The Disclosure Regarding the Compensation and Incentive - Example

Unit Code: Unit Name: Unit Chair: Members Name: Due Date: 6th May, 2013 Declaration: “I certify that the attached work is entirely my own, except where material quoted or paraphrased is acknowledged in the text. I also declare that it has not been submitted for assessment in any other unit or course.” Table of Contents Introduction 3 Motivation to Improve Remuneration Disclosure 3 Literature Review 4 Analysis 5 Possible Consequences of Voluntary Remuneration 7 Literature Review 7 Analysis 8 Share Based Payment 10 Literature Review 10 Analysis 11 Conclusion 12 References 14 Introduction Financial statements have an impact on the society as various decisions which are taken by the society are based on financial statement. Since, financial statements provide different benefits like relevance, reliability, comparability, verifiability, timeliness, and understandability the importance of ensuring complete disclosure increases. This has thereby ensured that the accounting statements provide proper disclosure pertaining to remuneration of executives and the manner in which an executive is compensated. This will require complete description of the different activities based on which executives are compensated and will need to provide a linkage between executive compensation and performance. The report thereby explores the manner in which the different factors motivate the importance of providing complete remuneration disclosure and the manner in which executives’ remuneration is calculated and the different theories which will help to ensure that the remuneration disclosure is clearly depicted. In addition to it the report also highlights the consequences of voluntary remuneration disclosure and the manner in which share based payment has an influence on the organization and the manner in which it provides different values to the shareholders. This will thereby help to improve the reliability and validity of the financial statement and will ensure that the decisions taken based on financial statements will be better. Motivation to Improve Remuneration Disclosure Proper disclosure pertaining to executives’ remuneration is gaining prominence as new reforms and rules have increased the burden on the management to provide complete information regarding the remuneration of executives. Providing complete information pertaining to the executives’ remuneration increases relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement and ensures that the shareholders are able to use it in a better manner (Alexander & Jermakowicz, 2006). Providing proper disclosure thereby ensures that the different risk aspect is clearly denoted, the prospect of the company regarding the future is highlighted and the manner in which share price movement takes place can be accounted thereby helping to provide a lot of information which will help the shareholders and is as Literature Review Studies conducted in the direction to find out the manner in manner in which financial statement provide better disclosure ensures to increase relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement. This reduces the risk for the user of financial statement as decisions based on it are better. Complete disclosure ensures that the compensation of the executives is determined and helps to understand the basis on which the executives are paid (Barth, Beaver & Landsman, 2001). The motivation to ensure that the financial report is complete and provide most information has resulted in an increase use of disclosure principle with regard to remuneration of executives in the financial statement. A similar study in the same direction brings out the fact that different powers in the hand of the management has increased the level of discretion in the hand of the management which has thereby increased the chances of concealing information pertaining to executives compensation. This at times also results in having no relation with the compensation and performance of the executive which thereby has an impact on the level of disclosure. The prime reason which makes executives conceal their salary and not providing based on performance is that it provides an opportunity where more salary can be paid to the executives than they deserve (Benston, Bromwich & Wagenhofer, 2006). This thereby results in misuse of funds and will require that the management looks towards following the philosophy of complete disclosure so that the financial statement provides relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement so that the decisions taken by the user is better. Another study carried out in the same direction further reveals that providing proper disclosure through which correct information is provided helps to improve the important of the financial statement. To be able to justify the financial statement it is imperative that the financial statement is prepared from the perspective of the shareholders and will require the use of different theories like PAT, Stakeholders, Agency, Legitimacy, and so on (Daske & Gebhardt, 2006). Using the different theories will help to ensure that the entire performance is monitored and will help to provide complete disclosure which will thereby ensure the use of the financial statement and will improve decision making. Analysis Organizations to ensure proper disclosure with regard to the executive compensation which will determine the manner in which the compensation is calculated and relating it to performance requires the use of different theories so that better information can be provided. This will help to monitor the entire performance and will and ensure that the management follows the different requirements of disclosure which has been provided by different accounting bodies. Some of the theories will help to ensure proper disclsoure of executive compensations are as Positive Accounting Theory: Executives look to ensure that the compensation which they get is not linked to performance and look to ensure that they act in their self interest which helps to increase the amount of compensation that they will receive. This can be reduced only when the principle of complete disclosure is followed as it will help to ensure that complete disclosure is provided regarding the manner the compensation of the executive has been calculated. PAT will ensure that the compensation paid to the executive is dependent on the performance of the executive which will help to link performance to the compensation that the executives are paid and will ensure that they work in maximizing the value for the firm. The PAT theory will help to remove some of the actions which are not desired and will help to provide better and complete information based on which the compensation of an executive is determined. The accounting system will thereby reflect the compensation based on performance and will change with the creation of wealth for the shareholders and will thereby help to bring the required change through which the compensation of executives is determined. Still, while looking to use the PAT theory consideration has to be made to the different projects or strategies that have been implemented by the executives (Healy & Wahlen, 2001). There may be situation when a particular project or strategy might not provide immediate rewards and instead provide rewards after a few years. This might lead towards reducing the compensation of executives which they deserve and might result in the selection of projects which provides profits in the short run and might impact the long term performance. PAT theory has to look towards analyzing the manner in which situation has to be dealt with and will require that the performance is determined so that based on it the compensation of the executive can be determined and will help to ensure that proper disclosure regarding the executive compensation is provided. Stakeholder Theory: This theory will require that the organization looks to work on behalf of the stakeholders by looking to maximizing the wealth of the shareholders which includes the society and the environment. Working for the stakeholders will ensure that the executives will look to take decisions for the society and won’t be guided by personal motives (Schipper, 2003). This will help to provide the required link between the compensation of an executive and the performance thereby ensuring that the principle of disclosing the compensation of executive is properly determined. This will thereby provide better disclosure pertaining to compensation of executive and will help to improve the relevance and reliability of the financial statement for the user. Agency Theory: This theory looks towards ensuring that the management looks to work on behalf of the shareholders and looks to maximize the wealth of the shareholders but since the executives gets influenced and look to work for their own personal benefit it is important to have agents. The agents will be compensated for his role and can be a person outside the organization. This will help to monitor the entire performance and will help ensure that the agent looks to work on behalf of the shareholders (Sloan, 2001). This will thereby have an impact on the performance of the executive as the executive might look to ensure that they work on behalf of the shareholders and takes decision which maximizes the wealth of the shareholders. This will also help to link compensation with performance and will ensure that the overall effectiveness of proper disclosure of executive compensation helps the users of the financial statement to take better decisions. Legitimacy Theory: This theory requires that the management looks to provide complete disclosure regarding the different principles and standards which has been applied in the financial statement. This will require that the management follows the standards laid by IASB and looks to provide complete disclosure regarding the manner in which employees’ compensation has been determined. This will provide the user an opportunity to check whether the remuneration of an executive is linked to the performance and will also help to provide the direction based on which incentives were provided. This will thereby ensure that the executives act for the shareholders and take decisions which will provide maximum value and ensure that overall effectiveness is gained (Holthausen & Watts, 2001). This will also help to improve the relevance of the financial statement and ensure that the business and its users gain This highlights that using the different models and theories provide complete information pertaining to proper disclosure and will thereby help to guide the management to ensure that the financial statement provides complete information which will thereby help to increase the importance of the financial statement. Possible Consequences of Voluntary Remuneration The different disclosure which has been developed with regard to the compensation that an executive gets brings a required change in the relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement. IASB also states that the different characteristics which has been provided by the financial statement helps to improve the overall relevance of the financial statement and is as Literature Review A study conducted in the direction of voluntary remuneration disclosure requires that the voluntary remuneration looks to achieve simplicity and transparency. This will require that the remuneration of executives which has been declared is clear and provides complete description of the process through which it has been founded. This will further require that the financials look to even provide complete information pertaining to the different incentives and perks that the executive receives so that it will help to understand the manner in which the compensation has been disclosed. This will thereby help to improve the relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement and ensure that the IASB guidelines are followed. This has been supported by another research in the same direction which states that the presentation of financial statement should be in such a manner that it provides readability. This will be achieved only when the presentation of executive compensation is done in a simplest form. This will help the users to understand the different financial figures and will provide a complete description of the different information which the financials contains (Beasley, 2006). This will thereby help to multiply the importance of relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial statement and ensure that the voluntary disclosure of remuneration helps the user to take better decisions. This has been aided by another study which states that the voluntary disclosure of remuneration requires that the executive provides complete information pertaining to the short and long term incentives and the different factors which has helped to find out the incentive which the executive will get. This will thereby multiply the effectiveness of the financial statement as it will provide information pertaining to relevance, reliability, comparability, verifiability, timeliness, and understandability (Cohen, Krishnamorthy & Wright, 2004). This will thereby help the user to be in a position through which better decisions will be taken and will multiply the overall effectiveness of the financial statement. Analysis Voluntary disclosure of executive remuneration and incentive in the financial statement will help to provide different value and help to improve the process of decision making as it will look to provide the following Relevance: The relevance of the financial statement will improve because complete disclosure from the executive regarding the compensation and different benefits which the executives receive will provide the user of the financial will complete description about the different expenses being incurred. This will also help to ensure that the financial statement is prepared according to the guidelines provided by IASB and will thereby ensure that the financial information reveals a lot of information which will ensure better decisions. Reliability: The reliability of the financial statement will increase as it will ensure that the financial statement provides all details regarding the manner in which executive compensation is calculated and the relation it has with the performance. This will provide an opportunity through which the user will be able to understand the different future projects and will provide the required directives through which the overall reliance on the financial statement will increase (Bartov & Mohanram, 2004). This will also make more and more people use the financial statement for decision making and will thereby increase the reliance of decisions as they will be better Comparability: The process will also ensure that the financial reports will provide better comparison with other organization. This is on the backdrop that providing complete information about the salary which has been provided by the executives will help to improve decision making as comparison with other organization will help to determine the different parameter based on which the compensation is determined (Hirst, Hopkins & Wahlen, 2004). This will also help to compare the different future projects which are expected and will thereby provide a complete framework through which the overall use of financial statement will increase. Verifiability: Disclosing complete information regarding the compensation of an executive voluntarily by the executive will ensure that the information can be verified. The user to find out the accuracy of the information provided in the financial statement can look to use it as a method through which the user is able to judge the different aspects and based on it look to the different information which has been disclosed (Jonas & Blanchet, 2000). This will thereby help the users as the different parameters can be easily verified and compared which will thereby help to understand the different basics based on which the compensation of an executive is determined. Timeliness: Voluntary executive compensation will also ensure that the principle of timeliness is followed. This is because of the fact that the financial statement looks to provide complete information regarding the manner in which compensation has been provided. Further since the financial information has to be prepared by a certain date it will ensure that the user of the financial information is supplied by the different information through which the decisions which are made by the user will improve and will ensure that the overall effectiveness will improve decision making (Soderstrom & Sun, 2007). Understandability: The use of the financial statement will increase as it will help the user to understand the different components of the financial statement better. This will thereby ensure that the different benefits which the user of the financial statement gets increases. This will thereby ensure that the overall decision making process further gains and helps to provide the required understanding of the factors which influences decision making (Dechow, Sloan and Sweeny, 2005). This will help to ensure that the user are in a better position to take different decisions and will be able to improve their overall effectiveness Thus, the voluntary remuneration disclosure provides different incentives like relevance, reliability, comparability, verifiability, timeliness, and understandability and helps the user of the financial statement to take better decisions. The entire process will help the user to take better decisions and will reduce the overall level of risk that is present. Share Based Payment Share based payment is a method where the executives and the employees are compensated in some form of equities or other instruments along with cash. This form of payment usually has a link with the performance of an employee as executives who are able to perform on the required standards are provided extra incentives in the form of equities the description of which is as follows Literature Review A study conducted in the direction shows that using a process of share based payments helps an organization as the extra incentive is passed on through equity which thereby ensures that the organization doesn’t have to pay additional money. This also helps to provide a link between performance and compensation and helps to determine the different areas based on which the overall compensation is determined (Bartov, Goldberg & Kim, 2005). This mechanism also helps to ensure that the executives work on behalf of the shareholders as the executive know that they will be compensated in the form of equities and will thereby look to pretect the interest of the shareholders and look at maximizing the returns for the shareholders. In a similar manner a study substantiates the point that share based payment helps to link performance with compensation but also has a relevance on the organization as at times it might give rise to situations where the equity holding of an executive or a group of executive is high and thereby look towards having a major role in decision making. This might thereby create a situation where the executives look to take decisions for their own benefit and is an area which needs to be controlled so that the different benefits which an organization gets is better controlled. This will also require proper monitoring to ensure that no executives form a cartel or have more that a certain percentage of shares which might influence decision making (Beuselinck & Manigart, 2007). This will thereby help to ensure a positive impact and will provide the organization with an objective through which better decisions will be taken. Another research in the same direction shows that the process of having a share based payment will ensure that the executives will know that their performance is monitored. This will have a positive influence as it will force the executive to work for the shareholders and take decisions which helps to improve the relevance, reliability, comparability, verifiability, timeliness, and understandability of financial data (Ball, Kothari & Robin, 2000). This will translate into a situation where the overall effectiveness is gained in the financial statement and helps to ensure that the decision which is taken is better and has a lower level of risk. Analysis Organization in Australia were seen to record share based payment in the notes and were of the perception that share based payment had no role in determining the manner in which compensation is paid. Instead share based payment has a role as it helps to influence decision making. Share based payment helps to link performance with compensation but also has relevance on the organization as at times it might give rise to situations where the equity holding of an executive or a group of executive is high and thereby look towards having a major role in decision making (Camfferman & Cooke, 2002). This might thereby create a situation where the executives look to take decisions for their own benefit and is an area which needs to be controlled so that the different benefits which an organization gets is better controlled. This will also require proper monitoring to ensure that no executives form a cartel or have more that a certain percentage of shares which might influence decision making. This will thereby help to ensure a positive impact and will provide the organization with an objective through which better decisions will be taken. This will also require that while looking to work on the fundamentals of share based payment a proper link between the compensation and performance is achieved so that the business is able to understand the manner in which the compensation of an executive has been determined. This will help to provide the framework and will ensure that the measurement of the salary which is paid to the executives is better. This will thereby provide the required directives through which the compensation of the executives is properly calculated (Eisinga, Scheepers & Snippenburg, 2001). The entire process will also help to ensure that user of the financial statement is able to understand the manner in which different aspects of the compensation have been considered and the role different areas had on the performance of the executive. The organization looking to work on the concept of share based payment has to look towards providing proper information regarding the manner in which the compensation of the executive will be determined. This should provide a complete disclosure so that the user of the financial statement is able to understand the manner in which decision making is influenced. This will help to work according to the principle of full disclosure and will help to ensure that the business provides complete disclosure in their financial statement. Conclusion The report thereby shows the manner in which organization needs to ensure that complete disclosure regarding the compensation and incentive of executive is provided in the financial statement. Being able to disclose all information will help to ensure relevance, reliability, comparability, verifiability, timeliness, and understandability of the financial information and will provide complete information through which better decisions will be taken. The process will also require that while looking to provide complete disclosure the organization has to ensure that the share based payment is properly disclosed and looks to ensure that no executive have a large share of equity which thereby influences decision making for their own benefit. This will thereby help to ensure that the entire process of decision making improves and the organization is able to take decisions through which the overall effectiveness is the financial statement will increase. References Alexander, D. & Jermakowicz, E. 2006. True and Fair View of the Principles/Rules Debate. Abacus, 42(2), 132-164 Ball, R., Kothari, S. & Robin, A. 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29, 1-51 Barth, M., Beaver, W. & Landsman, W. 2001. The relevance of the value relevance literature for financial accounting standard setting: another view. 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