Financial Accounting Theory: CEO Incentives and Company Performance

This report delves into the intricacies of CEO compensation within the framework of financial accounting theory. It examines the impact of incentives on company performance and shareholder value, considering the challenges of balancing executive pay with investor expectations. The report highlights the competitive landscape, particularly the comparison between the US and British markets, and explores the potential consequences of shareholder discontent and board decisions on compensation packages. The analysis includes the role of benchmarking and the threat of state intervention. The report also references relevant academic sources to support its findings and conclusions on the topic of CEO compensation.

Running head: FINANCIAL ACCOUNTING THEORY
Financial Accounting Theory
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1FINANCIAL ACCOUNTING THEORY
Summary:
The international market for CEO is facing competition and the growing debate
regarding the package of CEO continuous to make headlines. Despite the shareholders
disgruntle British companies must increase the pay of CEO to compete with US (Cooper,
Gulen and Rau 2016). However, companies have sought to address the issue by increasing
the pay performance but it is an arduous task with shareholders expressing discontent against
CEO increase in performance bonus.
Revolts over pay may be rare but provides alarming indications of weak board and
uncertain management succession. This may cause declining share prices with reduced
investor’s returns. The boards that offers incentives packages to CEO faces the tricky path of
long-term performance with uncertain organizations fortune (Almadi and Lazic 2016). The
threat of state intervention is inescapable and chairperson facing shareholders disgruntlement
may defend incentives with benchmarking and competition.
With increasing demand for CEOs and high executives in the competitive market,
incentives could help in matching with US. Though US have increased incentives by 9% in
2013 to Britain’s 1% rise, incentivising the CEOs pay may enable British firms to keep pace
with US. Regardless of investors expectation from companies a rising tide of compensation
may help in keeping a valuable CEO within the firm.

2FINANCIAL ACCOUNTING THEORY
Reference List:
Almadi, M. and Lazic, P., 2016. CEO incentive compensation and earnings management: The
implications of institutions and governance systems. Management Decision, 54(10), pp.2447-
2461.
Cooper, M., Gulen, H. and Rau, P.R., 2016. Performance for pay? The relation between CEO
incentive compensation and future stock price performance.