Research in Accounting Practice: Agency Theory and Compensation Packages

RUNNING HEAD: RESEARCH IN ACCOUNTING PRACTICE
Accounting Research

Research in accounting practice 2
Question 1
Part A
The agency theory focuses on reducing the agency cost which arises due to the conflict of
interest between principal and agent. In order to make the employees work in best interest of
shareholders, company should motivate them by offering performance and equity based
compensation. The fixed salaries given to the managers and employee does not motivate
them anymore. Instead of that, employees start looking for their own benefits. So agency
theory suggest that the compensation package must be desirable and should also include
components other than fixed salaries. This will motivate the employees and will reduce
agency cost (Ims, Pedersen and Zsolnai, 2014).
Part B
A compensation package comprises of different components listed below:
 Salary and wages
It is the largest part of a compensation package and is used as a point of comparison between
the potential employees. Salaries are been given as per the skills and performance of the
employee. This component motivate employees to work hard because salary increment take
place only when an individual improve his performance and meets his targets as well as
organizational objectives (Singh, 2007)).
 Bonuses
These are basically the performance incentives which are usually paid to the employees in a
lump sum at the end of the year. Bonus is been given according to the performance of an
employee plus helps in motivating him (AllBusiness.com. 2018).
 Health insurance

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It includes health insurance of an employee sponsored by employer. Moreover, it is a benefit
of great value to the employees. It save their money and provide them a sense of security that
they would not be denied in their existing health issues. This motivate them to work for
company with full interests (AllBusiness.com. 2018).
 Stock options
These are been used by many companies in order to retain, attract and compensate best
employees in the organizations. Stock options are basically a contract between the employees
and employer in which workers or employees are allowed to purchase a specific number of
company’s shares for a given period of time and at a fixed price. This benefit them by
exercising their options when company’s stocks are traded at higher prices which earn them a
certain amount of profit. It motivates them and help the employer to keep them in the
organization (Olagues and Summa, 2010).
 401(k) contribution
It is a type of pension plan which is less expensive and more popular. It is included in the
compensation packages of employees because it gives them some control over their
contribution and they have the right to know the manner in which money is invested. Such
plans offer employees a security regarding their contributed amount. As a result of which,
employees feel motivated and are focused (Francis and Schipper, 2011).
 Life insurance
This is something related to securing the whole life of an employee. It also cost less when
purchased by the employer. An organization offering life insurance policies in its
compensation packages will definitely attract people and motivate its employees
(AllBusiness.com. 2018).

Research in accounting practice 4
 Perks
Other benefits like food and beverages, club memberships, company discounts and
conveyance facilities also helps the employer in keeping its employee motivated and
encouraged for meeting the set targets.
Part C
The identification of employee’s risk tolerance is one of the important factor for deciding a
compensation package for him or her. Keeping the right attitude towards risk benefits the
employees and make them feel secure and more valued. This also help them in becoming
more engaged in their work and remain positive for the same. As a result of which, their
productivity will be enhanced which ultimately affect the performance of the organization. If
the workers keep a positive attitude towards every type of business risk then it may also lead
to less absenteeism. All this will positively impact the desired compensation package of
employees and their overall performance. On the other hand, if employees have negative
attitude towards risk then it may result in decrease of their compensation (Searles, 2017).
Part D
Performance based compensation is a system under which employee’s pay is directly linked
to his or her performance. However, there are some factors which limit the effectiveness of
such performance based compensation. Three of them are as follows:
 The effectiveness can be weakened due to the flaws in the design phase,
implementation and operational phase. Lack of adequate budget for funding
performance based increases can limit the effectiveness of the employee’s
compensation package. In addition to this, Biasness and favouritism are also the
factors which do affect employee’s compensation packages. Though it is performance