Performance Management and Executive Compensation Essay Example for Free

Performance instruction and Executive Compensation EssayIntroductionIn the history of modern economies, from the late 1800s to at once businesses have faced ethical challenges regarding compensation for executives and its relation to job performance. In response to major economic crises during the 20th century, the United States enacted broad-based legislation mea undisputables as attempts to hamper what were seen as ethical challenges and agency conflicts surrounding both performance management and executive compensation.To understand the current issues facing businesses and regulators, it is important to look at triple of virtually significant legislative acts Congress has passed. The Securities commute get alongs of 1933 and 1934, as well as the SarbanesOxley Act of 2002 represent legislative interventions regarding corporate financial accounting toward the goal of curtailing the ethical challenges and the conflict of agency problems that can arise from performance man agement and executive compensation. Yet even after these laws were enacted, ethical conflicts can and still do arise when it comes to the compensation for employers and executives.Securities Act of 1933The Securities Act of 1933 was born in response to the stock market crash of 1929. Just as it was then, companies who issue securities to raise notes for funding new investments or to expand operations have an inherent incentive to present their go with and its plans in the rosiest light possible to investors (Sarkar, 2013).The Securities Act of 1933 serves the treble purpose of ensuring that issuers of securities to the public disclose material information to investors as well as ensuring that any securities transactions ar not based on ambidextrous information or practices (Sarkar, 2013). The Securities Act of 1933 affects public disclosures through a mandatory registration process for sellers and brokers and applies to the sale or trade of any regulated credentials type (Sark ar, 2013).Securities Act of 1934 (a.k.a. the Exchange Act)The Exchange Act primarily regulates transactions of securities that take place after its initial offering by a social club (Sarkar, 2013). These transactions often take place between parties other than the issuer, such as through trades that retail investors execute via brokerage sign of the zodiacs (Sarkar, 2013). The biggest effect of The Exchange Act was the creation of the Securities and Exchange Commission (SEC), a federal agency responsible for regulating the securities markets (Sarkar, 2013). Since 1934, the SEC has taken on the role of mitigating fraud, abuse, and other ethical issues in the financial reporting of publicly traded entities.Sarbanes-Oxley Act of 2002The Sarbanes-Oxley (SOX) Act of 2002 was the most significant legislation passed since the 1930s and came in the aftermath of the corporate scandals at companies such as Enron, WorldCom, and Arthur Andersen (Amadeo, 2013). Sarbanes-Oxley created the Publi c Company Accounting Oversight Board (PCAOB), a new organization whose purpose is to help oversee the accounting industry (Amadeo, 2013). To prevent the appearance of conflicts of interest that had led to the Enron fraud, SOX established new prohibitions for auditors when engaging in consultation work for their auditing clients. It also banned friendship loans to executives and gave increased job protections to whistleblowers (Amadeo, 2013).Performance Management and Executive CompensationEven after the passing of the Securities and Exchanges Acts of 1933 and 1934 and the Sarbanes-Oxley Act of 2002, there are reasons to be concerned about ethical violations in financial accounting. devil areas where there still exist possibilities for unethical activity which could harm the supply of reliable information to investors are the performance management within a company and the compensation packages of executives.Current Ethical ChallengesWhen evaluating situations to support ethical d ecision-making, one must first identify the ethical problems as they arise (Eldenburg, 2005). Performance measurements are most often measured in terms of time or financial figures how long or how much. When selecting a new CEO, the board of directors is required to offer a financial package that is both lucrative enough to attract the most qualified individual and yet also appears fair to other ranking executives of the company. much(prenominal) financial packages need to be approved by the major shareholders when the salary will impact the companys financial reports. During an economic recession, firms may significantly downsize their workforce as well as benefits and labor rates employees receive, yet often find themselves contractually obligated to hand-out large bonuses and increasing salaries for their executives.This is potentially a major ethical issue for a company and its executives, with the fibers of the company being reduced while executives are earning more and more even though the firm is struggling. CEOs at the countrys 200 largest companies earned an reasonable of 20 percent more last year than in 2009, according to recent corporate filings. By comparison, average pay for workers in the private sector rose just 2.1 percent last yearnearly the smallest increase in decades (Harkinson, 2011).It is also not unhearable of for CEOs to be forced to step down while still receiving their lucrative compensation packages only to also be given a generous specious parachute as they leave. Excesses like this can have detrimental effects on employee morale as the majority of the company often consists of those earning the least. Boards of directors should take into experimental condition the financial standing of the firm before they offer an over-the-top compensation package to a CEO.As an illustration of the contrary, Steve Jobs volunteered to work at Apple for a salary of only $1 per year A regulatory filing shows Apple CEO Steve Jobs compensation package remained the usual $1 in monetary 2010 as is customary, Jobs got no bonus or perk (Steve Jobs, n.d.). In terms of ethical challenges and executive compensation, Jobs proved by his example that it is possible to put the company first even if that meant earning a salary of $1. CEOs do not often have to settle for such low salaries to show leadership and camaraderie however, pass judgment less exorbitant amounts can help avoid accusations of greed and impropriety altogether.Current Agency IssuesPrincipals hire movers to make decisions for them and to act in their behalf (Eldenburg, Wolcott, 2005, pp. 591). Often, agents may go on to hire agents of their own, delegating authority and establishing sub-units known as province centers which can decentralize decision-making and accountability. A particularly special case of the principal-agent relationship involves the executives of companies who are effectively agents of the shareholders selected to run the company. Four com mon types of responsibility centers are cost centers, revenue centers, profit centers, and investment centers. (Eldenburg Wolcott, 2005, pp. 595)Those agents who possess decision-making authority over a responsibility center use demographic financial data provided by the accountants for budgets and reviews of sales, profits/losses, value appraisals, and costs. Accountant and audit provided information is used to evaluate and measure performance, superintend the effectiveness of managers, reward performance, and influence decisions. (Eldenburg Wolcot, 2005) The audit information accountants prepare and present is vital to the principal/agent relationship and performance measurement, but also has its costs. The direct challenge presented by the principal/agent relationship concerns the high level of pressure to perform that an agent can experience in the form of the agents compensation.Money, as well as other forms of compensation such as bonuses and stock options, increased autho rity, and ownership expectations are direct motivators of challenges to the ethical foundation garment of agent performance. When principals evaluate the performance of agents, their decisions are likely to be based on the same accounting information their agents also used. This common use provides a potential incentive for an agent to alter, falsify, or otherwise misrepresent certain data that principals receive.As decision-making authority is granted from a principle to an agent, the agents performance is evaluated to some degree from each authority level. Evaluating the effectiveness of the decisions made in each agency level or responsibility center is the eye of measuring, monitoring, and motivating performance. Poor performance leads to a loss of decision-making authority, responsibilities, compensation, and other benefits within the entire principal-agent structure. Conversely, outstanding performance has the opposite effect and benefits everyone up the principal-agent ladd er.ConclusionThe Securities Exchange Acts of 1933 and 1934 are essential because of their transparency as spelled out in their objectives, and for providing prospective investors detailed information about investment decisions. Their main purpose was to protect shareholders from refutal and scam in the selling of security. The Acts mandated that securities sold to the public within the United States of America must be listed with the Securities and Exchange Commission.Later, the Sarbanes-Oxley Act of 2002 (SOX) was established to make sure that CFOs and CEOs authenticate and approve the financial reporting of their companies. Despite these monumental pieces of regulation, which resulted in the creation of two separate oversight agencies, there are still situations hypersensitized to ethical challenges and agency issues particularly concerning performance management and executive compensation.ReferencesAmadeo, K 2013. Sarbanes-Oxley Act of 2002. Retrieved from http//useconomy.about .com/od/themarkets/p/sarbanes-oxley.htmEldenburg, L. Wolcott, S. (2005). Cost management Measuring, monitoring, and motivating performance, (1st ed). Hoboken, NJ potty Wiley Sons.Harkinson, J. (2011). Americas 10 Most Overpaid CEOs. Retrieved from http//www.motherjones.com/politics/2011/04/10-most-ridiculously-overpaid-ceosMcConnell, C., Brue, S. (2005). Economics principles, problems and policies (16th ed.). New York McGraw-Hill.Sarkar, D 2013. Securities Act. Retrieved from http//www.law.cornell.edu/wex/securities_act_of_1933Steve Jobs again earned $1 for work. (n.d.). Retrieved from http//www.timesleader.com/stories/Steve-Jobs-again-earned-1-for-work-at-A,115771