executive compensation has been argued to be one of the possible causes in the prostration of the organisations. The inappropriate design of the executive compensation has caused the stockholders to bear a cost on the wealth extracted by the executives.
Although the intended intent of the executive compensation constituents such as the stock options and the public presentation related wage is to aline the involvement of the stockholders to the directors, negative effects have take topographic point finally. The deceitful coverage in the fiscal place of the company by the executives has caused farther losingss to the principals of the company. Egoistic executives are likely to bring forth falsified fiscal public presentation and merchandising the options grant by the usage of the insider information in order to obtain maximized net income. In a nut shell, the executives will still hold the purpose to supply dishonest coverage of the fiscal place to the public even they are good compensated.
Disclosure demands of the executive compensation are of import to the executives to supply information sing the design and wagess offered to the executives. The information provided has influence on the determination doing procedure by the stockholders, possible investors and other stakeholders. However, the revelation of the information may non ever in favor of the interested parties. Some organisations may non unwrap full information sing the compensation granted by the executives. Compensation to the executives may has hidden disbursals that is non reflected in the revelation such as the fringe benefits consumed. This may non able to supply utile information to the stockholders and the investors during determination devising.
Therefore, appropriate actions should be taken to better the feasibleness of the executive compensation and its revelation to the populace. To ease better involvement alliance of the proprietors and the directors of an organisation, institutional investors should be encouraged to affect in the shareholdings of an organisation ( Hartzell and Starks, 2003 ) . In order to pull institutional investors with big pool of fund to put into a house, the house may accommodate the compensation schemes that are preferred by most investors. This has indirectly influence the design of the executive compensation every bit good as the revelation of the information associate with the executive compensation provided. These revelations can supply advantages such as cut downing information dissymmetry between the directors and other investors and the stockholders.
Furthermore, the function of independent wage commission should be emphasized in the design of the wage bundle. The independence of the commission members should ever analyze in order to guarantee the wage designed is non opposing the involvement of the stockholders. The revelation demand of the executive compensation besides needs to be more rigorous by covering more inside informations of the composing of the compensation. More information sing the compensation is disclosed can help the investors and stockholders in doing economic determination.
Finally, in order to protect the involvement of the proprietors, stockholders are urged to take part more in the determination doing procedure in the company peculiarly in the one-year general meeting. This can guarantee the involvement of the proprietors is good protected and the voice of the stockholders can be taken into consideration by the direction of the company in way and policies acceptance by the direction.
