ACC307 Accounting Theory: Analysis of Managerial Pay and Performance

This report delves into accounting theory, focusing on managerial pay and performance measures. It addresses how organizations balance the motivation of managers with the risks associated with performance-based pay. The report analyzes a CEO compensation contract from Snam's 2017 Remuneration report, examining short-term and long-term incentives, fixed pay, and the role of agency theory in designing remuneration components. It further discusses the separation of control and ownership and how bonus plans can mitigate issues like risk aversion, dividend retention, and horizon problems. Finally, it explores the challenges of lending during economic downturns and the importance of accounting information in managing financial agency problems, emphasizing the need for effective covenants and risk management.

Running head: ACCOUNTING THEORY
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ACCOUNTING THEORY 2
Accounting theory.
Question 1
It is marked that making the managerial pay depending on measures of managerial and /
or firm performance definitely encourages the personnel to convey good performance to
stakeholders. It truly builds up team spirit among the team affiliates to achieving the greater
productivity and reach its objectives. Performance based pay encourages personnel as it makes
their work rewarding and interesting. Nevertheless these may create a series of unintended
consequences. Huge fiscal incentives causes’ unpremeditated risk and occasionally
counterproductive outcomes, it is tough to satisfactorily stipulate precisely what individuals
ought to do and thus how their performance should be measured.
One of the unpremeditated result caused by performance based pay might be on
relationships and teamwork. Relationships amongst workforces can be causalities of scramble for
payments. If the work necessitates teamwork, hitherto personnel are rewarded centered on
individuals as contrasting to team output then this will reduce the performance (Shi 2017). In this
situation the company can evade the risk by being fair. Fairness has an important connection
with the co-operation. Cautious management and implementation of performance centered pay
can lead to affirmative results.
One more unpremeditated result is ethics and quality. Using greatly precise individual
performance incentives and assessment with occupations that are multipart, inter-reliant and have
numerous and unstructured goals can effect in personnel and management disregarding vital
facets of their work and interfere with performance in order to meet goals set (Dominici 2017).
The personnel might stress quantity over quality. Hence, when designing sustainable linked

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reward systems, it is essential to make sure the conditions used for performance appraisal is well-
managed and monitored. This will ensure suitable managerial pay and deliverance of good
performance to shareholders.
Question 2
This report is based on the Snam’s Remuneration report of 2017. Short-term variable
incentive is provided yearly in monetary form. It is an implement that is useful in inspiring and
directing management’s accomplishment in short term, in link with the company targets set by
the Board of Directors. The quantity of short-term incentives hinge on the position held and
corporation individual performance outcomes. The criteria for implementations are;
Corporate/ CEO: Investments (20%), Operational Efficiency (30%)
Expansion of non-regulated events (10%), Sustainability (accident occurrence index for staffs
and contract personnel (10%), free cash flow (30%)
DIRS Targets: the Annual monetary incentive is calculated at 50% from the outcomes of the
target allocated to the CEO and, for the residual 50% from specific targets focused on financial,
operating and work performance.
The incentives provided depend on the outcomes attained in the preceding year and
assessed according to a performance gauge of 70/130 points, with least level for incentives
equivalent to a general performance of 85%. CEO short term value are 50% of the fixed payment
for outcomes of the corporate structure equivalent to the target score= 100; 65% of the fixed
payment equivalent to the max score=130. The long term variable incentive is kept for those
holding position with the utmost direct accountability for company outcomes, guarantees better
alignment between the actions management and interest of stakeholders.

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The CEO fixed pay which is not based on performance is € 970,000 which is about 75%
and € 150,000 which is about 25% which is based on performance. The CEO yearly bonus is
calculated with reference to target incentive level (performance= 100) and a supreme level
(performance 130) correspondingly equivalent to 50% and 65% of the fixed remuneration in
association with the outcomes accomplished in preceding year compared with target defined.
The accounting decision that the CEO might make to increase their bonus is to increase
employees salary based on performance this will motivate workers hence maximize performance
hence their bonus will increase.
The agency theory can give an explanation for the remuneration components. Agency
theory is used to plan the incentives suitably by considering what interest motivates the manager
to act. Incentives encouraging corrupt behavior are removed and rules discouraging ethical risk
are placed. This increases the financial gains which in turn increases the compensations.
Question 3
The parting of control and ownership means that executives can act in their personal
concern, that maybe differing to the interest of investors. This can be classified into number of
particular problems (Khoso 2018):
Risk aversion problem. Executives desire lesser risk than stakeholders since their human capital
is tied to the Company. They favor to diversify their personal risk fairly than maximizing the rate
of the Company by risk ventures.
Dividend retention problem. Executives select to fee out less of the company’s incomes in
bonuses in order to wage for their personal advantages.

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Horizon problem. Executives are only concerned in money flows influencing their payment for
the time they stay with the company, while stakeholders have a longstanding concern in the
company’s money flows since stake values equal the existing value of stakeholders’ prospects of
all future money flows.
Bonus plans may be used in different ways to reduce these problems. To lessen horizon
problem lasting pluses such as stakes or preferences are suitable, as it inspires executives to
advance lasting performance, and also take a long-standing devotion (Pepper 2015). Binding a
higher percentage of executive wage to share price movement, using proportions such as total
stakeholder return, primarily as the managers tactics superannuation is also expected to hearten
executives to exploit lasting performance. Relating bonuses to seek out extra profits, which in
turn are going to be available for dividend, thus lessening the dividend retention problem.
Including incentives to hearten managers to invest in more risky projects can reduce the risk
aversion problem (Bosse 2016).
Question 4
Lending in the recession or economic downturn period is somewhat very challenging
and risky since in this period individuals loses their work and businessmen get into losses in their
companies. So the lending at this time can be very risky to the bank (Becker 2017). Simple
covenants are sensibly effective in decreasing financial agency problems and therefore help the
bank acquire the benefits of debt financing. Nevertheless the net benefit achieved from debt
financing will finally be contingent on the nature of the covenant restriction, and the ability to
suitably implement them. The bank must be concerned with the risk aversion problems and
horizon problems. Accounting provides information on the dynamics and structure of
corporation’s wealth, financial position and outcomes. Accounting information delivered is

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envisioned for both external and internal users (Cascino 2017). The accounting information will
help the company’s management, which is the internal users, to base judgment and long and
short term plans, essential to accomplish their aims.

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References
Becker B, Ivashina V. Financial repression in the European Sovereign debt crisis. Review of
Finance. 2017
Bosse DA. And Phillips, R.A. Agency theory and bounded self-interest. Academy of
Management Review, 41(2), pp.276-297.
Cascino S, Clatworthy M, Garcia Osma B, Gassen J, Imam S. 2017. The Usefulness of Financial
Accounting Information: Evidence from the Field.
Dominici, G., Yolles, M. and Caputo, F., 2017. Decoding the dynamics of value concretions in
consumer tribes: An agency theory approach. Cybernetics and systems, 48(2), pp84-101.
Khoso, I, Shaikh M, Parmar V, and Bashir, A., 2018. Escalating Behavior to losing projects.
Agency theory Perspective. Grassroots, 48(1).
Pepper, A. and Gore, J., 2015. Behavioral agency theory: New Foundations for theorizing about
executive compensation. Journal of management, 41(4), pp.1045-1068
Shi, W., Connelly, B.L and Hoskisson, R.E., 2017.External corporate governance and financial
fraud: cognitive evaluation theory insights on agency theory prescriptions. Strategic
management journal, 38(6) pp.1268-1286.