Agency theory linked to management accounting - Essay Example

The behavioural premise of the innovative financial-economic theory is based contradict to the thoughts of trustiness, faithfulness, loyalty, stewardship, and care for others that motivate the conventional principal-agent association. The conventional conception of agency is established on ethical measures. But the theory in the conventional sense is not possible as human beings are rational maximizers. Duska (1992) elucidates as: "To do something for another in a system geared to maximize self-interest is foolish.

Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others"Another point of view is that as individual rewards are openly connected to individual venture efficiency than collective rewards managers prefer individual motivation allocation (Hayes, 1976).Agency theory accepts that employees and employers have diverse ends, behave in a self-interested way, and are eager to presume altering points of risk.

In this paper, a review of how incentive remuneration plans can help create a commonality of interest between the two groups is examined.The agency theory presumes that the agent and the principal are self-interested and try to make the most of their gains in their relationship. A simple instance is the case of a store manager who acts as an agent of the owner. The store manager desires for as much rewards for his work as possible that too for as little work as feasible. But at the same time the store owner would look for the manager to work the maximum for a very little pay as possible.

This premise drops the themes of honesty and commitment from the agency association as their inappropriateness with the basic theory of balanced maximization. According to DeGeorge (1992) "The job of agency theory is to help devise techniques for describing the conflict inherent in the principal-agent relationship and controlling the situations so that the agent, acting out of self-interest, does as little harm as possible to the principal's interest". In reality management accounting study has an extended past of researching how incentives sway behaviour (Luft & Shields 2003; Bonner & Sprinkle 2002; and Young & Lewis 1995).

Organisations have from a very long time made use of incentives as a means for adjusting the involvements of managers and of employees with the interests of the firm and its shareholders. For instance, in the 1980s, CEO Roger Smith brought in operation dependent pay to the line workers at GM. Thus when GM was doing well, the workers also was doing well (Business Week, 1900). One primary anxiety for managers who want to stimulate their workers is how to allocate financial motivators among team members(Ramaswami & Singh, 2003).

Particularly, managers have to settle on, amid other things, (1) How much contingent dependent remuneration should be (2) How financial inducements should be allotted among the workers. The sharing of performance payoffs is mainly motivating and brings forth much academic dispute about suitable allotment rules (Meindl, 1989). Incentive Plans Performance plans extend the managers' verdict sphere by rewarding them on the attainment of some accounting-based events over a period running from three to six years instead of current annual performance (Kumar and Sopariwala, 1992; Enis, 1993).

Actually plans based on performance are of two types: performance unit plan or performance share plan. Healy & Wahlen (1999) stated that market anticipations, management reward and rigid interference were the principal components attractive earnings management. Fields et al (2001, p. 260) states that "when managers exercise their discretion over the accounting numbers with or without restrictions". In reality managers or agents are motivated to maximise the firm's value