Accounting Theory: Managerial Pay and Performance Measures

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student
Name of the University
Author’s Note

1ACCOUNTING THEORY
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Requirement (a)...........................................................................................................................3
Requirement (b)...........................................................................................................................3
Requirement (c)...........................................................................................................................3
Requirement (d)...........................................................................................................................4
Requirement (e)...........................................................................................................................4
Answer to Question 3......................................................................................................................4
Answer to Question 4......................................................................................................................5
References........................................................................................................................................6

2ACCOUNTING THEORY
Answer to Question 1
It can be observed that most of the business organizations develop their managerial pay
contingent based on the performance of the managers or performance of the firms. This aspect
provides major motivation to senior managers to perform better in order to get high pay. At the
same time, they feel the pressure for not-performing as there is risk of termination. In order to
maintain a balance between the managerial pay and performance measures, business
organizations use the technique of bonus system or incentive system. Under this scheme, the
business organizations provide the compensation of the senior managers based on two aspects.
They are fixed salary and performance based bonus or incentives. Under the fixed salary, the
senior managers are entitled to receive a certain amount of salary on fixed basis irrespective of
their performance (Geiler and Renneboog 2016). It implies that this portion of the managerial
pay does not depend on the performance of the senior managers and the company provides the
guarantee for the payment of the amount of the fixed salary.
On the other hand, the other part of the salary is considered as the variable salary and it is
also considered as performance bonus or performance incentive. It needs to be mentioned that
the performance of the senior managers determine the payment of this portion of compensation.
Under this process, the senior managers receive bonus on incentive in case they are able to
achieve the targeted performance of the company. Business organizations provide high bonus
premium on the high performance of the managers. Business organizations make the payment of
this part of bonus or incentive in the form of cash or in the form of issue of share of the
company. In this manner, the business organizations balance between these two considerations
(Pepper 2016).