Executive Compensation Scheme Shareholder

Introduction

Executive compensation is incentive payment to the executive who is acting as an agent to run the company on behalf of the shareholder. Cash compensation include the salary and bonus, while total compensation composed of long-term incentive payouts, the value of restricted stock grants, the value of stock option etc. The unexpected earnings and stock returns directly influenced changes in cash-based and total compensation but not changes in stock-based compensation.

Literature review

Nourayi and Daroca (2008), stated that the compensation scheme of the executive level is not have strongly related to firm performance. Found the compensation scheme also has a declining link to the performances of the company. Both this authors suggest that performance of the company is not related to only executive compensation scheme. Lee (2009) state, that the magnitude of the observed pay and performance relationship is too small to provide an effective incentive. In others hand that may look forward for executive compensation measure of performance, the management are trying to increase their incentive, there may induce future profitability (Nourayi.m, Mints.s.m, 2008) [online]. Conversely accounting based measurement about the company past performance (Nourayi.m, Mints.s.m, 2008).

Nourayu.M and Mints.S.M (2008) state that the incentive paid using non- cash compensation (stock option grants) should be disclosed a pay performance scheme at executive level. The remuneration package typically includes a fixed component and a variable or incentive payment, which is largely paid as a cash bonus and a long term incentive including share option or other form of shares payment which should be disclosed in the corporate governance section of the company annual report (Lee.J, 2009).

Nourayi and Mintz (2008), state that the any compensation scheme discloses to the financial report may lead the management purposely alter the financial report to mislead the shareholder or to influence contractual outcomes that depend on the financial accounting numbers.

Nouray and Daroca(2008), state that the “CEO compensation in regulated industries are influenced heavily by the accounting profit and operational growth as indicated by the increase in the number employees”. Both author are stated that the large corporate, the CEO compensation more depend on the firm performance and paid by cash compensation. In other hand the smaller corporate, characterized by their cash flow problems, the executive compensation will tend to option based compensation.

Lee (2009), state that the executive should have their own incentive package for the stewardships role. From the view of the Lee (2009) paid of compensation to encouragement the executive level is to increase corporate value and to retain key management for their performance. Nourayi and Mintz (2008) provide that, the sensitive company's performance is no longer tenure and Chief Executive Officers (CEO) of compensation. Drawing from Nourayi and Daroca (2008) result in research, state that the CEOs of the firm that have bad performance still got a higher compensation.

Nourayi and Daroca (2008), has make the empirical research that the growth of the sales or shareholder return are not much related to the executive compensation, but are correlated to the “earning, book value and per share dividend”. In other hand the companies are using the stock option as compensation scheme; the (CEO) may manipulate the earning of the company to lead the share price increase and get higher return on the increasing share price (Nourayi.M.M, Mintz.S.M, 2008). The executive want to increase the value of the share, that may incurred the fraudulent activity in the company.

Research by Nourayi and Daroca (2008) found that compensation “holding of stock and option are little supported to deduce the shareholder agency cost and the value of the company”. According to Lee (2009), when the executive are paid compensation using stock option may create a conflict of interest between the management and shareholder. “These conflicts generally arise from the management motives to pursue their own interest at the expense of the shareholder” (Lee.J 2009). Lee is providing that the top executive compensation have a significant positive relationship with the shareholder wealth.

Compensation scheme

The increase in the compensation scheme may influenced by the increase in sales in company, this increase in rate of compensation may known as the incentive reward to the CEO (Nourayi.M.M, Daroca.F.P, 2008). Sales, assets, and stock price performance, are less likely to be affected by the CEO discretionary choice (Nourayi.M.M, Mintz.S.M 2008). Nourayi.M.M and Daroca.F.P state that the politics may affect the executive compensation.

Nourayi.M and Mintz.S.M. (2008) are discussed that when the company are provides others incentives other than the cash compensation measurements, this may lead to inaccuracies of accounting because of the difficulty in discerning the value in monetary term to show in company financial statement.

Nourayi and Daroca (2008) state that the company provides the stock option in compensation scheme may incur conflict on the value of the compensation when disclose it. This is because the stock option only incurred the economic costs by the outside investors would pay for invest and does not provide an accounting cost or cash expenditure. Lee (2009) is stated that the compensation for CEO typically includes the base salary, a variable component, and other benefit. “The variable component is regarded as performance-related the basis which management performance will be measured not reported in the annual report” (Lee.J 2009). The compensation do not disclose to traditional financial statement, the compensation scheme is proposal by the executive themselves.

The compensation scheme may direct correlated to the performance of the management. The high compensation may help CEO mange the company better. The good corporate may have committee remunerations to control the total of the compensation claim by the executive level in the company.

Conclusion

In the conclusion, the executive compensation should be proposal by the independence board of director. The level of the compensation scheme of the CEO do not set by one or close relationship person with the CEO. This will influence by the CEO to get higher compensation but provide the poor performance in company. The total compensation need to disclose to the annual report. To give the shareholder can have decided to continue employed the CEO to help them manage the corporate, to decide the corporation is manage in good status or not. The stock option compensation needs to disclose at the price of the day issues to the executive. The executive may need to monitor the rule and regulation in the country that lead the level of the compensation scheme in corporate may too high or low to executive level.

Reference

Lee,J, 2009. ‘Executive performance-based remuneration, performance change and board structures’. The International Journal of Accounting, UK Vol. 44, pp 138-162

[URL: https://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6W4P-4W3874D-1-1&_cdi=6548&_user=8187596&_orig=search&_coverDate=06%2F30%2F2009&_sk=999559997&view=c&wchp=dGLbVlW-zSkzV&md5=d9559ecc007c2a6b1c67d353b6e22a71&ie=/sdarticle.pdf]

(Accessed date: 20/07/2009)

Nourayi,M.M and Daroca,F.P, 2008 ‘CEO compensation, firm performance and operational characteristics’ Managerial Finance vol.34 No. 8 pp. 562-584

[URL: https://www.emeraldinsight.com/Insight/viewPDF.jsp?contentType=Article&Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0090340804.pdf]

(Accessed dated: 23/07/2009)

Nourayi,M.M and Mintz,S.M, 2008 ‘Tenure, firm’s performance, and CEO’s compensation’ Managerial Finance vol.34, No 3 pp. 524-536

[URL: https://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=3355AC1544DBC095B56E07D9ED60CBF7?contentType=Article&hdAction=lnkpdf&contentId=1733175&history=true]

(Accessed dated: 20/ 07/2009)

Bibliography

Ang,J.S. and Constand,R.L, 1997 ‘Compensation and performance: the case of Japanese managers and directors’ Journal Multinational Financial Management Vol. 7 pp. 275-304 [URL: https://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6VGV-3SX8BMF-1-1&_cdi=6048&_user=8233547&_orig=na&_coverDate=12%2F31%2F1997&_sk=999929995&view=c&wchp=dGLzVtb-zSkzS&md5=c96040dd6413837aa4e1ee57b2480470&ie=/sdarticle.pdf] (accessed dated: /07/2009)

Brunello, G and Graziano, C, Parigi. B, 2001. ‘Executive compensation and firm performance in Italy’. International Journal of Industrial Organization Volume 19 Pages 133-161[Online] [URL:https://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6VFK-3XH3HHM-4-6&_cdi=6013&_user=8233547&_orig=na&_coverDate=09%2F30%2F1999&_sk=999949996&view=c&wchp=dGLbVtz-zSkWz&md5=2f1563eef1372d955d1954a3b8e79156&ie=/sdarticle.pdf] [Accessed: 3 July 2009]

Devers,C.E and Cannella,Jr.A.A, 2007 ‘Executive compensation: A Multidisciplinary review of recent developments’ journal management 33:1016 [online] URL: https://jom.sagepub.com/cgi/reprint/33/6/1016 (accessed dated: 24/07/2009)

Lee,J, 2009. ‘Executive performance-based remuneration, performance change and board structures’. The International Journal of Accounting, [online] UK Vol. 44, pp 138-162 URL: https://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6W4P-4W3874D-1-1&_cdi=6548&_user=8187596&_orig=search&_coverDate=06%2F30%2F2009&_sk=999559997&view=c&wchp=dGLbVlW-zSkzV&md5=d9559ecc007c2a6b1c67d353b6e22a71&ie=/sdarticle.pdf (accessed date : 20/07/2009)

Michael F, Peter M.Y. F, Oliver M. R, 2006. ‘Corporate performance and CEO compensation in China’ Journal of Corporate Finance vol-12 pages 693– 714[Online] [URL: https://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6VFK-4GGXX91-1-3&_cdi=6013&_user=8233547&_orig=na&_coverDate=09%2F30%2F2006&_sk=999879995&view=c&wchp=dGLbVtz-zSkWz&md5=098f43a768ee82d17f359d83e536c3e6&ie=/sdarticle.pdf] [Accessed: 8July 2009]

Nourayi,M.M and Daroca,F.P, 2008 ‘CEO compensation, firm performance and operational characteristics’ Managerial Finance [online] vol.34 No.8 pp.562-584 [URL: https://www.emeraldinsight.com/Insight/viewPDF.jsp?contentType=Article&Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0090340804.pdf] (Accessed dated: 23/07/2009)

Nourayi,M.M and Mintz,S.M, 2008 ‘Tenure, firm’s performance, and CEO’s compensation’ Managerial Finance vol.34, No 3 pp. 524-536 [URL: https://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=3355AC1544DBC095B56E07D9ED60CBF7?contentType=Article&hdAction=lnkpdf&contentId=1733175&history=true] (Accessed dated: 20/ 07/2009)

Cite this page