Executive Remuneration and Performance: ACC5502 Report

This report delves into the multifaceted aspects of executive remuneration, exploring its critical role in financial management and organizational performance. The analysis begins by emphasizing the significance of performance-based pay, highlighting how it can incentivize employees, enhance productivity, and foster a competitive advantage. The report provides a comprehensive overview of various compensation methods, including performance-related pay, incentive schemes, merit pay, and equity-based incentives, such as stock options and long-term incentive plans. The report also discusses the potential drawbacks of linking executive remuneration solely to financial data, as this approach may overlook other crucial parameters. The report further examines the influence of human resource management practices on employee motivation and company goals, using performance-based pay (PBP) systems and executive compensation strategies to illustrate the importance of fair and effective compensation models. The report concludes by exploring the role of executive remuneration in maintaining employee motivation and organizational objectives, as well as the necessity of considering factors beyond performance and paper qualifications when determining payment formats. The report suggests that organizations should adopt performance-related pay models to enhance employee motivation, productivity, and competitiveness.

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ACC5502 Accounting and Financial Management

Remuneration
Answer – 1
(i)
Employers should always decide the pay of an employee on the basis of his performance,
knowledge, skills, and attributes. Employees who are efficient and have better capabilities are
attracted to performance related pay job formats. They are instilled with such formats to
perform better and give best efforts. Most of the organization use performance related pay job
formats for the purpose of employees’ yearly appraisal and to facilitate incentive procedures.
Performance related pay aims at facilitating appraisal system and building enthusiasm in its
employees’. There are various countries that allow a system where the financial appraisal of a
personnel depends on their qualifications and designation. A lot of inequality of income was
noted in different organizations. It was observed that such inequalities were mostly due to
documented qualifications. Executive remuneration is one of the vital factors for the
company because it helps the organization to retain the employees. It needs to be noted that
the executive remuneration should be linked to the aims of the organization as it will lead to a
balanced approach.
There are many factors other than performance and paper qualifications on which the
payment formats depends such as practice, custom, collective bargaining and behaviour of
the labour industry. It has been observed that in order to achieve organizational objectives
there is a downward trend mostly in the private sector in associating the incentives with the
performance of the personnel in the last few years. Compensation has been closely knitted
with performance. Resurgence of interest in performance related pay job formats is facilitated
by governments in most developed countries (Balakrishnan et. al, 2014). Currently most of
the companies are associating employee’s rewards on the basis of their performance. The
employees, managers and society altogether hold a different view on compensation. For the
society, compensation should be evaluated keeping justice in mind. Equal pay should be
facilitated for equal work instead of fixed incremental procedures in an organization. This
happens where the employees are not rewarded on the basis of their performance but on the
basis of fixed incremental systems that are prerogative at the same time. Taking tenure of
service into consideration, many personnel are promoted automatically. If the rewards are
facilitated entirely on the basis of what an employee deserves taking his performance and
such other required factors into consideration then the employees might be more motivated,
enthusiastic and might give in more efforts. This might also help an organization to retain its
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Remuneration
workforce as well. The organization can retain the employees when the remuneration is in
direct tune to the objectives of the company. this means that the employees needs to be
remuneration as per their performance. In order to gain a competitive advantage in the
industry, the organization should always opt for performance-related pay job formats. In
order to enhance the performance and overall productivity it is required for the organization
to keep its employees motivated and enthusiastic (Parrino et. al, 2012). Motivation happens
when there is a remuneration structure based on the performance. The executives should feel
that the remuneration is entirely based on the input provided by them.
Employees who are not delivering as per the requirements and expectations are not rewarded
legitimately for the management of the company would not want to pay employees for mere
presence. It was a matter of debate that when compensation on the basis of prerogative
rewards is given to employees then it develops an attitude of nonperformance in employees.
A lot of research work for the human resource management has been infused in performance
related pay job formats. Fewer samples are ascertained from non- western societies. Ghanaian
situation is focussed on account of such backdrop.
The ultimate agenda of the research is to analyze the influence of the human resource
management on the enthusiasm of personnel and on the ascertainment of company’s goals.
There are various companies that adopted the PBP system which will further be assessed in
the report. The important questions that are answered are-
1. In context to the ascertainment of organizational goals will it be appropriate to say that
performance-based pay (PBP) system is better than time-based pay?
2. The connection with performance rewards important and appropriate enough?
The analysis will help to understand the influence of performance-based pay. The outcome
might also build interest in the concept and also serve as a foundation for the research work.
The yielded information might also allow the policymakers to take the importance of
performance-based pay as a guiding tool in both private and public domain. The performance
of a personnel is associated with his pay in the performance-based pay (Lee et. al, 2015). PBP
is a compensation scheme that can be termed as a process of pay where an employee is
provided an increment in pay or his appraisal is evaluated entirely taking his performance for
a particular period into consideration (Horngren, 2011). It is one of the innovative concepts
that has played a bigger role in terms of influencing. It is the system where an employee is
provided incentives entirely on the basis of performance. When remuneration justifies the
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Remuneration
performance it creates a sense of understanding and leads to enhancement in the work level.
Such performance can either be organizational, individual or group performance. Researchers
also evaluated that the performance-based rewards are not just confined to financial rewards
because sometimes non-financial rewards can also substitute for pay. Recognition is one such
fine example of non-financial rewards (Marsh, 2009).
Gaining competitive advantage and equity is one of the most important reasons for
acknowledging performance-based pay mechanisms. Researchers evaluated various factors
for which the company’s management shall install performance-based pay like facilitating
selection and hiring, alteration in company’s culture, exhaust trade unions, enhance the
function of line manager, improve financial control and create higher value for money, allow
for incentives and non-material rewards like recognition, and enhancing ductility.
Performance-based pay can be classified as incentive pay or monetary rewards and merit pay.
Incentive pay is when the compensation depends on the organizational performance factor
like ROI, quantity of goods manufactured or sold, earning or share while merit pay is a type
of compensation where the individual performance is assessed and the previous pay along
with the increment earned becomes the revised pay for the employees. There are numerous
types of incentive pay systems while only one type of merit pay systems. Incentive pay plans
can be broadly classified into 3 categories-
1. Collective bonus schemes
2. Collective bonus schemes based on generated profits
3. Individual bonus schemes
The report lays entire emphasis on merit pay and its influence. The analysis of contingent pay
for public managers was one of the first opinions of the influences of merit pay formats.
Individual contingent pay formats which denoted increments in performance-based pay were
the opinions confined to various research works. No positive results were identified in such
research. It was ascertained that merit pay in the public sector was not backed up by the
sufficient evidences and it was influenced by information asymmetries and invalid contracts
(Peirson et. al, 2015). The managers also were not aware of the employees’ performance and
lacked interdependence as well. Both private and public sector were analysed by the National
Research Council (NRC) in the United States on performance pay. It was ascertained from,
such analysis that the employees are instilled with motivation, enthusiasm and perform better
if there are legitimate incentive plans. It was concluded that such schemes can be successfully
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Remuneration
installed in jobs that are simple and structured and where there is high trust and which allows
for the formulation of better performance goals (Merchant, 2012). Research on pay for
performance and he examined it using secondary sources on federal programmes. She
initially emphasized the factors behind the installation of performance-based policy as an
innovation in policy. She analysed governmental organizations as well by means of assessing
prospects for the success of PBP. It was also reported that the legal constraints and
regulations were not legitimate enough to progress in the public domain. Her reports reflected
that the progress of performance-based pay is depressing on account of legal procedures,
constraints, funding, and regulations but are not much affected by paramount failing (Petty
et.a l, 2012).
Executive pay or executive compensation comprises of the financial rewards and non
financial rewards received by an individual from the organization for their services to the
same. It is actually a combination of bonuses, salary, shares of or call options on the
organization stock, perquisites and benefits that are construed taking government laws and
regulations, tax laws, the motives of the organization and the individual and incentives for
performance. Equity-based incentives or EBC is also one substantial concept where the
employer chooses to compensate his employees with incentives based on equity that is shares
of or call options on the organization equity stock. Stock options are the common equity-
based incentives amongst all. Other options used as equity-based incentives are restricted
stock, phantom stock and LTIP. This allows the chief executive officers of the organization to
act in the best interest of the stakeholders. The most commonly used elements for the
remuneration are discussed below. It needs to be noted that the mechanism should be selected
by the organization depending on the aims and objectives. It creates a strong morale factor
and hence, leads to better performance (Phua et. al, 2011). Therefore, executive
remuneration can be in the form of various factors that are mentioned below:
a. Stock Options- The individuals are sometimes provided stock options that can be
exercised later. Such compensation depends majorly on the organizational performance. This
minimizes the conflict of interest with stakeholders but such options carry certain associated
risks which is a disadvantage, for the employees are to be acknowledged by means of rewards
for a better performance and not penalized for poor performance (Phua et. al, 2011). It creates
a sense of understanding where the employees are able to provide strong effort to the
organization.
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Remuneration
b. Long-Term Incentive Plans- Performance measure is a factor for such plans so as to
determine the right to receive or exercise options or procure such stocks. Such plans are
mostly based on options and stocks. This is one of the long-term plans that is provided so that
the employees perform and contribute to the organization on a long-term basis (Phua et. al,
2011).
c. Stock ownership - When an employee has more stock in an organization then his
compensation is closely associated with the stock returns. This eradicates any conflict of
interest between stakeholders and employees. Often there are some restrictions are allowed
regarding the duration for which the stocks are to be sold. Such restrictions on stock are
known as restricted stocks. Restricted stocks are not that commonly used in comparison to
stock options.
d. Other compensation- It comprises of components such as severance payments, imputed
interest, debt forgiveness, extra performance related bonus and pay-outs for cancellation of
stock options. Such compensation does not belong to any other columns.
e. Bonus plans- It is evaluated on the basis of an executive’s performance. Cash bonuses are
provided that are calculated on percentage basis of executive’s salary. Also, non-financial
rewards are paid by means of recognition. It is one of the best methods to influence the
employee and get the most out of work (Phua et. al, 2011). It leads to a strong focus on the
work level and get the work done. it has been noted that this policy leads to the maximum
work and create an atmosphere where the employees are able to contribute to the
productivity.
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Remuneration
(ii)
a. When executive remuneration is linked to financial data it will create a culture that is
not beneficial for the executives. The risk appears in the fact that such a presence leads to
immense problem for the executives. It means only the financial data is concerned while the
other parameters are left untouched. It needs to be noted that the executives are not only
concerned with financial performance rather appears for the non-executive performance too.
Moreover, considering this the employees even draw remuneration for their non-financial
work (Brown, 2013). Hence, it is imperative that only the financial aspect should not be
highlighted rather the non-financial aspect should even be projected. This will provide a clear
cut highlight on the performance and in tune with the functioning of the company.
It has been observed that the managers are using the method of analysis of work and
strategies in order to evaluate appropriate results for the management. The evaluation of a
balanced scorecard helps the management to analyze the situation of the organization and
then make appropriate targets. It is not just a process of evaluation and improvement, but it is
a diverse process which contains the analysis of products, processes, customers and the
market developers (Chapman et. al, 2007). There are various choices provided by the
balanced scorecard to the managers so that they can choose the most suitable criteria for
themselves. It has been clearly stated that all the organizations nowadays have a large number
of physical and operational strategies which are important for the achievement of the goals.
Therefore the main objective of using a BSC is to provide the firm with the data of strategic
and competitive needs that are to be fulfilled by the organization (Chenhall, 2007). The
application of BSC enables the management to analyze the future and present performance of
the firm. Also, the information that has been derived may be used by the firm to launch new
products. The BSC also depicts all other strategies which have already been adopted by the
firm in the past which can be analyzed to make future decisions. BSC cannot be defined as a
template which is same for every firm, but it is different for every firm because of the
different marketing strategies and the competition that is faced by the organizations (Hopper
& Bui, 2016).
The current management systems have used the analysis of the organization's operating
system in order to identify and fill the certain gaps and problems that may prevail in the
system. Therefore it can be clearly noticed that the use of a balanced scorecard will be a very
modern technique for the organizations, so as to strategize and control the operational
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Remuneration
systems of the firm (Drury, 2011). It is imperative that the management can use the balance
scorecard to trace the risk as the division is properly provided and can focus on the individual
perspective to eliminate the risks. When an overall emphasis is provided on the specific
segment, it eliminates the risks as the management can take appropriate decisions.
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Remuneration
PART 2
QUESTION 1
1) Profit desired by Mango ltd. = $1000000
Expected sale in the coming year= 750000 units
Fixed costs= $687500
Given,
The variable costs are 55% of the selling price.
Assuming the selling price is x,
Variable cost= 0.55x
Hence, contribution = selling price – variable cost percent
= x – 0.55x
= 0.45x
When targeted profit is known,
Sales price per unit * quantity = (variable cost percent * number of units sold) + fixed expenses +
target profit
hence, x * 750000 = (0.55x * 750000) + 687500 + 1000000
or, 750000x = 412500x + 1687500
or, 1687500 = 337500x
x= $5
Thus, the selling price per unit should be $5 in order to make a profit of $1000000.
2) Overhead recovery rate- 175% of direct labour
Let the direct labour cost be $x
Therefore, the manufacturing overhead = 175% * x
= $1.75x
Direct material $1200
Direct labour $x
Manufacturing
overhead $1.75x
Total cost = 1200 + x + 1.75x
Or, 2506.25 = 1200 + 2.75x
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Remuneration
Or, x= $475
Direct material $1200
Direct labour $475
Manufacturing
overhead $831.25
Total cost
$2506.2
5
Therefore, manufacturing overhead allocated to job 101 to date = $2506.25
3) Calculation of minimum acceptable selling price
Particulars $
Direct material 7000
Direct labour 2500
Manufacturing
overhead 1500
Total variable costs 11000
Creative kitchens has been operating at a capacity less than its maximum capacity and it has enough
capacity to fulfil the order by renovations galore. Hence, they should not accept any selling price
more than $11000.
4) Estimated annual savings= $300000
Estimated useful life = 15 years
Internal rate of return = 8%
Here, annual savings is the inflow.
We know, at IRR, Inflow= Outflow
Outflow= Estimated annual savings * Discouting factor
= 300000 * 8.5594
= 2567820
Therefore, cost of machinery = $2567820
5) Calculation of pay-back period
Year
Outflo
w Inflow
Cumulativ
e Inflow
0 19000 NIL NIL
1 NIL 6000 6000
2 NIL 8000 14000
3 NIL 7000 21000
4 NIL 6000 27000
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Remuneration
5 NIL 5000 32000
32000
Pay-back period = 2 + (5000/7000)
=2.714 years
Hence, payback period of the project = 2.714 years.
6) Calculation of Net Present Value(NPV)
Discount rate- 10%
Year Inflow
Discountin
g factor
Present
value
1 6000 0.9091 5454.6
2 8000 0.8264 6611.2
3 7000 0.7513 5259.1
4 6000 0.683 4098
5 5000 0.6209 3104.5
24527.
4
Where, Present Value= Inflow * Discounting factor
Given, present value of outflow= $19000
Net present value(NPV)= Present value of inflow- present value of outflow
= 24527.4 – 19000
= 5527.4
7) i) The accountant’s evaluation of the project is not correct as the calculation is done and the
conclusion has been arrived at without taking into account the discounting factor.
ii) Calculation of outflow
present
outflow 320000
major
overhaul
90000 *
0.4972 44748
364748
Present value of outflow (PVOF) = $364748
Calculation of inflow
Present value of inflow (PVIF) = 85000 * discounting factor
= 85000 * 4.4873
= 381420.5
Therefore, PVIF = $ 381420.5
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Remuneration
Calculation of NPV(net present value)
PVIF
$381420.
5
PVOF $364748
NPV(NPV = PVIF-
PVOF) $16672.5
Since the NPV is positive at $16672.5, the project should be accepted.
iii) At Internal rate of return, present value of inflow = present value of outflow
Therefore, at IRR, PVIF = PVOF
Here,
PVIF= $381420.5
Whereas, PVOF = $364748
Therefore, clearly the IRR is greater than 15%
8) i) Sales Budget
For the quarter ending December 2018
Octobe
r
Novemb
er
Decemb
er Total
a) Budgeted
sales(units) 20000 25000 30000 75000
b) Budgeted
sales($) 90000 112500 135000
33750
0
c) Cash
Sales(90%) 81000 101250 121500
30375
0
d) Credit
sales(10%) 9000 11250 13500 33750
ii) Purchase budget
for the quarter ending December 2018
Octobe
r
Novembe
r
Decembe
r Total
a) Opening stock(units) [30% of the
following month] 6000 7500 9000 22500
b) Sales(units) 20000 25000 30000 75000
c) Closing stock(units) 7500 9000 8400 24900
d) Purchase(units) (b+c-a) 21500 26500 29400 77400
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