Accounting and Finance Division Ms Finance Finance Essay

Published: 2021-06-26 03:50:05
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2. Introduction and background:
In today’s modern business world, every company wants to get prosperous with their current market condition, where it is facing competition against its rivals within local market and international market. The question always has been arise whether the company performance is related to the pay or incentives of executives, so in order to find if there is any relationship between them, hence I have opted to choose the topic. Top management drives the company, plays a vital role in leading the company for growth and development. The executive purpose is making profit and taking corrective decisions for the firm. Gray, SR., Benson and PG states that a small part of non-profit organisation ie executives but amazingly set the importance of non-profit organizations and in general factor community observation regarding their levels of pay of executive. MC Jensen, WH Meckling narrates that generally shareholder shows very less interest on the size of the firm but it prefers measuring efforts of executive in economic performance. It also states that shareholder’s basic objective is to maximize the return on investments. One of the main point arises is high salary for top executive are worth paid for their performance. For example, in one of the articles publish in Zimbio (https://www.zimbio.com/CEO+Richard+Fuld/articles/182/Lehman+Brothers+CEO+Defends+Nearly+500+Million) in term of 8 years with Lehman Brothers, Richard Fuld made $484 million in form of bonuses, salary and stock options as he eventually drove his company out of existence. McKnight, PJ in his articles highlighted that salaries are always pre-determined during the beginning of the financial year and bonuses are decided at the end of the financial year with taking into consideration of companies economic performance and, then there should not be any relationship between compensation and performance of the individuals. The main objectives of this study are to focus on key elements of executive compensation is related to company performance. Conyon, MJ (2007) reveal in UK there are two or more executive compensation consultants such as Monk, UK PricewaterhouseCoopers and also Deloitte is main consultants. In an organisation, of the total work force only few percentage of the total workforce works in top management and they enjoys good sum of compensation. During the boom period of financial market, companies tend to pay enormous fees to their workers which includes top executive of the company. This rise in bonuses was severely lop-sided on the way to cash rather than stock. There has been many discussions on performance of an individual should be relate to their compensation and benefits. Performance based incentives brings out more of growth opportunities within the company, it also involves more of risk taking and promotes long term orientation.
3. Theory and prior research:
In the past few decades there have been many literature review by researcher on the rise in executive compensation, hence this rise in incentive, has shown interest researcher to work on this topic. Bebchuk and Grinstein (2005) narrates that there has been significant rise in executive compensation and growth are mostly based on equity which does not due to reducing cash based compensation These are established on two factors “arm`s length model of bargaining and managerial power model” influencing the pay and incentives of executive compensation. Conyon & Sadler (2001) described that the compensation of the company has been increased drastically in the recent decades. It also held on tournament theory which predicts that the CEO may put on effort to promote a well-paid place job. Also observed relationship between performance of the company and incentives received to executive, by measuring the return on company with management financial incentives and firm performance. According Trojanowski & Renneboog (2002) evaluates that if the ownership of the company is given to the executive then the company will show positive performance. It also states that cumulative use of agency theory results to company performance in the market (stock performance), increase in compensation and stock dependent. It also analyse two managerial of labour market executive disciplinary costs and executive compensation schemes. Voulgaris, Stathopoulos & Walker (2010) showed a new evidence of executive pay relates with executive compensation. It states that the managerial power approach has aggregate outcome on the compensation which influence the equity based compensation pay level to rise. It also showed executive compensation is more relates to power of top level executive than that of economic causes. Pay and compensation structure are related to the managerial power approach. Ozkan (2007) with the data set of 390 UK non-financial firm periods from 1999 – 2005 shows constructive and significant link between level of executive compensation and performance of firms. The author also showed the level of compensation for large UK companies includes both cash and equity based components. This paper used GMM – system method which controls the presence of unobserved firm-specific effects and for the growth within the explanatory variables. The CEO cash compensation does not get impacted with the proportion of non-executive directors of the firm, but ownership can provide incentives to non-executives directors. Espenlaub, Stathopoulos, & Walker (2007) by collating data from 3307 executives observed that there is a relationship between managerial incentives and firm risk reveals a nonlinear relationship with the size of the firm to medium size quoted companies. The article also explains that small size company shows there is a negative relationship between pay by performance and risk consistent with standard agency model but for large company relationship becomes unstable with different models. Hence it concludes that neither of any models can full explain the relationship of performance by pay and the risk. Goh & Gupta (2010) narrates that there is a wide range of equity based pay structure in firm and an extensive of compensation consultant of high level of pay. This paper use the samples of 350 FTSE firms from 2002 – 2008 it states that the CEO and top executive of the firm enjoy high salary incremental in the year and less uncertain payment package. And greater bonus in terms of cash and less in term of equity based compensation in the form of stock. It also finds no evidence that the increase in number of consultant results to increase in compensation than that of non-increasing consultant for the firm. Therefore it concludes that in some company’s consultant are successful in constructive compensation of pay of top executive of the firm. Camara (2008) states that ever since 1995 not less than 50% of the FTSE companies have decided to raise and grant bonuses to senior executives, as the payoffs which are dependent of the firm stock return relative to a given period of time. Hence the results suggests that the firm in UK practice when relative performance incentives standby with absolute performance incentives tends to decline in cost of cost of incentives package, they also take undertake high risky capital investment projects and to increase the wealth of shareholders they reduce the incentives of the executives. Conyon, Peck & Sadler (2000) observed 100 UK companies which are listed in stock market and covering more than 500 executives all over from UK at the end of 1990s. It has been observed that there is a convex relationship between executive pay at a managerial level and a break between CEO executive pay and board structural level. It also showed the executive have small role in forming the company performance. Conyon (2007) highlighted three main findings from his studies; CEO compensation are paid very high and they are greater than firm using consultant compensation, the amount of equity based incentives is higher than the consultant of the firm and found less evidence with the possible within the conflicts of interest which tends to high pay or package to CEO. Murphy (1998) this paper examines the pay structure of executive compensation by equipping potential researcher by summarizing the empirical and theoretical research. Also it has been analyse that higher pay and performance are less in huge firms, the pay level and performance is less in regulating utilities than that of industry firm and the pay performance is high in US than any other countries. Labour economist usually focused on market performance but now they are more interested in pay of executives as inside data of the firm is very messy and unavailable. Hence the study of executive compensation states that there is a comprehensive and perspective significant influencial of top management of the firm in compensation paid to them also. Conyon & Murphy (2000) states that they found a difference in incentives and pay of executives in United States and United Kingdom in 1997, US CEO earns 45% higher cash compensation and total compensation by 190%. The median CEO of US gets 1.48% of any shareholders wealth increase whereas UK gets 0.25%. The main differences between these countries are US feature greater share option award from institutional and there is a culture difference. Conyon (2007) observed that a letter from Warren Buffet in February 07 to the stakeholders of Berkshire Hathaway “CEO perks at one company are quickly copied elsewhere. All the other kids have one may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees” Therefore it is not so much academically proven that executive compensation is related to equity compensation to executives.
4. Research objectives:
The plans of the research is based on the prior working reports and evidence of article or journal in which researchers tried to explain and reviewing their point of view toward the topic and looking out for evidence obtained by the researcher deriving their best possible outcomes; whether it is directly or indirectly relates to executive compensation. Also in terms of agency theory whether it is applicable in stock price to grow gradually during this period as top management of the firm are agents of stock holder. It will be based on top executive incentives earned when they were in the power to drive the company during the term and check if the benefits received from the firm are up to their marks of their contribution made toward the company.
To identify performance of executive in UK market with regards to their pay compensation.
To examine the exemption and the factors associates behind the executive compensation
It will focus on the relationship between the executive performance pay and size of the firm by two equations
The basic motivation for study in this topic is to understand the policies of company regarding their pay and package structure and to understand the structure of compensation paid to executive and to have a close review on their decision making and its outcome.
5. Methods and data:
Based on the model applied by McKnight (1996) showed the relationship between the executive performance and incentives pay and size of the firm by two equations The basic hypotheses to determine the executive compensation are used by two hypotheses equation: Determining company performance with the compensation paid to the executives. And the empirical relationship between sizes of the firm with the compensation paid to their executives. It predicts compensation which is dependent variables …. (1) A¢Ë†” Compit = AŽA±t +AŽA²A¢Ë†” (Perf)it-1 Where, A¢Ë†” Compit is percentage change in executive compensation and percentage change in annual bonus and sum of salary. A¢Ë†” (Perf) = Performance of the company over the period of time i = aggregate salary of executive t = time (year) The percentange change in company’s performance A¢Ë†” Perfi = [(A¢Ë†” Perft – (A¢Ë†” Perfit – 1))/ (A¢Ë†” Perfit – 1)] Where the performance of the company can be represented by A¢Ë†” Perfi in year subtracted by performance in the previous year t-1 divided by the performance variable in the year t-1. The following equation shows relationship between size of the firm and executive pay compensation. This equation forecasts compensation which is dependent by and A¢Ë†” Compit will be influenced by size of the firm as independent… (2) A¢Ë†” Compit = AŽA±t +AŽA²ln(Size)it-1 + eit Where A¢Ë†” Compit = the salary and bonus over a period of time. i = aggregate salary of executive t = time (year) ln(Size)it-1= Log of the size of the firm ie sales turnover and total asset of the firm The nature of the research will be to desire the goals of the topic chosen and meeting their objectives. The basic objective of research would be collecting data, eliminating irrelevant data which are not useful for the research. The study period for this would range from 1997 to 2007 of 60 medium to large UK companies. Review of applied research theory, interpreting them with wide range of different reports and working on the similar issue. As the research is based on the performance of the company, it becomes very crucial to find the performance relationship of the company with respect to compensation drawn by the executives. For research on executive compensation the data sets use would be annual reports, secondary data and if required from the Data Stream. If in case any additional information or data set is required for the topic then Data Stream or from companies annual report websites will play an important role in analysing the data contents and presenting. The annual statement reports includes following detail remuneration policy statement, details of compensation committee members and advisors, performance graph, details of the directors if it is internal or external, the details of the director remuneration and the term spent etc.
6. Research ethics:
Vrakatseli (2006) “ethical considerations were taken into account; therefore the name of the project as well as the names of the firm that participated in it was reformed in this study to ensure confidentiality”. The study for topic does not involve any direct contact with human nature. It is an explanatory theory based on the performance of the executive pay and compensation. This study of executive compensation involves the past study by practitioners and data from the Datastream. It is a case study where I need to find the correct, needful and relevant data, as per regulation act, it is a compliance issue to deal with human behaviour. According to Willig (2001), investigators should always respect the thoughts and protect their applicants from any harm or loss or damage, and they should aim to preserve their emotional well-being and self-respect their privacy at all times.
7. Time scale and resources:
If deadline for a dissertation is given, planning and fixing of a project before deadline makes one feel good for project. Flexibly or alternate planning of the projects should be there during stumble. The proposed dissertation timeline can be slightly different but most of them follow a general process of flowchart. Dissertation plans and time consuming for work (each section) to get completed on time so that there is no possible delay for it. Time schedule grid motivates encourage that the particular task needs to be performed. Some of the examples of planning and managing the work are brainstorming about the topic, random flow of fishbone diagrams, analysing critical path with help of flow chart and a very common use to planning the project is Gantt chart. According to Taylor, S.J. & Bogdan, R. (1998) showed different methods of collecting data and techniques which needs to be applied, when applying to actual study and practice. A research design must be planned in order to get work completed on time. It is mapping out the method for the best answering the research questions.
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Creating and developing research questions
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Planning, collecting and managing general information to start
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Company annual reports collecting data and other information
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Reading and evaluating information
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Organizing information
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Gantt chart

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